Solution Manual for Fundamental Accounting Principles Volume 1 17th Canadian Edition By Kermit Larso by ACADEMIAMILL

Chapter 1

Accounting in Business

Chapter Opening Vignette Critical Thinking Challenge Questions* 1. What questions might Molly Burke (MB) need the answers to, to get a loan from a bank? The key question the bank wants answered is whether Molly Burke can repay the loan. In order to assess this, they would ask questions such as: 

Financial Results: How much is the business earning per year? How profitable have MB‘s events been for the past year? How much are revenues and expenses? How are the results compared to the past year or couple of years? Where do you expect results to be in the next few years?



Cash: How much cash does Molly Burke currently have? How much does she want for the loan? What is her credit score?



Debt: Are there any outstanding loans? If so, what is the balance outstanding, the term, the payments, and the interest rate?



Assets: What personal or business assets does Molly Burke have? The bank may want to take some of Molly Burke‘s assets as collateral.



Customers: How many customers on average are served per day? How many customers are new or repeat customers?



Employees: How many employees does MB need to hire to serve customers? Does Molly Burke pay his employees a salary or a wage? How much does MB pay them? Does MB have the cash in the bank to pay employees?



Production Assets: Does Molly Burke own any assets that are used in the production of MB creative outlets? If so, does MB pay cash or does MB owe money on it? If MB owes money, is interest? Does MB lease them? Does MB have insurance?



Creative/Production Products (Inventory): How does Molly Burke manage MB creative inventory? Does it become obsolete and, if so, over what time period?



Advertising: Does Molly Burke advertise? If so, how much does MB pay?



Taxes: What is the amount of income tax MB pays?



There are many other questions that could be asked.

2. Who else might require accounting information from Molly Burke‘s business? Other stakeholders that might require accounting information from Molly Burke‘s business include Canada Revenue Agency (CRA), employees, and potential investors. *The Chapter 1 Critical Thinking Challenge questions are asked at the beginning of this chapter. Students are reminded at the conclusion of the chapter to refer to the Critical Thinking Challenge questions at the beginning of the chapter. The solutions to the Critical Thinking Challenge questions are available here in the Solutions Manual and accessible to students in the print and eBook.

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Knowledge Check-Up Questions 1. d) 6. c)

2. a) 7. d)

3. b) 8. a)

4. b) 9. d)

5. a) 10. c)

Concept Review Questions 1. Accounting will provide Molly Burke (MB) useful information to make good decisions. For instance, it is important for Molly Burke to track MB revenues and expenses to determine whether business is profitable (MB revenues are exceeding MB expenses). Based on the accounting information, Molly Burke can make decisions on how to price creative production activities where MB can decrease expenses to improve profits. Accounting will provide Molly Burke important information on MB business‘ performance to make informed decisions on existing and planned activities strategy. 2. Businesses offering products include Spin Master Corp., Lululemon, NIKE, and Reebok which produce apparel; Dell, Hewlett-Packard, and Apple which produce computer equipment; and Abercrombie and Fitch, GAP, and Zara which produce clothing. Service business examples include: WestJet Airlines which provides airline services; Bell Canada, Rogers Communications, and Telus provide information communication services; and Google, Twitter, Skype, Facebook and Instagram which provide internet services. 3. ―Accounting is relevant to all students even if they do not plan on becoming an accountant. If you are pursuing a career in marketing, you will need to understand information such as sales volume, advertising costs, promotion costs, salaries of sales personnel, and sales commissions. If you are studying human resources, you will need to understand the financial position of your company to determine whether you have the resources to hire new employees or provide existing employees a pay increase. Even if you do not pursue a career in business, understanding the basics of accounting can help you better understand your own personal finances and the world around us. I am convinced that this course will be a good investment of our time.‖ 4.

Answers will vary on what students would sell. Business organizations can be organized in one of three forms: sole proprietorship, partnership, or corporation. These forms have implications for legal liability, taxation, continuity, number of owners, and legal status as follows: Sole Proprietorship Legal entity no Limited liability no Unlimited life no Business income taxed no One owner allowed yes

Partnership no no no no no

Corporation yes yes yes yes yes

Answers and reasons will vary for the best form of business. Possible answers include: A sole proprietorship would be easiest to form for a student. A partnership would be helpful in bringing people with multiple skills and/or resources together. A corporation would be the easiest to obtain financing and to limit liability. 5. The equity section of the balance sheet reports a Hailey Walker, Capital account. The presence of the owner‘s capital account indicates that Organico has been organized as a sole proprietorship.

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6. The two organizations for which accounting information is available in Appendix III at the end of the book are Recipe Unlimited Corporation, Spin Master Corp., Telus or Indigo. 7. Hospitals, colleges, prisons, and bus lines are examples of organizations that can be formed as profit-oriented businesses, government units, or not-for-profit establishments. 8. External users and their uses of accounting information include: (1) lenders for measuring the return of loans; (2) shareholders for assessing the acquisition of shares; (3) members of the board of directors for overseeing management; and (4) potential employees for judging employment opportunities. Other users are external auditors, consultants, regulators, unions, suppliers, and appraisers. Internal users and their uses of accounting information include: (1) management for overseeing performance, financial position, and cash flow; (2) current employees for generating special purpose reports to assist management; (3) internal auditors for identifying high-risk areas to audit; and (4) Sales staff to determine how to increase sales. 9. The internal role of accounting is to serve the organization‘s internal operating functions by providing useful information in completing their tasks more effectively and efficiently. By providing this information, accounting helps the organization reach its overall goals. 10. ―Tyler, there are a number of areas you could pursue within accounting. There are also a number of opportunities within those accounting areas. I have put together some information to help with your decision.‖ Accounting professionals practice in four Accounting-related opportunities within each broad fields including: field are numerous and include: Financial accounting - Statement preparation - Statement analysis - Auditing - Regulatory - Consulting - Planning - Criminal investigation Managerial accounting - General accounting - Cost accounting - Budgeting - Internal auditing - Management advisory services Taxation - Preparation - Planning - Regulatory - Investigations - Consulting Accounting-related - Lenders - Consultants - Analysts - Traders - Managers - Directors - Underwriters

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- Planners - Appraisers 11. The independent auditor for Recipe Unlimited International is KPMG LLP. 12. The purpose of accounting is to provide decision makers with information helping them make better decisions. Examples include information for people making investments, loans and similar decisions. 13.

Accounting professionals deal with a variety of information about their employers and clients that is not generally available to the public. Ethical issues arise concerning the possibility that accounting professionals might personally benefit by using confidential information. There is also the possibility that their employers and clients might be harmed if certain information is not kept confidential.

14. An income statement user must know what time period is covered to judge whether the company‘s performance is satisfactory. For example, a statement user would not be able to assess whether the amounts of revenue and profit are satisfactory without knowing whether they were earned over a week, a month, or a year. 15. The revenue recognition principle provides guidance that managers and auditors need for knowing when to recognize revenue. For example, if revenue is recognized too early, the income statement reports income earlier than it should and the business looks more profitable than it really is. On the other hand, if the revenue is not recognized on time, the income statement shows lower amounts of revenue and profit than it should and the business looks less profitable than it really is. Basically, this principle requires revenue to be recognized when it is earned and can be measured reliably. The amount of revenue should equal the value of the assets received from the customers. 16. The four financial statements are: the income statement, the balance sheet, the statement of changes in equity, and the statement of cash flows. 17. An income statement reports on the business‘s performance during the period. It shows whether the business earned a profit (or loss). The statement does not simply report the amount of profit or loss but lists the types and amounts of the revenues and expenses. The balance sheet reports on the financial position of a business at a specific point in time. It is often called the statement of financial position. It provides information that helps users understand a company‘s financial status. The balance sheet lists the types and dollar amounts of assets, liabilities, and equity of the business. 18. Cash has purchasing power and can be used to acquire other assets. A business that sells products to a customer and does not collect cash immediately has created an Accounts Receivable. This account represents a future collection of cash. Supplies are resources that will help a business carry on its operations. 19. I disagree with Rachel. While an accounts receivable and an accounts payable both show up on the balance sheet and in the accounting equation, an accounts receivable is an asset and an accounts payable is a liability. These two accounts also represent two different perspectives. When a company sells products or services on credit, an accounts receivable is created. When a company buys products on credit, an accounts payable is created. 20. A revenue is an inflow of assets received in exchange for goods or services provided to customers as part of the major or central operations of the business. A revenue also may occur as a decrease in liabilities as when a service or product is delivered having been paid for in advance. The accountant has recorded revenue incorrectly. The accountant should record $5,000 in revenue from the sale of frozen yogurt and $10,000 as an owner‘s investment in the owner‘s equity account. Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw Hill

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21. A business‘s equity is increased by investments into the business made by the owner and by profit, which is the excess of revenues over expenses. It is decreased by withdrawals made by the owner and by a loss, which is the excess of expenses over revenues. 22. (a) Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. (b) Liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events. (c) Equity is the residual interest in the assets of an entity that remains after deducting its liabilities. The term ―net assets‖ means the same thing as equity, which is also determined as assets less liabilities. Assets = Liabilities + Equity (Net assets). A celebrity‘s assets may include land, real estate, cars and companies. A celebrity‘s liabilities may include a mortgage, bank debt and credit card debt. A celebrity‘s equity represents their net worth, which is their assets less liabilities. 23. Financial statements need to be prepared in a specific order because they are integrated. Some of the numbers on one financial statement are inputs for other financial statements. Financial statements should be prepared in the following order: 1) Income Statement 2) Statement of Changes in Equity 3) Balance Sheet and 4) Statement of Cash Flow. The profit on the income statement is an input in the statement of changes in equity. The ending equity balance on the statement of changes in equity is an input for the balance sheet. The cash balance on the balance sheet corresponds to the ending cash balance on the statement of cash flows.

QUICK STUDY Quick Study 1-1 There are a variety of questions and this list is certainly not exhaustive: 1. How much was spent on advertising last year? And/or how much is projected to be spent this year? 2. What is the effect of advertising on sales? And/or what is the projected effect of advertising on this year‘s sales? 3. How much was spent on delivering flowers last year? And/or how much is projected to be spent this year? 4. How much will it cost to create a webpage and sell flowers online? 5. Can sales be increased by selling online? And/or what is the experience of our competitors in this regard? 6. When pricing flowers, how much is being charged for delivery? 7. Are there enough sales staff to answer phones/emails and/or are sales being lost because of insufficient staffing and/or staffing issues? Quick Study 1-2 a.

Do not record

b. c.

Record Do not record

Record

Do not record

Meeting with the mechanical staff to determine new machine requirements for next year. Receiving the company‘s utility bill detailing the usage for the past month. Analyzing last year‘s sales report to determine if the discount policy is effective in getting customers to buy in multiple quantities. Downloading the online bank statements and identifying customer payments. Interviewing and then hiring an employee for an accounting position.

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Quick Study 1-3 a.

Highlands United Church

Non-business

b. c.

Royal Alexandra Hospital Toronto-Dominion Bank

Non-business Business

d. University of Toronto e. Loblaw f. World Vision

Non-business Business Non-business

Quick Study 1-4 1. 2. 3. 4. 5. 6. 7.

SP C P SP C C P

Quick Study 1-5 1. 2. 3. 4. 5. 6. 7. 8.

A C B A A B B C

Quick Study 1-6 1. Relevant facts: You have failed your midterms and are at high risk of failing the course. Your university policy will punish all academic acts of dishonesty. You have faced a difficult personal situation during the semester. 2. Ethical issues involved: Whether it is ethical for you to look at accounting notes during the final exam. 3. Fundamental principles and rules applicable to the matter in question: Your university policy will punish all academic acts of dishonesty. You believe in the principle of honesty. It is not honest to misrepresent the amount of accounting knowledge you know. 4. Established internal procedures: The university‘s policy will punish all acts of academic dishonesty. 5. Alternative courses of action: Continue engaging in acts of academic dishonesty until you are caught. The consequence will be that you may be caught in the future and be punished for it. Resolve to not engage in any acts of academic dishonesty in the future. The consequence will be that you avoid the chance of being punished for unethical behaviour in the future. Conclusion

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The behaviour in the situation described appears to be unethical based on the application of the Chartered Professional Accountants of Ontario‘s Rules of Professional Conduct - Approach to Ethical Conflict Resolution. You are acting against your University‘s policy and against your own personal value of being honest. Quick Study 1-7 a. b. c.

Reporting entity principle (It is called Reporting Entity Concept in the chapter as well as in QS 1-8) Revenue recognition principle Historical cost principle

Quick Study 1-8 1.

Revenue recognition principle

Measurement (cost) principle

Reporting entity principle

Quick Study 1-9 1. 2. 3. 4. 5.

Revenue Recognition Historical Cost Reporting Entity Going-Concern Currency

Quick Study 1-10 Currency

Revenue Recognition Going-Concern

Historical Cost Reporting Entity

1. Delco performed work for a client located in China and collected 8,450,000 RMB (Chinese currency), the equivalent of about $1,320,000 Canadian. Delco recorded it as 8,450,000. 2. Delco collected $180,000 from a customer on December 20, 2023 for work to be done in February 2024. The $180,000 was recorded as revenue during 2023. Delco‘s year end is December 31. 3. Delco‘s December 31, 2023 balance sheet showed total assets of $840,000 and liabilities of $1,120,000. The income statement for the past 6 years has shown a trend of increasing losses. 4. Included in Delco‘s assets was land and building purchased for $310,000 and reported on the balance sheet at $470,000. 5. Delco‘s owner, Tom Del, consistently buys personal supplies and charges them to the company.

Quick Study 1-11 a.

Equity

= $ 75,000 – $ 40,500 = $ 34,500

Liabilities

= $300,000 – $ 85,500 = $214,500

Assets

= $187,500 + $ 95,400 = $282,900

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Quick Study 1-12 a.

Equity

= $374,700 – $252,450 = $122,250

Liabilities

= $150,900 – $126,000 = $ 24,900

Assets

= $ 37,650 + $112,500 = $150,150

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Quick Study 1-13 a.

All-In Servicing Income Statement For Month Ended April 30, 2023 Revenues $300 Expenses 125 Profit (loss) 175

All-In Servicing Income Statement For Month Ended May 31, 2023 Revenues $135 Expenses 85 Profit (loss) $ 50

All-In Servicing Statement of Changes in Equity For Month Ended April 30, 2023 Tim Allin, capital, April 1 $ 50 Investments by owner $ 30 Profit 175 205 Total $255 Less: Withdrawals by owner 15 Tim Allin, capital, April 30 $240

Assets Cash Equipment

Total assets

All-In Servicing Balance Sheet April 30, 2023 Liabilities $ 60 Accounts payable 205 Equity Tim Allin, capital Total liabilities and $265 equity

All-In Servicing Statement of Changes in Equity For Month Ended May 31, 2023 Tim Allin, capital, May 1 $240 Investments by owner $ 60 Profit 50 $110 Total 350 Less: Withdrawals by owner 75 Tim Allin, capital, May 31 $275

$ 25 240

Assets Cash Equipment

$265 Total assets

All-In Servicing Balance Sheet May 31, 2023 Liabilities $120 Accounts payable 200 Equity Tim Allin, capital Total liabilities and $320 equity

$ 45 275 $320

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Quick Study 1-14 1. 2.

$20,000 - $15,000 = $5,000 beginning capital on January 1, 2023 $5,000 + $3,000 + $8,000 - $4,000 = $12,000 ending capital on December 31, 2023

Quick Study 1-15 a. b. c. d. e.

Assets Increase/Decrease Increase Decrease

Liabilities

Increase Decrease Increase

Decrease

Equity

Decrease Decrease

Quick Study 1-16 c a c c c b c a c a a a b a+b

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.

Supplies .................................................... $10 Supplies expense ...................................... 22 Accounts receivable .................................. 25 Accounts payable ...................................... 12 Equipment ................................................. 40 Tim Roadster‘s withdrawals in April ........... 35 Notes payable ........................................... 30 Utilities expense ......................................... 10 Furniture ..................................................... 20 Revenue ..................................................... 70 Rent revenue .............................................. 35 Salaries expense ........................................ 45 Tim Roadster‘s investments in April............ 60 Profit* ......................................................... 28

*Calculated as: 70 + 35 – 22 – 10 – 45 = 28

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Quick Study 1-17 1. 2. 3. 4. 5. 6. 7.

Total revenues ............................................... Total operating expenses .............................. Profit .............................................................. Total assets ................................................... Total liabilities ................................................ Tim Roadster, capital (April 30, 2023) ........... Total liabilities and equity...............................

70 + 35 = 105 22 + 10 + 45 = 77 105 – 77 = 28 10 + 25 + 40 + 20 = 95 12 + 30 = 42 60 – 35 + 28 = 53 42 + 53 = 95

Quick Study 1-18 d

1. Loss ........................................................

d b a d d d a b d a d c a

2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.

Rent expense .......................................... Rent payable ........................................... Accounts receivable ................................ Paul Sangha‘s investments in May .......... Interest income ....................................... Paul Sangha‘s, capital, May 1, 2023 ....... Repair supplies ......................................... Notes payable ........................................... Paul Sangha‘s withdrawals in May ............ Truck ......................................................... Consulting revenue ................................... Paul Sangha, capital, May 31, 2023 .......... Cash .........................................................

2 Income statement & Statement of changes in equity 22 Income statement 6 14 30 Statement of changes in equity 2 Income statement 0 Statement of changes in equity 5 25 5 Statement of changes in equity 15 18 Income statement 23* 20

* See QS1-19 for details on how this amount was calculated.

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Quick Study 1-19 SANGHA CONSULTING Income Statement For Month Ended May 31, 2023 Revenues: Consulting revenue ........................................... Interest income .................................................. Total revenues ........................................................... Operating expenses: Rent expense ..................................................... Loss ....................................................................

$18 2 $20 22 $ 2

SANGHA CONSULTING Statement of Changes in Equity For Month Ended May 31, 2023 Paul Sangha, capital, May 1................................ Investments by owner ........................................ Total .................................................................... Less: Withdrawals by owner .............................. Loss............................................................ Paul Sangha, capital, May 31..............................

$ 0 30 $30 $5 2

7 $23

SANGHA CONSULTING Balance Sheet May 31, 2023 Assets Cash ................................................ Accounts receivable ...................... Repair supplies .............................. Truck ...............................................

Total assets ....................................

Liabilities $20 14 5 15

$54

Rent payable ............................. Notes payable ........................... Total liabilities .......................... Equity Paul Sangha, capital ................ Total liabilities and equity ....................................

$ 6 25 $31 23 $54

Quick Study 1-20 Creating standards facilitates comparability across companies and periods. Without standards, each enterprise would develop its own standards. Readers of financial statement would then have to become familiar with every company‘s particular accounting and reporting practices. It would be almost impossible to prepare statements that could be compared.

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Quick Study 1-21 Assets

Liabilities

Equity

$700,000

(a) $280,000

$420,000

$500,000

(b) $250,000

Quick Study 1-22

[Code:

Income statement (I), Balance sheet (B), or Statement of cash flows (CF).]

Balance sheet

CF Statement of cash flows

Balance sheet

Income statement

Balance sheet

Quick Study 1-23

1. 2.

A assets L liabilities

3. 4.

A assets L liabilities

5. 6.

A assets A assets

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EXERCISES Exercise 1-1 (10 minutes) a. b. c. d. e. f. g.

Corporation Sole proprietorship Corporation Partnership Sole proprietorship Sole proprietorship Corporation

Exercise 1-2 (10 minutes) External Users Investor Supplier

Canada Revenue Agency

Customer

External Auditors

Lenders

Decisions Whether to invest in the company. Whether to buy or sell their stocks in the company. Whether to sell to Starbucks? Will Starbucks be able to pay for products? Does Starbucks represent ethical/socially responsible practices that suppliers want to align their image with? Has Starbucks filed their tax return? Have they appropriately reported their financial information and paid their taxes? Should we audit Starbucks? Will the company be here to serve me in the long-run? Will Starbucks continue to honour their loyalty program? Does Starbucks represent ethical/socially responsible practices that customers want to align their image with? Has Starbucks reported all of their financial information appropriately in accordance with the appropriate accounting standards? Have they recorded all of their transactions and are they recorded at the correct amounts? Has Starbucks disclosed all the necessary information to provide useful information to it‘s investors and other financial statement users? Should we provide a loan to Starbucks? Will Starbucks be able to repay the loan? Should we take any assets as collateral?

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Exercise 1-2 (Continued) Internal Users Marketing

Decisions Do we have enough money to launch a new marketing campaign? What products or promotion should we promote? How should we price our products? How many employees can we afford to hire this year? How much should we pay employees? How much money should we invest into training? Can we provide employees with benefits? How is Starbucks‘ performance? What changes should we make in the coming year? Do we have enough money to operate in the short and long term? Will Starbucks be able to pay my wages? Should I participate in the stock option plan? If I have stock options, when should I exercise them?

Human Resources

Finance / Management

Employees

There are a number of users and decisions that can be identified.

Exercise 1-3 (20 minutes) Accounting Role

Typical Day An external auditor is hired by a company‘s board of directors to express an opinion on whether their financial statements are prepared appropriately in accordance with the accounting standards (CAS 200).

(1) External Auditor

A typical day for an external auditor could involve: 

Working at the client‘s site with a team of auditors.



Each team member will be assigned sections of the financial statements to audit.



Interviewing the Chief Financial Officer, Controller, internal accountants and employees from various departments to gain a strong understanding of the company.



Understanding the company‘s processes for how they sell product/services, how they purchase product or supplies, how they pay their employees.



Reviewing the client‘s financial statements.



Performing testing over the financial statements by selecting a sample of items or transactions from the general ledger.



Reviewing supporting documents such as bank statements, invoices, contracts.



Submitting completed sections to the senior auditor or manager for review.



Having a coffee break and lunch with the auditing team.

Exercise 1-3 (continued) (2) Controller

A controller is often responsible for preparing the financial statements with the

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assistance of one or more staff accountants. A controller will report to more senior Finance staff such as the Chief Financial Officer. A typical day for a Controller could involve:

(3) Tax Specialist



Meeting with the management team to discuss the company‘s performance.



Preparing monthly, quarterly or annual financial statements.



Providing analysis and comments on the financial information for management and the Board of Directors.



Preparing reports with financial information that will help management make strategic and operational decisions.



Preparing budgets and cash flow projections.



Ensuring employees are following company policies and procedures.



Managing and supervising a team of accounting staff.



Meet with client to understand their tax planning needs.



Researching the tax standards.



Writing a tax memo analyzing and concluding on appropriate tax treatment.



Working on corporate or personal tax returns.



Looking through the documents the client has given you and using tax software to prepare the tax return.



Discuss ideas with other tax specialists or the Tax Manager / Partner.

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Exercise 1-4 (20 minutes) (Answers will vary.) a. 1. Relevant facts: Your colleague mentioned that he makes personal calls and gets them reimbursed by your company. Your employer allows you to submit business calls for reimbursement. 2. Ethical issues involved: Whether it is ethical to submit personal calls for reimbursement. 3. Fundamental principles and rules applicable to the matter in question: Your employer‘s rule is that you can submit business calls for reimbursement. It is not honest to misrepresent personal calls for business calls. 4. Established internal procedures: Your employer reimburses business calls. 5. Alternative courses of action: Bring the situation up with your colleague. Your colleague may become upset and this could affect your working relationship. Stay silent, which will likely result in your colleague continuing to submit personal calls for reimbursement. Let your employer know. This action could result in your colleague being disciplined by your employer. Conclusion The behaviour in the situation described appears to be unethical based on the application of the Chartered Professional Accountants of Ontario‘s Rules of Professional Conduct - Approach to Ethical Conflict Resolution. Your colleague is acting against your employer‘s policy and a personal value of being honest.

b. 1. Relevant facts: It appears that the three people ahead of you entered without tickets. 2. Ethical issues involved: Whether it is ethical watch a movie without purchasing a ticket. Whether it is ethical for the ticket-taker to let non-paying patrons into the movie theatre. 3. Fundamental principles and rules applicable to the matter in question: The movie theater‘s rule is that people must pay for a ticket to watch a movie. To watch a movie without paying is like stealing. Stealing a movie viewing is not honest. The three people have misrepresented themselves as paying patrons. 4. Established internal procedures: Patrons of the theatre must pay for the movie they will watch. The ticket-taker needs to see a ticket before admitting people into the theatre. 5. Alternative courses of action: Bring the situation up to the manager at the movie theatre. The consequence will be that the ticket-taker will likely lose his/her job. Do not take action as this situation does not involve you. This will likely lead to more people entering the movie theatre without paying. This may lead to ticket prices being increased to cover the cost of this kind of lost sale.

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Exercise 1-4 (Continued) Conclusion The behaviour in the situation described appears to be unethical based on the application of the Chartered Professional Accountants of Ontario‘s Rules of Professional Conduct - Approach to Ethical Conflict Resolution. The three people and the ticket-taker have violated the movie‘s theater‘s policy.

c. 1. Relevant facts: The cashier only provides a cash register receipt if the customer asks. The cash register records will be inaccurate if not all sales are recorded. 2. Ethical issues involved: Whether it is ethical to only provide a cash register receipt if a customer asks. 3. Fundamental principles and rules applicable to the matter in question: The fitness centre would require the cashier to perform all of their duties. It is not honest for the cashier to intentionally or unintentionally not perform all of their duties. 4. Established internal procedures: The fitness centre requires that all sales are recorded in the cash register and the customer receives a receipt. 5. Alternative courses of action: The cashier could continue providing cash receipts only if they are asked. Eventually, the supervisor and/or owner of the facility will recognize that drop-in revenues are lower than the actual number of drop-in customers attending the facility and the cashier will lose his/her job and perhaps face criminal charges. Also, the prices may increase if the owner believes revenues are decreasing. The cashier could follow procedure and provide all customers with a receipt whether or not they ask for one. This cashier will be able to work at the fitness center and earn wages for a longer period of time. Conclusion The behaviour in the situation described appears to be unethical based on the application of the Chartered Professional Accountants of Ontario‘s Rules of Professional Conduct - Approach to Ethical Conflict Resolution.

Exercise 1-5 (10 minutes) B

Description 1. Requires every business to be accounted for separately from its owner or owners.

2. Requires financial statement information to be based on costs incurred in transactions.

3. Requires financial statements to reflect the assumption that the business will continue operating instead of being closed or sold.

4. Requires revenue to be recorded only when the earnings process is complete

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Exercise 1-6 (10 minutes) Code

Description

Principle/Assumption

1. A company reports details behind financial statements that would impact users' decisions.

Full disclosure principle

2. Financial statements reflect the assumption that the business continues operating.

Going-concern assumption

3. A company records the expenses incurred to generate the revenues reported.

Expense recognition (matching) principle

4. Concepts, assumptions, and guidelines for preparing financial statements.

General accounting principle

5. Each business is accounted for separately from its owner or owners.

Reporting entity principle

6. Revenue is recorded when products and services are delivered.

Revenue recognition principle

7. Detailed rules used in reporting events and transactions.

Specific accounting principle

8. Information is based on actual costs incurred in transactions.

Measurement (cost) principle

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Exercise 1-7 (15 minutes)

Balance Sheet Assets

Liabilities

Income Statement

Statement of Changes in Equity

Owner‘s Equity

Revenue

Owner‘s Capital, Ending Balance

Interest Income

Advertising Expense

Owner‘s Capital, Beginning Balance

Expenses

Cash

Accounts Payable

Accounts Receivable

Interest Payable

Service Revenue

Fuel Expense

Investment by Owner

Interest Receivable

Salaries Payable

Rent Revenue

Insurance Expense

Profit / Loss

Merchandise Inventory Supplies

Unearned Revenue Notes Payable

Interest Expense Maintenance Expense Other Expenses

Withdrawals

Prepaid Expenses Prepaid Rent Land Building Vehicles Equipment Furniture

Owner‘s Capital, Ending Balance

Rent Expense Salaries Expense Supplies Expense Telephone Expense Utilities Expense Vehicle Expenses Wages Expense Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw Hill

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Exercise 1-8 (10 minutes) a) $540,000 – $504,000 = $36,000 profit b) $177,000 – $300,000 = $123,000 loss c) $44,000 + 0 – 0 + x = $110,000 x = $110,000 – $44,000 x = $66,000 profit d) $60,000 + $52,000 – 0 + x = $88,000 x = $88,000 – $60,000 – $52,000 x = –$24,000 or a $24,000 loss Exercise 1-9 (15 minutes)

Answers

(a)

(b)

(c)

(d)

(e)

$ (19,750)

$46,000

$7,000

$10,250

$102,000

$102,000 140,000 (8,000)

Proofs: Equity, January 1 ..................................... $ 0 Owner‘s investments during the year ..................................... 60,000 Profit (loss) for the year............................ 15,750 Owner‘s withdrawals during the year ....................................(19,750) Equity, December 31 ...............................$56,000

0 $

46,000 30,500

31,500 (4,500)

37,500 10,250

(27,000) $49,500

(20,000) $7,000

(15,750) (63,000) $32,000 $171,000

Exercise 1-10 (15 minutes) EXTRAORDINARY STUDIOS Income Statement For Month Ended November 30, 2023 Revenues: Wedding consulting revenue ............................... Operating expenses: Salaries expense ................................................. Rent expense ...................................................... Telephone expense ............................................. Utilities expenses ................................................. Total operating expenses ................................. Profit ....................................................................

$22,000 $6,000 2,550 1,680 660 10,890 $ 11,110

1-22

Exercise 1-11 (15 minutes) EXTRAORDINARY STUDIOS Statement of Changes in Equity For Month Ended November 30, 2023 Jean Higgins, capital, November 1 ........................ Investments by owner .......................................... Profit .................................................................. Total ............................................................... Less: Withdrawals by owner .................................. Jean Higgins, capital, November 30 ......................

$ 84,000 11,110

95,110 $95,110 3,360 $91,750

Analysis component: The owner, Jean Higgins, invested $84,000 of assets during the month, which caused equity to increase. Also, profit earned during the month was $11,110 causing equity to increase during November. The total increases in equity during the month were a total of $95,110 ($84,000 + $11,110). NOTE: Students might point out that equity decreased by a total of $3,360 in withdrawals which in combination with the total increase of $95,110 caused a net increase in equity of $91,750.

Exercise 1-12 (15 minutes) EXTRAORDINARY STUDIOS Balance Sheet November 30, 2023 Assets Cash ................................................ Accounts receivable ......................... Office supplies ................................. Automobiles ..................................... Office equipment.............................. Total assets .....................................

Liabilities $16,000 17,000 5,000 36,000 25,250 $99,250

Accounts payable ....................... Equity Jean Higgins, capital .................. Total liabilities and equity .....................................

$ 7,500

91,750 $99,250

Analysis component: $91,750 (or 92.44% calculated as $91,750/$99,250 × 100) of the total $99,250 assets are financed by Jean Higgins, the owner of Extaordinary Studios.

1-23

Exercise 1-13 (15 minutes) ACADEMIC LEARNING SERVICES Income Statement For Month Ended July 31, 2023 Revenues: Tutoring revenue ................................................. Textbook rental revenue ...................................... Total revenues ................................................. Operating expenses: Office rent expense ............................................. Tutors‘ wages expense ........................................ Utilities expense .................................................. Total operating expenses ................................. Loss ....................................................................

$6,200 500 $ 6,700

$4,500 1,740 880 $

7,120 420

Exercise 1-14 (15 minutes) ACADEMIC LEARNING SERVICES Statement of Changes in Equity For Month Ended July 31, 2023 Breanne Allarie, capital, July 1 .............................. Investments by owner .......................................... Total ............................................................... Less: Withdrawals by owner .................................. Loss ............................................................ Breanne Allarie, capital, July 31 ............................

$ 15,400 3,200 $ 18,600 $ 3,000 420

3,420 $ 15,180

Analysis component: Withdrawals of $3,000 by the owner, Breanne Allarie, caused equity to decrease during July, 2020. Also, the loss of $420 caused equity to decrease in July. The total decrease in equity during the month of July was $3,420 (calculated as $3,000 + $420). NOTE: Students might point out that equity increased by $3,200 of owner investments which, in combination with the total decrease of $3,420, caused a net decrease in equity of $220.

1-24

Exercise 1-15 (15 minutes) ACADEMIC LEARNING SERVICES Balance Sheet July 31, 2023 Assets Cash ................................................ Accounts receivable ......................... Supplies ........................................... Furniture .......................................... Computer equipment ....................... Total assets .....................................

Liabilities $ 3,600 4,000 2,080 3,800 4,200 $17,680

Accounts payable ....................... Equity Breanne Allarie , capital.............. Total liabilities and equity .....................................

$ 2,500

15,180 $17,680

Analysis component: $2,500 or 14.14% (calculated as $2,500/$17,680 × 100) of the total $17,680 assets held by Academic Learning Services are financed by debt. Exercise 1-16 (20 minutes) Beginning of the year ........................... End of the year .....................................

Assets $ 75,000 $120,000 (a)

$ 29,000

Answers

Proofs: Equity, January 1 ..................................... $ 45,000 Owner‘s investments during the year ..................................... 0 Profit (loss) for the year............................ 29,000 Owner‘s withdrawals during the year .................................... 0 Equity, December 31 ...............................$74,000 a.

– – –

Liabilities $30,000 $46,000

(b)

(c)

(d)

$(51,000)

$(4,000)

$86,000

= = =

Equity $ 45,000 74,000

45,000 $

45,000 $ 45,000

0 86,000

80,000 (51,000)

75,000 (4,000)

(57,000) $74,000

0 $74,000

(42,000) $74,000

An alternative calculation: $45,000 + 0 + x – 0 = $74,000; x = $29,000

An alternative calculation:

$45,000 + 0 + x - $57,000 = $74,000; x = $86,000 An alternative calculation: $45,000 + $80,000 + x - 0 = $74,000; x = ($51,000) where the negative represents a loss.

(Continued)

1-25

An alternative calculation: $45,000 + $75,000 + x - $42,000 = $74,000; x = ($4,000) where the negative represents a loss.

Exercise 1-17 (10 minutes) a. If assets decreased by $15,000 during August, then $25,000 + $15,000 = $40,000 Assets at August 1, 2023. Therefore, Equity at August 1, 2023 = $40,000 - $10,000 = $30,000 b. If liabilities increased by $9,000 during August, then $10,000 + $9,000 = $19,000 Liabilities at August 31, 2020. Therefore, Equity at August 31, 2023 = $25,000 - $19,000 = $6,000

Exercise 1-18 (15 minutes)

Cash + + $36,000

Assets Accounts Receivable

b) c)

Office Supplies

+ $1,150 +

Liabilities Accounts Payable

Equity

+ Katie Copp, Capital + $36,000

+ $1,150

8,100

d)* e) f) Totals

– 5,600

$38,500 +

– 5,600 + $1,800 $1,800

$1,150

$41,450 = *Note: For (d), since no exchange has occurred, no entry is required.

+ 1,800 $40,300

$41,450

1-26

Exercise 1-19 (20 minutes)

Cash a)

+$29,000

- 4,000

Assets Accounts Parts + Receivable + Supplies

Liabilities + Equity Accounts Stacey Comeau, + Equipment = Payable + Capital + $29,000 - 4,000

+ $1,550

+ $4,900

+ $ 4,900

– $ 2,700

+ $2,700

f)* g)

– $1,550

+ $4,900

+ $ 4,900

i) Totals

– $4,200 $21,450 +

– $ 4,200 $30,600

$4,900 +

$1,550 +

$2,700 =

$30,600

*Note: For (f), since no exchange has occurred, no entry is required.

Exercise 1-20: (15 minutes) b. c. d. e. f. g.

Office Supplies were purchased paying cash of $500. Office Furniture was purchased paying cash of $8,000. Completed work for a client on credit; $1,000. Purchased office supplies on credit; $400. Paid $250 to a creditor. Collected $750 cash from a credit customer.

1-27

Exercise 1-21 (20 minutes) Assets

Cash

+ $3,000

+ $6,500

= Liabilities +

Equity

Accounts + Supplies + Equipment = Accounts + Receivable Payable

Mailin Moon, Capital Owner +$5,500 Investment

+ $2,500

+$6,500 Revenue

c) d)

Explanation of Equity Transaction

+ $600

– $ 1,450

– $ 1,450 Sal. Expense

– $ 1,400

– $ 1,400 Rent Expense

e)* f) g) Totals

$6,650 +

+ $4,500 $4,500 + $14,250

$600 +

$2,500 = =

$600 +

+$4,500 Revenue $13,650

$14,250

*Note: For (e), since no exchange has occurred, no entry is required.

1-28

Exercise 1-22 (25 minutes) Mailin Moon– Freelance Writing Income Statement For Month Ended March 31, 2023 Revenues: Freelance writing revenue Operating expenses: Salaries expense Rent expense Total operating expenses Profit

$11,000 $

1,450 1,400 2,850 $8,150

Mailin Moon– Freelance Writing Statement of Changes in Equity For Month Ended March 31, 2023 Mailin Moon, capital, March 1 Investment by owner Profit Mailin Moon, capital, March 31

Assets Cash Accounts receivable Supplies Equipment

Total assets

$ $5,500 8,150

Mailin Moon– Freelance Writing Balance Sheet March 31, 2023 Liabilities $6,650 Accounts payable 4,500 600 2,500 Equity Mailin Moon, capital $14,250 Total liabilities and equity

13,650 $13,650

$ 600

13,650 $14,250

Analysis component: a. Supplies of $600 were financed by accounts payable, a liability. b. Equipment of $2,500 was financed by owner investment, an equity transaction. c. Cash of $6,650 and Accounts receivable of $4,500 were financed by an investment by owner of $3,000 and profit of $8,150. Profit includes the equity transactions of revenues and expenses (revenues of $11,000 less expenses of $2,850).

1-29

Exercise 1-23 (20 minutes) Assets

= Liabilities +

Equity

Explanation of Equity Transaction

Ali Omar, Capital Cash a)

Accounts Accounts + Receivable + Supplies + Equipment = Payable +

$4,300

Owner +$19,300 Investment

+$15,000

+$1,600

+$950

d)* e)

+$550

+$550 Revenue

+$600

+$600 Revenue

-$200

-$250

i) Totals

+$600 $4,450 +

-$250 Adv. Expense -$600 $550 +

$2,550 + $22,550

$15,000 =

$2,350 + =

$20,200 $22,550

*Note: For (d), since no exchange has occurred, no entry is required.

1-30

Exercise 1-24 (25 minutes) Omar‘s Yard Care Income Statement For Month Ended March 31, 2023 Revenues: Yard care revenue Operating expenses: Advertising expense Profit

$1,150 250 $ 900 Omar‘s Yard Care Statement of Changes in Equity For Month Ended March 31, 2023

Ali Omar, capital, March 1 Investment by owner Profit Ali Omar, capital, March 31

$ $19,300 900

20,200 $20,200

Omar‘s Yard Care Balance Sheet March 31, 2023 Assets Cash Accounts receivable Supplies Equipment

Total assets

4,450 550 2,550 15,000

$22,550

Liabilities Accounts payable

$ 2,350

Equity Ali Omar, capital Total liabilities and equity

20,200 $22,550

Analysis component: The $900 of profit does not represent cash because all of the revenues ($550 + $600 = $1,150) were on account. The $250 of advertising expense was paid in cash. The profit (loss) on an income statement represents the profit (loss) that was actually earned which is not necessarily going to agree to the profit (loss) actually received in cash. This is in accordance with the revenue recognition principle which says that revenues (and also expenses) are recorded at the time earned (or expensed in the case of expenses) regardless of whether cash has been exchanged.

1-31

Exercise 1-25 (20 minutes) Assets

Cash

= Liabilities +

Accounts + Supplies + Equipment = Accounts + Receivable Payable $6,500

$4,000

Natalie Gold, Capital $11,600

$6,000 +$800

-$2,500

+$1,100

-$950

-$950 Wage Exp.

-$1,200

-$1,200 Rent Exp.

-$600

h)* Totals

$1,900

Explanation of Equity Transaction

Bal. a)

$1,200 -$800

Equity

-$2,500 +$1,100 Revenue

-$600 Utilities Exp. +$1,600

$2,650 +

$2,000 + $13,050

+$1,600 Revenue

$1,900 +

$6,500 = =

$1,500 +

$11,550

$13,050

*Note: For (h), since no exchange has occurred, no entry is required.

1-32

Exercise 1-26 (25 minutes) VIVID VOICE Income Statement For Month Ended July 31, 2023 Revenues: Consulting revenue Operating expenses: Rent expense Utilities expense Wage expense Total operating expenses Loss

$2,700 $ 1,200 600 950 2,750 $ 50

VIVID VOICE Statement of Changes in Equity For Month Ended July 31, 2023 Natalie Gold, capital, July 1 Less: Loss Natalie Gold, capital, July 31

$ 11,600 50 $ 11,550 VIVID VOICE Balance Sheet July 31, 2023

Assets Cash Accounts receivable Supplies Equipment

Total assets

$2,650 2,000 1,900 6,500

$13,050

Liabilities Accounts payable

$ 1,500

Equity Natalie Gold, capital Total liabilities and equity

11,550 $13,050

Analysis component: $11,550 or 88.51% (calculated as $11,550/$13,050 × 100) of the assets are financed by Natalie Gold, the owner. $1,500 or 11.49% (calculated as $1,500/$13,050 × 100) of the assets are financed by debt.

1-33

PROBLEM SET ―A‖ Problem 1-1A (10 minutes) Type of Business Organization Characteristic

Sole Proprietorship

Partnership

Corporation



Limited liability Unlimited liability



 

Owners are shareholders Owners are partners



Taxed as a separate legal entity



1-34

Problem 1-2A (20 minutes) To: CEO From: Accountant Subject: Analysis of recording employees as assets This memo analyzes whether it is appropriate to record our employees as assets on Bright Consulting‘s balance sheet. Based on our generally accepted accounting principles, the definition of an asset has three key characteristics: 1. An asset is a resource controlled by a business. 2. An asset results from a past transaction. 3. An asset is expected to generate future economic benefits for the business. a) Recording employees as assets 1. At Bright Consulting, we employ many employees. We hire employees and we pay them salaries. It can be argued that our employees are controlled by our company. 2. As our employees have all been hired, it can be argued that their employment has resulted from a past transaction. 3. I understand that at Bright Consulting, our business is based on the knowledge and skills of our employees. Our employees perform consulting work for our clients that generate revenue for our company. It can be argued that we can expect our employees to generate future economic benefit for our company. b) Not recording employees as assets 1. While employees are hired by Bright Consulting, it can be argued that our company does not control our employees. We may control our employees‘ time while they are at work, but we cannot say that we control them as a whole. 2. As our employees have all been hired, it can be argued that their employment has resulted from a past transaction. 3. Our employees help our company earn consulting revenue. However, it is difficult to quantify and put a dollar amount on how much future benefit an employee will generate. We cannot reliably measure the amount of future benefit our employees may generate. Some employees may provide a lot of future benefit while others may provided limited future benefit. c) Conclusion Based on the above analysis, I recommend that we do not record our employees on the balance sheet. We cannot argue that we control our employees and we cannot reliably quantify the future benefit our employees may generate for our company.

1-35

Problem 1-3A (20 minutes) Year Beginning capital + Owner investment + Profit (loss) – Owner withdrawals = Ending capital

2024 1 125,000 0 (5,000) 0 120,000

2023 3 28,000 0 175,000 78,000 125,0002

2022 0 10,000 60,0005 42,000 28,0004

Note: The superscripts show the order in which the answers were calculated. Calculations: 1. $120,000 + 5,000 = $125,000 2. $125,000 (The beginning capital balance for one period is the ending capital balance of the previous period) 3. $125,000 + $78,000 - $175,000 = $28,000 4. $28,000 (The beginning capital balance for one period is the ending capital balance of the previous period) 5. $28,000 + $42,000 - $10,000 = $60,000

Problem 1-4A (30 minutes) CROSS FITNESS Income Statement For Year Ended July 31, 2023 Revenues: Group training revenue ........................................ Personal training revenue .................................... Total revenues ................................................. Operating expenses: Wages expense................................................... Rent expense ...................................................... Supplies expense ................................................ Utilities expense .................................................. Interest expense .................................................. Total operating expenses ................................. Profit ....................................................................

$153,500 5,500 $159,000 $69,500 21,500 17,400 11,300 3,600 123,300 $ 35,700

1-36

(continued) CROSS FITNESS Statement of Changes in Equity For Year Ended July 31, 2023 Jay Grey, capital, August 1, 2022.......................... Investments by owner .......................................... Profit .................................................................. Total ............................................................... Less: Withdrawals by owner .................................. Jay Grey, capital, July 31, 2023 ............................

$ 80,800 $ -035,700

35,700 $ 116,500 53,500 $ 63,000

CROSS FITNESS Balance Sheet July 31, 2023 Assets

Liabilities

Cash ............................................ Accounts receivable ..................... Supplies ....................................... Prepaid rent ................................. Workout equipment......................

$ 7,100 57,000 3,900 5,500 20,700

Accounts payable ..................... Notes payable .......................... Total liabilities ...................

$ 10,900 35,000 $ 45,900

14,700

Equity Jay Grey, capital .......................

Furniture ......................................

63,000

Total assets .................................

$108,900

Total liabilities and equity..........

$ 108,900

Analysis component: $45,900 or 42.15% (calculated as $45,900/$108,900 × 100) of the assets are financed by debt. $63,000 or 57.85% (calculated as $63,000/$108,900 × 100) of the assets are financed by Jay Grey, the owner.

1-37

Problem 1-5A (30 minutes) DANCE TRAINING CO Income Statement For Year Ended December 31, 2023 Revenues: Dance training revenue........................................ Choreography revenue ........................................ Total revenues ................................................. Operating expenses: Wages expense................................................... Rent expense ...................................................... Supplies expense ................................................ Utilities expense .................................................. Interest expense .................................................. Total operating expenses ................................. Profit ....................................................................

$143,000 24,100 $167,100 $68,800 18,000 16,700 10,600 2,900 117,000 $ 50,100

DANCE TRAINING CO Statement of Changes in Equity For Year Ended December 31, 2023 Jordan Ryan, capital, January 1, 2023 .................. Investments by owner .......................................... Profit .................................................................. Total ............................................................... Less: Withdrawals by owner .................................. Jordan Ryan, capital, December 31, 2023 ............

$ 80,100 $ -050,100

50,100 $ 130,200 50,000 $ 80,200

DANCE TRAINING CO Balance Sheet December 31, 2023 Assets

Liabilities

$ 26,400 50,000 3,200 4,800 20,000

Accounts payable ..................... Notes payable .......................... Total liabilities ...................

$ 10,200 28,000 $ 38,200

Furniture ......................................

14,000

Equity Jordan Ryan, capital .................

80,200

Total assets .................................

$118,400

Total liabilities and equity..........

$ 118,400

1-38

Problem 1-5A (concluded) Analysis component: $38,200 or 32.26% (calculated as $38,200/$118,400 × 100) of the assets are financed by debt. $80,200 or 67.74% (calculated as $80,200/$118,400 × 100) of the assets are financed by Jordan Ryan, the owner. Problem 1-6A (60 minutes)

Part 1 LeCLAIRE DELIVERY SERVICES Balance Sheet December 31, 2022 Assets Cash ..................................... Accounts receivable .............. Office supplies ...................... Trucks ................................... Office equipment................... Total assets _______________________

$ 26,250 14,250 2,250 27,000 69,000 $138,750

Liabilities Accounts payable ........ $ 3,750

Equity Jess LeClaire, capital ...................

135,000

Total liabilities and equity .............

$138,750

Calculations: 1. $138,750 – $3,750 = $135,000 (calculation of unknown amount) LeCLAIRE DELIVERY SERVICES Balance Sheet December 31, 2023 Assets Cash ..................................... Accounts receivable .............. Office supplies ...................... Trucks ................................... Office equipment................... Land...................................... Building .................................

$ 9,375 11,175 1,650 27,000 73,500 22,500 90,000

Total assets ..........................

$235,200

Liabilities Accounts payable ......................... Notes payable .............................. Total liabilities .........................

$ 18,750 52,500 $ 71,250

Equity Jess LeClaire, capital ...................

163,9502

Total liabilities and equity .............

$235,200

Calculations: 2. $235,200 – $71,250 = $163,950

1-39

Problem 1-6A (concluded)

Part 2 Calculation of profit for 2023: Jess LeClaire, Capital December 31, 2022 + Owner investment + Profit (loss) – Owner withdrawals = Jess LeClaire, capital December 31, 2023

$135,000 17,500 ? 18,000 $163,950

OR $135,000 + $17,500 + ? - $18,000 = $163,950; ? = $29,450 Analysis component: Assets increased by $96,450 ($235,200 - $138,750). $67,500 of the increase in assets were financed by an increase in debt (total liabilities went from $3,750 at December 31, 2022 to $71,250 at December 31, 2023). The remaining $28,950 increase in assets ($96,450 - $67,500) resulted from equity financing (equity increased to $163,950 at December 31, 2023 from $135,000 at December 31, 2023 because of $17,500 owner investment plus $29,450 profit less $18,000 of withdrawals during 2023).

Problem 1-7A (40 minutes) Part 1 Company A: (a) Equity on December 31, 2022: Assets ................................................................... Liabilities ............................................................... Equity ....................................................................

$106,000 –46,000 $60,000

(b) Equity on December 31, 2023: Equity, December 31, 2022 ................................... Owner investments................................................ Less: Owner‘s withdrawals .................................... Loss ............................................................. Equity, December 31, 2023 ................................... (c)

$60,000 26,000 6,600 24,000 $55,400

Amount of liabilities on December 31, 2023: Assets .............................................................. Equity .............................................................. Liabilities ..............................................................

$112,000 –55,400 $56,600

Problem 1-7A (Continued)

1-40

Part 2 Company B: (a) and (b) Equity: Assets ................................................................... Liabilities ............................................................... Equity .................................................................... (c)

Dec. 31, 2022 $121,000 –53,000 $68,000

Profit (loss) for 2023: Equity, December 31, 2022 ................................... Owner investments................................................ Profit (loss) ............................................................ Less: Owner withdrawals....................................... Equity, December 31, 2023 ...................................

Dec. 31, 2023 $98,000 –63,000 $35,000 $68,000 35,000 ? 7,600 $35,000

Therefore, the loss must have been $(60,400). Part 3 Company C: First, calculate the beginning balance of equity: Assets ................................................................. Liabilities ............................................................. Equity ..................................................................

Dec. 31, 2022 $74,000 –36,000 $38,000

Next, find the ending balance of equity by completing this table: Equity, December 31, 2022 ................................. Owner investments.............................................. Profit .................................................................. Less: Owner withdrawals..................................... Equity, December 31, 2023 .................................

$38,000 23,500 19,600 10,150 $70,950

Finally, find the ending amount of assets by adding the ending balance of equity to the ending balance of the liabilities: Liabilities ............................................................. Equity .................................................................. Assets .................................................................

Dec. 31, 2023 $46,000 70,950 $116,950

1-41

Problem 1-7A (Continued) Part 4 Company D: First, calculate the beginning and ending equity balances: Assets ................................................................. Liabilities ............................................................. Equity ..................................................................

Dec. 31, 2022 $168,000 –92,000 $76,000

Dec. 31, 2023 $266,000 –136,000 $ 130,000

Then, find the amount of owner investments during 2023 by completing this table: Equity, December 31, 2022 ................................. Owner investments.............................................. Profit .................................................................. Less: Owner withdrawals..................................... Equity, December 31, 2023 .................................

$76,000 ? 32,000 0 $130,000

Therefore, the owner investments must have been $22,000. Part 5 Company E: First, calculate the balance of equity as of December 31, 2023: Assets ................................................................. Liabilities ............................................................. Equity ..................................................................

$241,000 –158,000 $ 83,000

Next, find the beginning balance of equity by completing this table: Equity, December 31, 2022 ................................. Owner investments.............................................. Profit .................................................................. Less: Owner withdrawals..................................... Equity, December 31, 2023 .................................

? 10,600 37,600 19,600 $83,000

Therefore, the beginning balance of equity was $54,400. Finally, find the beginning amount of liabilities by subtracting the beginning balance of equity from the beginning balance of the assets: Assets ................................................................. Equity .................................................................. Liabilities .............................................................

Dec. 31, 2022 $262,000 –54,400 $207,600

1-42

Problem 1-8A (45 minutes) Parts 1 and 2 

Assets

Cash

 Accounts  Office  Office  Receivable Supplies Equipment

(a)

$160,000

(b)

 100,000

(c)



Building

Liabilities

 Accounts  Payable

Equity George Notes  Littlechild, Payable Capital

$20,000

Explanation of Equity Transaction

$180,000 Investment by owner $600,000

3,000



$500,000

+$3,000 72,000

(d)

$72,000

(e)* $5,200

(f)

 5,200

Service Revenue

(g)



3,500

 3,500

Advertising Expense

(h)



4,000

 4,000

Service Revenue

(i)



4,000

(j)



2,500  2,500

(k)



7,000

 7,000

Wages Expense

(l)



3,600

 3,600

Withdrawal by owner

Bal.

$ 45,400  $2,700

 4,000

 $3,000

 $92,000

 $600,000

 $68,000  $500,000  $175,100

$743,100 = *NOTE: For (e), since no exchange has occurred, no entry is required.

$743,100

1-43

Problem 1-8A (continued) Part 3 Littlechild Enterprises Income Statement For Month Ended March 31, 2023 Revenues: Service revenue Operating expenses: Wages expense Advertising expense Total operating expenses Loss

$9,200 $7,000 3,500 10,500 $1,300 Littlechild Enterprises Statement of Changes in Equity For Month Ended March 31, 2023

George Littlechild, capital, March 1 Investment by owner Total Less: Withdrawal by owner Loss George Littlechild, capital, March 31

Assets Cash Accounts receivable Office supplies Office equipment Building Total assets

Littlechild Enterprises Balance Sheet March 31, 2023 Liabilities $ 45,400 Accounts payable 2,700 Notes payable 3,000 Total liabilities 92,000 600,000 Equity George Littlechild, capital $743,100 Total liabilities and equity

0 180,000 $180,000

$ 3,600 1,300

4,900 $175,100

$ 68,000 500,000 $568,000

$175,100 $743,100

Analysis component: Assets result from a combination of debt and equity financing (A = L + E). Littlechild Enterprises‘ total assets of $743,100 resulted from incurring $568,000 in liabilities ($68,000 in accounts payable plus $500,000 of notes payable). $568,000/$743,100 x 100 = 76.44% or 76%. The remaining 24% of the assets were financed by equity transactions (owner investment and profit or loss less withdrawals made by the owner).

1-44

Problem 1-9A (60 minutes)

Cash Bal.

Oct. 31

$30,000

Nov. 1 3 3 5 6 8 15 *16 18 20 24 28 30 30 30

-7,200 +10,000 -10,000 -1,800 +2,000

Accounts Receivable

Office Supplies

Office Equip.

Electrical Equip.

Accounts Payable

Larry Power, Capital

$7,000

$1,900

$28,000

$14,000

$18,000

$62,900 -7,200 Rent expense +10,000 Investment by owner

+$18,000

+ $8,000

+1,800 +2,000 Electrical revenue +5,200

+5,200

+6,000

+6,000 Electrical revenue +1,000

+1,000 -5,200

-5,200 + 6,000 -4,400 -3,600 -1,400 $14,400

Explanation of Equity Transaction

+4,800 -6,000

$11,800

+4,800 Electrical revenue

$4,700

$33,200

$96,100

$32,000

$27,000 =

-4,400 Salaries expense -3,600 Utilities expense -1,400 Withdrawal by owner $69,100

$96,100

*Note: For November 16, since no exchange has occurred, no entry is required.

1-45

Problem 1-9A (concluded) Analysis component: Revenue is not recorded on November 28 because the revenue was actually earned on November 15. The revenue recognition principle requires that revenue be recorded when it was incurred (when the economic exchange occurred), on November 15. Cash is being collected on November 28 and is recorded as a reduction of the asset, accounts receivable, that was realized on November 15.

Problem 1-10A POWER ELECTRICAL Income Statement For Month Ended November 30, 2023 Revenues: Electrical revenue ........................................................ Operating expenses: Rent expense .............................................................. Salaries expense ......................................................... Utilities expense ......................................................... Total operating expenses ......................................... Loss ............................................................................

$12,800 $7,200 4,400 3,600 15,200 $2,400

POWER ELECTRICAL Statement of Changes in Equity For Month Ended November 30, 2020 Larry Power, capital, November 1 ....................................... Investments by owner ......................................................... Total ............................................................................ Less: Withdrawals by owner ................................................ Loss ........................................................................... Larry Power, capital, November 30 .....................................

$62,900 10,000 $72,900 $1,400 2,400

3,800 $69,100

1-46

Problem 1-10A (concluded) POWER ELECTRICAL Balance Sheet November 30, 2023 Assets Cash ..................................... Accounts receivable .............. Office supplies ...................... Office equipment................... Electrical equipment..............

$14,400 11,800 4,700 33,200 32,000

Total assets ..........................

$96,100

Liabilities Accounts payable................

$27,000

Equity Larry Power, capital ............ Total liabilities and equity ..............................

69,100 $96,100

Analysis component: Power Electrical incurred a loss of $2,400 for the month ended November 30, 2023. Therefore, instead of helping to finance assets, the November operating activities had a negative impact on equity. Equity did increase during November but because of an additional investment by the owner. As a sole proprietor, a goal is to increase equity because of positive earnings; not through owner investment.

Problem 1-11A (25 minutes)

1 Owner invests cash ........................... 2 Sell services for cash ......................... 3 Acquire services on credit .................. 4 Pay wages with cash ......................... 5 Owner withdraws cash ....................... 6 Borrow cash with note payable .......... 7 Sell services on credit ........................ 8 Buy office equipment for cash............ 9 Collect receivable from (7) ................. 10 Buy asset with note payable ..............

Balance Sheet Total Total Assets Liab. + + + – – + + + +/– +/– + +

Income Statement Equity + + – – –

Profit

+ – –

1-47

Problem 1-12A ARMANI COMPANY Income Statement For Year Ended December 31 Revenues: Consulting revenue ........................................... Rental revenue ................................................... Total revenues ................................................ Operating expenses: Salaries expense ............................................... Rent expense ..................................................... Selling and administrative expenses ...............

Profit

Total operating expenses .............................. ....................................................................

$ 33,000 22,000 $ 55,000 $20,000 12,000 8,000 40,000 $ 15,000

PROBLEM SET ―B‖ Problem 1-1B (5 minutes) a) b)

Recipe Unlimited Corporation is a corporation because it has shareholders. Spin Master is a corporation because it has shareholders.

1-48

Problem 1-2B (20 minutes) To: Marketing Manager From: Accountant Subject: Analysis of recording marketing costs as an asset This memo analyzes whether it is appropriate to record our $1 million spent on marketing costs as an asset on Global Consulting‘s balance sheet. Based on our generally accepted accounting principles, the definition of an asset has three key characteristics: 1. An asset is a resource controlled by a business. 2. An asset results from a past transaction. 3. An asset is expected to generate future economic benefits for the business. a) Recording marketing costs as an asset 1. Global Consulting had $1 million in cash that it owned. They then spent this money on marketing costs. It can be argued that the cash was controlled by Global Consulting and the benefits of the marketing costs will also benefit the company. 2. The marketing costs have been spent. Thus, they have resulted from a past transaction. 3. Our marketing costs are targeted at promoting our company and building awareness. These efforts strive to increase our sales. As we have already seen a 5% increase in our sales this year, it can be argued that the amount we spent on marketing has and will continue to generate future economic benefits for Global Consulting. b) Not recording marketing costs as an asset 1. Global Consulting controlled $1M in cash. However, once the money is spent, the company no longer controls this cash. 2. The marketing costs have been spent. Thus, they have resulted from a past transaction. 3. Marketing costs help promote a company and may introduce the company to new customers or reinforce the relationship with existing customers. This may lead to increased sales. However, there is no guarantee that $1 million spent on marketing will directly correlate to $1 million in increased sales. If there are increased sales, it is difficult to quantify what the full future benefit will be. The increased sales also may not be directly related to the $1M marketing costs. c) Conclusion Based on the above analysis, I recommend that we do not record the marketing costs as an asset. We cannot argue that the $1 million that has been spent is still controlled by Global Consulting. Also, we cannot reliably determine the future benefit of the marketing costs.

1-49

Problem 1-3B (20 minutes) Beginning capital + Owner investment + Profit (loss) – Owner withdrawals = Ending capital

2024 1 457,000 0 366,000 218,000 605,000

2023 3 369,000 0 192,000 104,000 457,0002

2022 0 400,000 (31,000)5 0 369,000 4

Note: The superscripts show the order in which the answers were calculated. Calculations: 1. 605,000 + 218,000 – 366,000 = 457,000 2. The beginning capital of 457,000 for 2024 is the ending capital from 2023. 3. 457,000 + 104,000 – 192,000 = 369,000 4. The beginning capital of 369,000 for 2023 is the ending capital from 2022. 5. 369,000 – 400,000 = -31,000 Problem 1-4B (30 minutes) FIREWORKS FANTASIA Income Statement For Year Ended December 31, 2023 Revenues: Service revenue................................................... Rent revenue ....................................................... Total revenues ................................................. Operating expenses: Wages expense................................................... Fireworks supplies expense................................. Utilities expense .................................................. Advertising expense ............................................ Office supplies expense ...................................... Total operating expenses ................................. Loss ....................................................................

$140,000 66,000 $206,000

$92,000 77,500 25,100 9,000 3,600 207,200 $ 1,200

1-50

Problem 1-4B (concluded) FIREWORKS FANTASIA Statement of Changes in Equity For Year Ended December 31, 2023 Wes Gandalf, capital, January 1 ........................... Investments by owner .......................................... Total ................................................................ Less: Withdrawals by owner .................................. Loss ........................................................... Wes Gandalf, capital, December 31 ......................

$175,200 30,000 $205,200 $12,000 1,200

13,200 $192,000

FIREWORKS FANTASIA Balance Sheet December 31, 2023 Assets Cash ....................................... Accounts receivable ................ Fireworks supplies .................. Office supplies ........................ Tools ....................................... Building ................................... Land........................................ Office equipment..................... Total assets ............................

Liabilities $ 8,000 14,000 49,000 3,000 18,000 81,000 63,000 14,000 $250,000

Accounts payable..................

Equity Wes Gandalf, capital............. Total liabilities and equity ................................

$ 58,000

192,000 $250,000

Analysis component: $58,000 or 23.20% (calculated as $58,000/$250,000 × 100) of the assets are financed by debt. $192,000 or 76.80% (calculated as $192,000/$250,000 × 100) of the assets are financed by Wes Gandalf, the owner.

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Problem 1-5B (30 minutes) DOG OBEDIENCE TRAINING CO Income Statement For Year Ended December 31, 2023 Revenues: Obedience training revenue ................................. Doggy daycare revenue....................................... Total revenues ................................................. Operating expenses: Wages expense................................................... Rent expense ...................................................... Supplies expense ................................................ Utilities expense .................................................. Interest expense .................................................. Total operating expenses ................................. Profit ....................................................................

$121,000 46,500 $167,500 $70,000 24,000 17,900 11,800 4,100 127,800 $ 39,700

DOG OBEDIENCE TRAINING CO Statement of Changes in Equity For Year Ended December 31, 2023 Tim Oram, capital, January 1, 2023 ...................... Investments by owner .......................................... Profit .................................................................. Total ............................................................... Less: Withdrawals by owner .................................. Tim Oram, capital, December 31, 2023 .................

$ 81,300 $ -039,700

39,700 $ 121,000 56,000 $ 65,000

DOG OBEDIENCE TRAINING CO Balance Sheet December 31, 2023 Assets

Liabilities

$ 7,600 62,000 4,400 6,000 21,200

Accounts payable ..................... Notes payable .......................... Total liabilities ...................

$ 11,400 40,000 $ 51,400

Vehicle .........................................

15,200

Equity Tim Oram, capital .....................

65,000

Total assets .................................

$116,400

Total liabilities and equity..........

$ 116,400

Analysis component: $51,400 or 44.16% (calculated as $51,400/$116,400 × 100) of the assets are financed by debt. $65,000 or 55.84% (calculated as $65,000/$116,400 × 100) of the assets are financed by Tim Oram, the owner.

1-52

Problem 1-6B (60 minutes) Part 1 CARMEN CREEK GOURMET MEATS Balance Sheet December 31, 2022 Assets Cash ..................................... Accounts receivable .............. Office supplies ...................... Office equipment................... Machinery .............................

$ 28,000 50,000 20,000 120,000 61,000

Total assets ..........................

$279,000

Liabilities Accounts payable .............................

$ 10,000

Equity Carmen Munch, capital ....................

269,0001

Total liabilities and equity .................

$279,000

CARMEN CREEK GOURMET MEATS Balance Sheet December 31, 2023 Assets Cash ..................................... Accounts receivable .............. Office supplies ...................... Office equipment................... Machinery ............................. Building ................................. Land......................................

$ 20,000 60,000 25,000 120,000 61,000 520,000 130,000

Total assets ..........................

$936,000

Liabilities Accounts payable ..................... Notes payable .......................... Total liabilities .......................

$ 30,000 520,000 550,000

Equity Carmen Munch, capital.............

386,0002

Total liabilities and equity .........

$936,000

Calculations: 1. $279,000 – $10,000 = $269,000 (calculation of unknown capital amount) 2. $936,000 – $550,000 = $386,000 (calculation of unknown capital amount)

1-53

Problem 1-6B (concluded) Part 2 Calculation of profit for 2023: Carmen Munch, Capital December 31, 2022 + Owner investment + Profit (loss) – Owner withdrawals (12 months X $2,000) = Carmen Munch, Capital December 31, 2023

$269,000 50,000 ? 24,000 $386,000

OR $269,000 + $50,000 + ? - $24,000 = $386,000; ? = $91,000 Analysis component: Assets increased by $657,000 ($936,000 - $279,000). $540,000 of the increase in assets were financed by an increase in debt (total liabilities went from $10,000 at December 31, 2022 to $550,000 at December 31, 2023). The remaining $117,000 increase in assets ($657,000 $540,000) resulted from equity financing (equity increased to $386,000 at December 31, 2023 from $269,000 at December 31, 2022 because of $50,000 owner investment plus $91,000 profit less $24,000 of withdrawals during 2023). Problem 1-7B (40 minutes) Part 1

Company V: (a) and (b) Calculation of equity: Assets ........................................................ Liabilities .................................................... Equity ......................................................... (c)

12/31/22 $165,000 –30,000 $135,000

12/31/23 $192,000 –26,000 $166,000

Calculation of profit (loss) for 2023: Equity, December 31, 2022 ........................ Owner investments..................................... Profit (loss) ................................................. Less: Owner withdrawals............................ Equity, December 31, 2023 ........................

$135,000 60,000 ? 4,500 $166,000

Therefore, the net loss must have been $(24,500).

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Problem 1-7B (continued)

Part 2 Company W: (a) Calculation of equity at December 31, 2022: Assets .......................................................... Liabilities ...................................................... Equity ...........................................................

$70,000 –50,000 $20,000

(b) Calculation of equity at December 31, 2023: Equity, December 31, 2022 .......................... Owner investments....................................... Profit ........................................................... Less: Owner withdrawals.............................. Equity, December 31, 2023 .......................... (c)

$20,000 10,000 30,000 2,000 $58,000

Calculation of the amount of liabilities at December 31, 2023: Assets .......................................................... Equity ........................................................... Liabilities ......................................................

$90,000 –58,000 $32,000

Part 3 Company X: First, calculate the beginning and ending equity balances: Assets .......................................................... Liabilities ...................................................... Equity ...........................................................

12/31/22 $121,500 –58,500 $ 63,000

12/31/23 $136,500 –55,500 $ 81,000

Then, find the amount of owner investments during 2023 by completing this table: Equity, December 31, 2022 ......................... Owner investments....................................... Profit ........................................................... Less: Owner withdrawals.............................. Equity, December 31, 2023 ..........................

$63,000 ? 16,500 0 $81,000

Therefore, the owner investments must have been $1,500.

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Problem 1-7B (continued) Part 4

Company Y: First, calculate the beginning balance of equity: Assets .......................................................... Liabilities ...................................................... Equity ...........................................................

Dec. 31, 2022 $82,500 –50,000 $32,500

Next, find the ending balance of equity by completing this table: Equity, December 31, 2022 .......................... Owner investments....................................... Less: Owner withdrawals.............................. Loss ................................................... Equity, December 31, 2023 ..........................

$32,500 38,100 18,000 46,000 $6,600

Finally, find the ending amount of assets by adding the ending balance of equity to the ending balance of the liabilities: Liabilities ...................................................... Equity ........................................................... Assets ..........................................................

Dec. 31, 2023 $ 72,000 6,600 $78,600

Company Z: First, calculate the balance of equity as of December 31, 2023: Assets .......................................................... Liabilities ...................................................... Equity ...........................................................

$160,000 –52,000 $108,000

Next, find the beginning balance of equity by completing this table: Equity, December 31, 2022 .......................... Owner investments....................................... Profit ........................................................... Less: Owner withdrawals.............................. Equity, December 31, 2023 ..........................

? 40,000 32,000 6,000 $108,000

Therefore, the beginning balance of equity was $42,000. Finally, find the beginning amount of liabilities by subtracting the beginning balance of equity from the beginning balance of the assets: Assets .......................................................... Equity ........................................................... Liabilities ......................................................

Dec. 31, 2022 $124,000 –42,000 $ 82,000

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Problem 1-8B (45 minutes) Parts 1 and 2 Assets + Accounts +

Office

Receivable

Supplies

Cash

(a)

+$120,000

(b)

– 50,000

(c)

–

Liabilities

+ Building = Accounts +

Equipment

Payable

+$240,000

18,000

+ Notes

+ Lily Zhang,

Payable

Capital

Explanation of Equity Transaction

+$130,000

Investment by owner



4,500

Advertising Expense

6,000

Consulting Services Revenue

+$190,000

6,400

+$10,400

4,500

(f)

Equity

+ 18,000 $4,000

–

Office

+ $10,000

(d) (e)

+$6,000

(g)

8,000

Consulting Services Revenue

(h)

–

5,500



5,500

Withdrawal by owner

(j)

4,000

(k)

– 6,400

(l) Bal.

–

(i)*  4,000  6,400

3,800 ______ ______ $43,800 + $2,000 + $4,000 +

_______ ________ $34,400 + $240,000 =

$324,200

______ ________  3,800 $4,000 + $190,000 + $130,200

Wages Expense

$324,200

Note: For (i), since no exchange has occurred, no entry is required.

1-57

Problem 1-8B (continued)

Part 3 Zhang Consulting Income Statement For Year Ended December 31, 2023 Revenues: Consulting services revenue Operating expenses: Wages expense Advertising expense Total operating expenses Profit

$14,000 $3,800 4,500 8,300 $5,700

Zhang Consulting Statement of Changes in Equity For Year Ended December 31, 2023 Lily Zhang, capital, January 1 Investment by owner $130,000 Profit 5,700 Total Less: Withdrawal by owner Lily Zhang, capital, December 31

135,700 $135,700 5,500 $130,200

Zhang Consulting Balance Sheet December 31, 2023 Assets Cash Accounts receivable Office supplies Office equipment Building Total assets

$ 43,800 2,000 4,000 34,400 240,000 $324,200

Liabilities Accounts payable Notes payable Total liabilities Equity Lily Zhang, capital Total liabilities and equity

4,000 190,000 $194,000

130,200 $324,200

Analysis component: Assets result from a combination of debt and equity financing (A = L + E). Zhang’s total assets of $324,200 resulted from incurring $194,000 in liabilities ($4,000 in accounts payable plus $190,000 of notes payable). $194,000/$324,200 x 100 = 59.84% or 60%. The remaining 40% of the assets were financed by equity transactions (owner investment and profit less withdrawals made by the owner).

1-58

Problem 1-9B (50 minutes)

June 30 July 1 1

Assets  Liabilities  Equity  Accounts  Office  Event  Sound  Accounts  Michael Cantu, Explanation of Cash Receivable Supplies Equip. Equip. Payable Capital Equity Transaction $ 12,000  $4,600  $1,560  $9,600  $24,000  $6,200  $45,560 + 20,000 + 20,000 Investment by owner – 1,000 – 1,000 Rent Expense

1 –

3,000

6 –

1,000

8 +

4,400

+ 8,000 + 1,000

+ 7,600

+ 3,840 –

Bal.

4,800

1,700

31 –

2,400 $20,000 

4,800 DJ Revenue

+ 6,000 DJ Revenue + 4,000 Equip Rental Revenue

– 4,800

– 4,500

31 –

– 7,600 + 6,000 + 4,000

28 +

4,400 DJ Revenue

+ 3,840

7,600

25 25

+ + 7,600

+ 4,800

17 23

+ 5,000

– – ______ $14,600

______  $6,400

$90,200

______  $17,200 

______ $32,000

 =

$15,040 

4,500 Wages Expense 1,700 Utilities Expense

–

2,400 Withdrawal by owner $75,160

$90,200

1-59

Problem 1-9B (concluded) Analysis component: The revenue recognition principle requires that revenue be recorded when it is incurred (when the economic exchange occurred), on July 15, even though cash is not received. The payment for this transaction is collected on July 28 and is recorded as a reduction of the asset, accounts receivable, that was realized on July 15. Problem 1-10B BEYOND MUSIC Income Statement For Month Ended July 31, 2023 Revenues: DJ revenue ......................................................... Equipment rental revenue.................................... Total revenues .................................................. Operating expenses: Wages expense................................................... Rent expense ...................................................... Utilities expense ................................................. Total operating expenses ................................. Profit ........................................................................

$15,200 4,000 $19,200

$4,500 1,000 1,700 7,200 $12,000

BEYOND MUSIC Statement of Changes in Equity For Month Ended July 31, 2023 Michael Cantu, capital, June 30 .................................. Investments by owner ................................................. Profit .......................................................................... Total ........................................................................ Less: Withdrawals by owner ........................................ Michael Cantu, capital, July 31 ....................................

$45,560 $20,000 12,000

32,000 $77,560 2,400 $75,160

BEYOND MUSIC Balance Sheet July 31, 2023 Assets Cash ..................................... Accounts receivable .............. Office supplies ...................... Event equipment ................... Sound system equipment......

$20,000 14,600 6,400 17,200 32,000

Total assets ..........................

$90,200

Liabilities Accounts payable .....................

$15,040

Equity Michael Cantu, capital ..............

75,160

Total liabilities and equity .........

$90,200

1-60

Problem 1-10B (concluded) Analysis component: The owner of Beyond Music invested $20,000 during the month ended July 31, 2023 therefore having a positive impact on equity. Equity increased during July largely because of this additional investment by the owner. As a sole proprietor, a goal is to increase equity because of positive earnings; not through owner investment.

Problem 1-11B (25 minutes)

1 2 3 4 5 6 7 8 9 10

Owner invests cash .............................. Pay wages with cash ............................ Acquire services on credit .................... Buy store equipment for cash ............... Borrow cash with note payable ............. Sell services for cash ........................... Sell services on credit .......................... Pay rent with cash ................................ Owner withdraws cash ......................... Collect receivable from (7)....................

Balance Sheet Total Total Assets Liab. + – + +/– + + + + – – +/–

Income Statement Equity + – –

Profit

+ + – –

+ + –

– –

Problem 1-12B ARMANI COMPANY Income Statement For Year Ended December 31 Revenues: Consulting revenue .............................................. Rental revenue .................................................... Total revenues ................................................. Operating expenses: Salaries expense ................................................. Rent expense ...................................................... Selling and administrative expenses ....................

Profit

Total operating expenses ................................. ....................................................................

$ 33,000 22,000 $ 55,000 $20,000 12,000 8,000 40,000 $ 15,000

1-61

ANALYTICAL AND REVIEW PROBLEMS A&R Problem 1-1 TASKER AUTO REPAIR SHOP Balance Sheet November 30, 2023 Assets Cash..................................... Accounts receivable ............. Parts and supplies ................ Equipment ............................

Total assets ..........................

Liabilities $ 6,300 47,250 14,175 22,050

$89,775

Accounts payable ..................... Mortgage payable..................... Total liabilities .......................

$34,650 28,350 $63,000

Equity Jack Tasker, capital .................

26,775

Total liabilities and equity .........

$89,775

Note to Instructors: To reinforce students‘ understanding of the nature of double-entry bookkeeping and the accounting equation, it may be advantageous to use this problem to demonstrate the importance of recording transactions correctly because neither double-entry bookkeeping nor the accounting equation guarantee the correctness of information; they only prove arithmetic accuracy. Accordingly, the best way to explain this seemingly impossible situation to beginning students in accounting is to summarize both incorrect and the correct balance sheets in detail.

1-62

A&R Problem 1-2 SUSAN HUANG, LAWYER Income Statement For Month Ended October 31, 2023 Revenues Legal revenue .......................................................... Operating expenses Salaries expense ..................................................... Rent expense .......................................................... Supplies expense .................................................... Telephone expense ................................................. Total operating expenses ..................................... Profit ............................................................................

$11,550 $2,940 2,100 420 210 5,670 $ 5,880

SUSAN HUANG, LAWYER Statement of Changes in Equity For Month Ended October 31, 2023 Susan Huang, capital, October 1..................................... Investment by owner ....................................................... Profit .............................................................................. Total ............................................................................ Susan Huang capital, October 31....................................

$10,500 5,880 16,380 $16,380

SUSAN HUANG, LAWYER Balance Sheet October 31, 2023 Assets Cash..................................... Accounts receivable ............. Supplies ............................... Law library ............................ Furniture...............................

$ 3,780 2,100 1,050 8,400 2,100

Total assets ..........................

$17,430

Liabilities Accounts payable ...............

Equity Susan Huang, capital.......... Total liabilities and equity ...............................

$ 1,050

16,380 $17,430

1-63

A&R Problem 1-3 Income Statement Revenues Expenses 1.

$14,000

Balance Sheet Liabilities

Assets $14,000

$5,000

$25,000

$500

Equity $14,000

$25,000 500

500

10,000

5,000

200

2,000

10.

12,000

11. 12.

45 900

500

900

1-64

ETHICS CHALLENGE 1-1 1.

The accounting principle most relevant to this situation is the revenue recognition principle. The revenue recognition principle provides guidance on when revenue should be recognized on the income statement. The principle states that revenue should be recognized when earned. In this case, the earliest the revenue could be considered earned is when the product is shipped to customers.

If Sue is aware of the revenue recognition principle she faces a dilemma of applying GAAP, which will result in different revenue recognition than her supervisor is advocating. Sue faces a dilemma of following the guidance of her profession or following her supervisor. If Sue does not conform to her supervisor‘s wishes she may face the consequence of losing her job. If Sue does what her supervisor requests she may face internal anguish of doing something that she knows is not professionally correct and which may negatively affect any users of the financial statements that she is helping produce.

Students should support their decision with appropriate reasons likely echoing the discussion in 2) above.

Sue may be able to discuss the situation she is facing with someone else in the company and find support for not following the supervisor‘s directive. If the intent to violate accounting principles is a commonplace occurrence in the snowboard company Sue may wish to seek employment elsewhere as the problem will likely reoccur in the future.

1-65

FOCUS ON FINANCIAL STATEMENTS FFS 1-1 Parts 1 and 2 June 2023

 June 1 5 7 9 15 17 29 30 Totals

Cash +20,000

Assets Accounts Receivable



= Office  Equip. +6,000

Liabilities + Accounts  Payable

+3,000 -1,500 +1,000 -5,000 +2,000

Explanation of Equity Transaction Owner investment Service revenue Rent expense

-1,000

+300 -1,500 15,000

Equity Diane Towbell, Capital +26,000 +3,000 -1,500

2,000

23,000

6,000 =

300

-5,000 +2,000 -300 -1,500 22,700

Wages expense Service revenue Utilities expense Wages expense

23,000

1-66

FFS 1-1 (continued) Parts 1 and 2 July 2023 Assets Accounts  Receivable 2,000

 Balance June 30 July 5 8 9 12 14 15 17 25 31 31 Totals

Cash 15,000

= Office  Equip. 6,000

Equity Diane Towbell, Capital 22,700

+3,500 -2,000

+2,000 -1,500

+1,800 -1,000 -2,500 +4,800 -600 -1,700 -2,000 12,500

Liabilities + Accounts  Payable 300

3,500

23,800

7,800

+3,500

Service revenue

-1,500

Rent expense

-2,500 +4,800 -300 -1,700 -2,000 23,000

Wages expense Service revenue Utilities expense Wages expense Owner withdrawals

+1,800 -1,000

-300

Explanation of Equity Transaction

800

23,800

1-67

FFS 1-1 (continued) Part 3 GLENROSE SERVICING Income Statement For Month Ended June 30, 2023 Revenues: Service revenue...................................................

$5,000

Operating expenses: Wages expense................................................... Rent expense ...................................................... Utilities expense .................................................. Total operating expenses ................................. Loss ....................................................................

$6,500 1,500 300 8,300 $3,300

GLENROSE SERVICING Statement of Changes in Equity For Month Ended June 30, 2023 Diane Towbell, capital, June 1 ............................... Investments by owner .......................................... Total ............................................................... Less: Withdrawals by owner .................................. Net loss ...................................................... Diane Towbell, capital, June 30 .............................

-026,000 $26,000

$ -03,300

3,300 $22,700

GLENROSE SERVICING Balance Sheet June 30, 2023 Assets Cash ................................................ Accounts receivable ......................... Office equipment..............................

Total assets .....................................

Liabilities $15,000 2,000 6,000

$23,000

Accounts payable .......................

300

Equity Diane Towbell, capital ................

22,700

Total liabilities and equity ...........

$23,000

1-68

FFS 1-1 (continued) Part 3 GLENROSE SERVICING Income Statement For Month Ended July 31, 2023 Revenues: Service revenue...................................................

$8,300

Operating expenses: Wages expense................................................... Rent expense ...................................................... Utilities expense .................................................. Total operating expenses ................................. Profit ....................................................................

$4,200 1,500 300 6,000 $2,300

GLENROSE SERVICING Statement of Changes in Equity For Month Ended July 31, 2023 Diane Towbell, capital, July 1 ................................ Investments by owner .......................................... Profit .................................................................. Total ............................................................... Less: Withdrawals by owner .................................. Diane Towbell, capital, July 31 ..............................

$22,700 $

-02,300

2,300 $25,000 2,000 $23,000

GLENROSE SERVICING Balance Sheet July 31, 2023 Assets Cash ................................................ Accounts receivable ......................... Office equipment..............................

Total assets .....................................

Liabilities $12,500 3,500 7,800

$23,800

Accounts payable .......................

800

Equity Diane Towbell, capital ................

23,000

Total liabilities and equity ...........

$23,800

1-69

FFS 1-1 (concluded) Analysis component: 1. The increase in assets of $800 from June 30, 2023 to July 31, 2023 was financed by a $500 increase in liabilities and a $300 increase in equity. The $300 increase in equity resulted from a profit of $2,300 less withdrawals of $2,000. 2. a. The income statement reports a company‘s financial performance. A company‘s financial performance is how a company performs or operates on a day-by-day basis: the generation of revenues and incurring of expenses that help create the revenues. b. The balance sheet reports a company‘s financial position at a specific point in time. Financial position describes what assets, liabilities, and equity a company has on a given date. For example, Glenrose Servicing‘s cash balance on July 31, 2023 is $12,500 — this describes how much cash Glenrose had on July 31. 3. Glenrose‘s July 31, 2023 income statement reports a profit of $2,300 which is reported on the July statement of changes in equity as one of the activities that caused equity to change during the month. The ending capital balance reported on the July statement of changes in equity is reported on the July balance sheet as the equity position on July 31, 2023. FFS 1-2 Part A 1. Recipe Unlimited Corporation‘s assets are classified into seven groups on the December 27, 2020 balance sheet: Current Assets, Long-term receivables, Property, plant and equipment, Investment in the Keg Limited Partnership, Brands and other assets, Goodwill, and Deferred tax asset. 2. Recipe Unlimited Corporation rounds to thousands of Canadian dollars on its financial statements. 3. The December 27, 2020 balance sheet shows Assets of $2,109,071 thousand = Liabilities of $1,825,535 thousand + Equity of $283,536 thousand. 4. No, the personal assets belonging to the owners of Recipe Unlimited Corporation are not included on Recipe Unlimited Corporation‘s financial statements in accordance with the Reporting Entity Principle. 5. (variety of answers possible, for example, the accounts receivable manager would want to know if receivables are being collected efficiently) Part B 6. a. Total assets = $1,342.1 million (US); b. Total net assets (US) = $1,342.1 million - $499.2 million = $842.9 million; Assets of $1,342.1 million (US) = Liabilities of $499.2 million + Equity of $842.9 million. 7. Data is provided on a comparative basis so decision makers can see the change from the previous year(s). 8. (variety of answers possible, for example, a potential creditor would be interested in knowing if Spin Master will have sufficient assets to cover any credit they grant)

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CRITICAL THINKING CT 1-1 Note to instructor: Student responses will vary therefore the answer here is only suggested and not inclusive of all possibilities; it is presented in point form for brevity. Goal(s)*: — Correctly stated sales reports* Problem(s): — Misclassification of items under GAAP Assumption(s)/Principle(s): — The report should be prepared in accordance with GAAP to protect users of the information … so that users know on what basis amounts have been recorded/reported. Facts: — as shown in the September sales report prepared by the sales person Conclusion(s)/Consequence(s): — August 28 sale should be in August and not in September; consequence of current reporting is that August revenue, profit, and equity was understated and September revenue, profit, and equity are overstated — September 10 purchase of desk is to be recorded as an asset and not expensed; consequence of current reporting is that September expenses will be overstated causing profit, assets, and equity to be understated. — September 2–30 lunch costs should have been expensed; consequence of current reporting is that statements won‘t balance (it appears there are two credit entries with no debit) and that expenses are understated with profit and equity overstated. — October 5 appears to be recorded correctly. *This should be the goal since it is assumed that the owner(s) of the business want accurate reports. However, the salesperson might want to overstate the sales to make himself/herself look good; the marketing manager might want to overstate sales for the same reason. The goal is highly dependent on ‗perspective‘.

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SOLUTIONS MANUAL to accompany

Fundamental Accounting Principles th

17 Canadian Edition by Larson/Dieckmann/Harris

Revised for the 17th Edition by: John Harris, Seneca College

Technical checks by: Rhonda Heninger, SAIT

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Chapter 2

Analyzing and Recording Transactions

Chapter Opening Critical Thinking Challenge Questions* Accounting information results in the ability to make effective day to day business decisions. Understanding cash flow and tracking revenue helps Tyler to invest in creating the right products to meet customer demands. It also helps Tyler to understand profitability and how to best invest her marketing dollars to sell the most profitable products.

Knowledge Check-Up Questions 2. a) 7. b)

2. c) 7. c)

3. a) 8. b)

4. c) 9. a)

5. d) 10. d)

Concept Review Questions 1. Welcome to Lululemon! We are happy to have you as a co-op student. The fundamental steps in the accounting process are those involved in the accounting cycle: Analyze transactions to determine if an economic exchange has taken place and, if so, journalize and post the transaction. An unadjusted trial balance is then prepared to help identify potential adjustments. Appropriate adjusting entries are journalized and posted and an adjusted trial balance is generated from which the financial statements are prepared. Closing entries are then journalized and posted. Finally, a post-closing trial balance is prepared. The accounting cycle helps Lululemon keep track of its business activities. These business transactions include buying fabric, selling yoga clothing and paying employees. The accounting cycle helps produce financial statements which provide Lululemon the information to make good business decisions. 2. An account receivable is an amount due to a company, but the amount can be increased by the customer (debtor) by making additional purchases. An account receivable is not a single document but represents the result of several written, oral, or implied promises to pay the creditor. A note receivable is a formal document that specifies the fixed amount due to a company on a fixed date or on demand. 3.

Four different asset accounts would include any of the following from Spin Master‘s December 31, 2020 balance sheet: Cash, Trade and other receivables, Inventories, Prepaid expenses, Advances on royalties, Property, plant and equipment, Intangible assets, Goodwill or Deferred income tax assets. Three different liability accounts would include any of the following: Trade Payables and other liabilities (same as Accounts payable and accrued liabilities), Contract liabilities (same as unearned revenue), Loans and borrowings, Provisions and contingent liabilities, Income tax payable and Lease liabilities. A debit will decrease and a credit will increase the following accounts: Accounts payable, Owner‘s capital and Revenue. Answers will vary, but can include liability (accounts payable, notes payable, unearned revenue and bank loan), owner‘s capital and revenue accounts. Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw Hill

2-73

Three debit balance accounts from Recipe Unlimited Corporation‘s December 31, 2020 balance sheet might include any of the following: Cash and cash equivalents; Accounts receivable; Prepaid expenses, deposits and other; Inventories; Property, plant and equipment; Long-term receivables; or Other assets. Three credit balance accounts might include any of the following: Accounts payable and accrued liabilities; Gift card liability; Current portion of lease liabilities; Maintenance provisions; Long-term debt; Other liabilities; Deferred tax liability; Common share capital; or Contributed surplus. Recipe Unlimited has a deficit, which means their Retained earnings is in a debit balance but it should be a credit balance. When a company sells services or goods, they will exchange their service or good for cash. When the company sells services or goods, they earn revenue. In the account equation, Cash (Asset) increases and Revenue (Equity) increases. If the customer does not pay today, the company records accounts receivable instead of cash. Accounts receivable holds value for the company because it is a promise from the customer to pay in the future. When the customer pays cash, the company no longer has accounts receivable. With the accounting equation, Accounts receivable (Asset) increases and Revenue (Equity) increases.

Account

(1) Type of account

(2) Normal Balance

Accounts receivable

Asset

Revenue

Equity

(3) Financial statement

(4) Time period

Debit

Balance Sheet

A specific point in time

Credit

Income Statement

Period of time

Owner‘s withdrawals are when a business owner takes out money that was earned in the business for personal use. An example is when an owner needs to take out money for a personal vacation. An expense occurs when a cost is needed to run the normal operations of the business. An example is that a business needs to pay its employees for selling clothes at a retail store. Account

(5) Type of account

(6) Normal Balance

(7) Financial statement

Owner‘s withdrawals

Equity

Debit

Statement of Changes in Equity

Expense

Equity

Debit

Income Statement

8. Debited accounts are recorded first. The credited accounts are indented. 9. A transaction should first be recorded in a journal to create a complete record of the transaction in one place. Then the transaction is posted to the ledger where entries are summarized by type, i.e., cash, accounts payable, interest expense, etc., to enable analysis by account. This arrangement also means that fewer errors will be made in the accounts. 10.

Accounting software is a tool that makes recording accounting transactions easier. You are still the “brain” behind the accounting. You will need to decide when to record a transaction, how to record the transaction, how to interpret the financial statements and what business decisions to make. Knowing how to record accounting manually will help you understand the entire accounting process and what happens behind the software. There are errors in software programs. Over relying on a software program can result in large errors. When you are writing a report using the computer, you still need to know how to write paragraphs and how to explain your content. Just like accounting software, the computer is only a tool. Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw Hill

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11. Not preparing a trial balance can cause errors in the financial statements. The trial balance helps to identify and correct errors. If the debits do not equal the credits in the trial balance, this is a clue that errors need to be corrected. 12. The title of the financial statements must have the 1) company name, 2) the name of the financial statement and 3) the date. Dollar signs are used beside the first number in each column and on the total. Some numbers are indented to show a list of similar numbers in a category. For instance, all expenses are indented. This formatting makes the financial statements easier to read. Indentations do not represent debits and credits. The financial statements do not have debits and credits like the trial balance.

QUICK STUDY Quick Study 2-1 Answer A E E L A L A E L L R R E L R L A A E R L A L R W OE E L A A

Answer Detail Asset Expenses (Equity) Expenses (Equity) Liability Asset Liability Asset Expenses (Equity) Liability Liability Revenues (Equity) Revenues (Equity) Expenses (Equity) Liability Revenues (Equity) Liability Asset Asset Expenses (Equity) Revenues (Equity) Liability Asset Liability Revenues (Equity) Owner‘s Withdrawals (Equity) Owner‘s Capital (Equity) Expenses (Equity) Liability Asset Asset

Account 1. Buildings 2. Building Repair Expense 3. Wages Expense 4. Wages Payable 5. Notes Receivable 6. Notes Payable 7. Prepaid Advertising 8. Advertising Expense 9. Advertising Payable 10. Unearned Advertising 11. Advertising Revenue 12. Interest Income 13. Interest Expense 14. Interest Payable 15. Subscription Revenue 16. Unearned Subscription Revenue 17. Prepaid Subscription Fees 18. Supplies 19. Supplies Expense 20. Rent Revenue 21. Unearned Rent Revenue 22. Prepaid Rent 23. Rent Payable 24. Service Revenue 25. Jessica Vuong, Withdrawals 26. Jessica Vuong, Capital 27. Salaries Expense 28. Salaries Payable 29. Furniture 30. Equipment

2-75

Quick Study 2-2 a. Equipment ............................................ Debit b. Land ........................................... Debit c. Debit Amrit Sandhu, Withdrawals........... d. Rent Expense ................................ Debit e. Interest Income .............................. Credit f. Prepaid Rent .......................... Debit g. Accounts Receivable .............. Debit h. Office Supplies ....................... Debit i. Notes Receivable ................... Debit j. Notes Payable ........................ Credit k. Amrit Sandhu, Capital ............. Credit l. Rent Revenue......................... Credit m. Rent Payable .......................... Credit n. Interest Expense..................... Debit o. Interest Payable...................... Credit Quick Study 2-3 a. b. c. d. e.

Credit Credit Credit Debit Credit

f. g. h. i. j.

Credit Debit Credit Debit Debit

k. Debit l. Credit m. Debit n. Debit o. Debit

f. g. h. i. j.

Debit Credit Credit Credit Debit

k. Credit l. Debit m. Debit n. Credit o. Credit

Quick Study 2-4 a. b. c. d. e.

Credit Debit Credit Debit Credit

Quick Study 2-5 Note: Students could choose any account number within the specified range. a. b. c. d. e.

173 409 302 301 128

f. g. h. i. j.

203 106 622 124 403

k. 629 l. 219 m. 222 n. 170 o. 115

Quick Study 2-6 a.

Analysis

Assets increase. Assets decrease.

Journal entry

Debit the Furniture account for $400.

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analysis b.

Analysis

Credit the Cash account for $400. No transaction required.

Journal entry analysis c.

Analysis

Assets increase. Equity increases.

Journal entry analysis

Debit the Accounts Receivable account for $600.

Analysis

Liabilities increase. Equity decreases.

Journal entry analysis

Debit the Cleaning Expense account for $300.

Analysis

Assets increase. Equity increases.

Journal entry analysis

Debit the Cash account for $25,000.

Credit the Revenue account for $600.

Credit the Accounts Payable account for $300.

Credit the Douglas Malone, Capital account for $25,000.

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Quick Study 2-7 Date a.

Aug.

Account Titles and Explanation

Debit

Furniture.................................................................

400

Cash ..............................................................

Credit 400

Purchase of furniture for cash. ........................... b.

Aug.

No transaction required.

Aug.

Accounts Receivable ..............................................

600

Revenue ........................................................

600

Provided services on credit. .............................. d.

Aug.

Cleaning Expense ..................................................

300

Accounts Payable ..........................................

300

Purchased cleaning services on credit. ............. e.

Aug.

Cash....................................................................... Douglas Malone, Capital ................................

25,000 25,000

Investment by owner ..........................................

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Quick Study 2-8 1 & 2. Jul 31 Aug 31 Bal.

Cash 25,000 400 25,000

Aug 1

Accounts Receivable 1,500 Aug 13 600 Bal. 2,100 Jul 31

Jul 31 Aug 1 Bal.

Furniture 5,000 400 5,400

Accounts Payable Jul 31 500 Aug 14 300 Bal. 800

49,600

Douglas Malone, Capital 28,000 Jul 3` 25,000 Aug 31 53,000 Bal.

Revenue 4,500 600 5,100

Jul 31 Aug 13 Bal.

Cleaning Expense 1,500 Aug 14 300 Bal. 1,800 Jul 31

3. The account balance for each T-account is shown above. The accounting equation (Assets = Liabilities + Equity) is proved as follows: $57,100 = $800 + $56,300

2-79

Last revised: October 26, 2012

Quick Study 2-9 May 2

Analysis

Assets increase. Equity increases.

Journal entry Debit the Car account for $8,000. analysis Credit the Dee Bell, Capital account for $8,000. Journal Entry Date May 2

Account Titles and Explanation

Debit

Car

Credit

8,000 Dee Bell, Capital

8,000

Investment by owner.

May 10

Analysis

Assets increase. Equity increases.

Journal entry Debit the Accounts Receivable account for $4,000. Credit the Revenue analysis account for $4,000. Journal Entry Date May 10

Account Titles and Explanation

Debit

Accounts Receivable

Credit

4,000

Revenue

4,000

Billed customer for work performed.

May 12

Analysis

Assets increase. Liabilities increase.

Journal entry Debit the Cash account by $10,000. analysis Credit the Unearned Revenue account by $10,000. Journal Entry Date

Account Titles and Explanation

Debit

May 12

Cash

10,000

Unearned Revenue

Credit

10,000

Collected cash for future services.

2-80

Last revised: October 26, 2012

Quick Study 2-9 (Continued) May 15

Analysis

Assets decrease. Equity decreases.

Journal entry Debit the Wages Expense account for $6,000. analysis Credit the Cash account for $6,000. Journal Entry Date

Account Titles and Explanation

Debit

May 15

Wages Expense

6,000

Cash

Credit

6,000

Paid for wages.

May 16

Analysis

Assets increase. Assets decrease.

Journal entry Debit the Cash account for $4,000. analysis Credit the Accounts Receivable account for $4,000. Journal Entry Date

Account Titles and Explanation

Debit

May 16

Cash

4,000

Accounts Receivable

Credit

4,000

Collection of cash from customer.

May 22

Analysis

Assets decrease. Liabilities decrease.

Journal entry Debit the Accounts Payable account by $3,000. analysis Credit the Cash account by $3,000. Journal Entry Date

Account Titles and Explanation

Debit

May 22

Accounts Payable

3,000

Cash

Credit

3,000

Paid for outstanding accounts payable.

2-81

Last revised: October 26, 2012

Quick Study 2-10 1 & 2.

Apr 30 May 12 May 16 Bal.

Cash 15,000 6,000 10,000 3,000 4,000 20,000

Unearned Revenue 1,800 10,000 11,800

101 May 15 May 22

205 Apr 30 May 12 Bal.

Accounts Receivable 106 3,200 4,000 May 16 May 10 4,000 Bal. 3,200 Apr 30

Dee Bell, Capital 8,900 8,000 16,900

301 Apr 30 May 2 Bal.

May 2 Bal.

Car 8,000 8,000

Revenue 3,000 4,000 7,000

150

Accounts Payable 202 3,000 6,000 Apr 30 3,000 Bal.

May 22

410 Apr 30 May 10 Bal.

Wages Expense 1,500 May 15 6,000 Bal. 7,500

650

Apr 30

3. The account balance for each T-account is shown above. The accounting equation (Assets = Liabilities + Equity) is proved as follows: $31,200 = $14,800 + $16,400

2-82

Last revised: September, 2021

Quick Study 2-11 Accounts Payable Accounts Receivable 1,000 650 400 920 920 1,500 3,000 Bal. 2,250

250 900 650

250 1,800 1,400 650 2,300 Bal.

Utilities Expense 610 520 390 275 Bal. 1,795

Service Revenue 13,000 2,500 810 3,500 19,810 Bal. Notes Payable

Cash 3,900 2,400 17,800 3,900 14,500 21,800 340 Bal. 8,440

4,000 8,000

50,000 38,000 Bal.

Quick Study 2-12

Date 2023 May 1

General Journal Account Titles and Explanation

Debit

Equipment................................................................ Accounts Payable ............................................ Purchased equipment on account.

500

Accounts Payable .................................................... Cash ................................................................ Paid for the equipment purchased May 1.

500

Supplies ................................................................... Cash ................................................................ Purchased supplies for cash.

100

Wages Expense....................................................... Cash ................................................................ Paid wages to employees.

2,000

Cash ........................................................................ Service Revenue .............................................. Performed services for a client for cash.

750

Accounts Receivable................................................ Service Revenue .............................................. Did work for a customer on credit.

2,500

Cash ........................................................................ Accounts Receivable........................................

2,500

Page 1 Credit

500

100

2,000

750

2,500

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Last revised: September, 2021

Collected May 6 customer account.

2-84

Last revised: September, 2021

Quick Study 2-13

Date 2023 Jan. 3

General Journal Account Titles and Explanation

Debit

Cash ........................................................................ Equipment................................................................ Stan Adams, Capital ............................................ Investment by owner.

60,000 40,000

Office Supplies ......................................................... Accounts Payable ................................................ Purchased office supplies on credit.

340

Cash ........................................................................ Landscaping Services Revenue ........................... Received cash for landscaping services.

5,200

Accounts Payable .................................................... Cash ................................................................ Paid part of the January 4 credit purchase.

200

Office Supplies ......................................................... Accounts Payable ............................................ Purchased supplies on account.

700

Accounts Payable .................................................... Cash ................................................................ Paid the balance owing re January 4 credit purchase; 340 – 200 paid on Jan. 15 = 140.

140

Page 1 Credit

100,000

340

5,200

200

700

140

2-85

Last revised: September, 2021

Quick Study 2-14 Date 2023 Jan. 3 6 15 30

Date 2023 Jan. 4 16

Date 2023 Jan. 3

Date 2023 Jan. 4 15 16 30

Date 2023 Jan. 3

Date 2023 Jan. 6

Cash Explanation

Debit

Account No. 101 Credit Balance

60,000 5,200 200 140 Office Supplies Explanation

Debit

Account No. 124 Credit Balance

340 700 Equipment Explanation

Debit

340 1,040 Account No. 163 Credit Balance

40,000 Accounts Payable Explanation

Debit

60,000 65,200 65,000 64,860

40,000 Account No. 201 Credit Balance 340

340 140 840 700

200 700 140 Stan Adams, Capital Explanation

Debit

Account No. 301 Credit Balance 100,000

Landscaping Services Revenue Explanation

Debit

100,000

Account No. 403 Credit Balance 5,200

5,200

2-86

Last revised: September, 2021

Quick Study 2-15 Vahn Landscaping Trial Balance January 31, 2023 Acct. No. 101 163 233 301 302 401 640 690

Account Cash .................................................................... Equipment ........................................................... Unearned revenue ............................................... Brea Vahn, capital ............................................... Brea Vahn, withdrawals ....................................... Revenue .............................................................. Rent expense....................................................... Utilities expense ................................................... Totals ...................................................................

Debit

Credit

$ 7,000 9,000 $ 2,000 14,000 1,000 11,000 6,000 4,000 $27,000

_ ____ $27,000

Quick Study 2-16 The correct answer is c. If a $2,250 debit to Rent Expense is incorrectly posted as a credit, the effect is to understate the Rent Expense debit balance by $4,500. This causes the Debit column total on the trial balance to be $4,500 less than the Credit column total. Quick Study 2-17 1. Subtract total debits in the trial balance from total credits 24,250 - 21,550 = 2,700 2. Divide the difference by 9 2,700  9 = 300 3. The quotient equals the difference between the two transposed numbers. 300 is the difference between the two transposed numbers. 4. The number of digits in the quotient tells us the location of the transposition Look for a difference of 3 between the third number from the right and the fourth number from the right. Through a process of elimination, the incorrect value is Rent Expense for $4,100. The correct value must be $1,400. Proof: Recalculate the trial balance replacing $1,400 for the incorrect $4,100 and the trial balance now balances at $21,550.

2-87

Last revised: September, 2021

Quick Study 2-18 1. Subtract total debits in the trial balance from total credits 728 - 503 = 225 2. Divide the difference by 9 225  9 = 25 The quotient equals the incorrect number. Through a review of the values in the trial balance, the incorrect value is Notes Payable for $25. The correct value must be $250. Proof: Recalculate the trial balance replacing $250 for the incorrect $25 and the trial balance now balances at $728.

EXERCISES Exercise 2-1 (30 minutes) (1) Basic Account a.

Cash

Asset

Balance Sheet

Supplies

Asset

Balance Sheet

Debit

Increase

Decrease

Accounts Payable

Liability

Balance Sheet

Credit

Decrease

Increase

Yoojin Chang, Capital Account

Owner‘s Capital

Credit

Decrease

Increase

Yoojin Chang, Withdrawals

Withdrawals

Debit

Increase

Decrease

Design Revenue

Revenue

Credit

Decrease

Increase

Salaries Expense

Expense

Debit

Increase

Decrease

Accounts Receivable Notes Payable

Asset

Balance Sheet and The Statement of Changes in Equity The Statement of Changes in Equity Income Statement Income Statement Balance Sheet

Debit

Increase

Decrease

Liability

Balance Sheet

Credit

Decrease

Increase

Prepaid Insurance

Asset

Balance Sheet

Debit

Increase

Decrease

i. j.

() Financial Statement

(d) Effect of a Debit

(e) Effect of a Credit

Increase

Decrease

2-88

Last revised: September, 2021

Exercise 2-2 a.

Analysis

Assets increase. Equity increases.

Journal entry analysis

Debit the Cash account for $15,000.

Analysis

Assets increase. Liabilities increase.

Journal entry analysis

Debit the Equipment account for $2,000.

Analysis

Assets increase. Assets decrease.

Journal entry analysis

Debit the Equipment account for $500.

Analysis

Assets increase. Equity increases from Revenue.

Journal entry analysis

Debit the Cash account for $1,000.

Analysis

Assets increase. Equity increases from Revenue.

Journal entry analysis

Debit the Accounts Receivable account for $700.

Analysis

Assets decrease. Liabilities decrease.

Journal entry analysis

Debit the Accounts Payable account for $1,000.

Analysis

Assets increase. Assets decrease.

Journal entry analysis

Debit the Cash account for $300.

Credit the Christina Reis, Capital account in equity for $15,000

Credit the Accounts Payable account for $2,000.

Credit the Cash account for $500.

Credit the Revenue account for $1,000.

Credit the Revenue account for $700.

Credit the Cash account for $1,000.

Credit the Accounts Receivable account for $300.

2-89

Last revised: September, 2021

2-90

Last revised: September, 2021

Exercise 2-3

Date a.

Sept.

Account Titles and Explanation

Debit

Cash ......................................................................

15,000

Christina Reis, Capital ...................................

Credit

15,000

Investment by owner. .........................................

Sept.

Equipment..............................................................

2,000

Accounts Payable .........................................

2,000

Purchased equipment on credit. ........................

Sept.

Equipment..............................................................

500

Cash .............................................................

500

Purchased equipment with cash. ......................

Sept.

Cash ......................................................................

1,000

Revenue ........................................................

1,000

Provided service for cash. .................................

Sept.

Accounts Receivable..............................................

700

Revenue ........................................................

700

Provided service on account. .............................

Sept.

Accounts Payable ..................................................

1,000

Cash .............................................................

1,000

Payment for Equipment. ....................................

Sept.

Cash ...................................................................... Accounts Receivable .....................................

300 300

2-91

Last revised: September, 2021

1 and 2. Accounts Receivable 106 (e) 700 300 (g)

Cash 101 (a) 15,000 500 (c) (d) 1,000 1,000 (f) (g) 300 Bal. 14,800

Bal. 400

Equipment (b) 2,000 (c) 500 Bal. 2,500

Christina Reis, Capital 301

Accounts

161

Revenue

403

Payable 201 (f) 1,000 2,000 (b)

15,000 (a)

1,000 (d) 700 (e)

1,000 Bal.

15,000 Bal.

1,700 Bal.

3. The account balance for each T-account is shown above. The accounting equation (Assets = Liabilities + Equity) is proved as follows: $17,700 = $1,000 + $16,700 Exercise 2-5 (30 minutes) a.

Analysis

Assets increase. Equity increases.

Journal entry Debit the Cash account for $32,600. analysis Credit the William Curtis, Capital account for $32,600. Journal Entry Date Oct. 2

Account Description Cash

Debit

Credit

32,600

William Curtis, Capital

32,600

Investment by owner.

Analysis

Assets increase. Assets decrease.

Journal entry Debit the Office Supplies account for $925. analysis Credit the Cash account for $925. Journal Entry Date Oct. 4

Account Titles and Explanation Office Supplies

Debit

Credit

925

Cash

925

2-92

Last revised: September, 2021

Exercise 2-5 (Continued) c.

Analysis

Assets increase. Liabilities increase.

Journal entry Debit the Office Equipment account by $13,600. analysis Credit the Accounts Payable account by $13,600. Journal Entry Date

Account Titles and Explanation

Debit

Oct. 6

Office Equipment

13,600

Accounts Payable

Credit

13,600

Purchased office equipment on credit.

Analysis

Assets increase. Equity increases.

Journal entry Debit the Cash account for $3,000. analysis Credit the Revenue account for $3,000. Journal Entry Date

Account Titles and Explanation

Debit

Oct. 10

Cash

3,000

Credit

Revenue

3,000

Cash collected for services provided.

Analysis

Assets decrease. Liabilities decrease.

Journal entry Debit the Accounts Payable account for $13,600. analysis Credit the Cash account for $13,600. Journal Entry Date

Account Titles and Explanation

Debit

Oct. 12

Accounts Payable

13,600

Cash

Credit

13,600

Made payment on outstanding payable.

2-93

Last revised: September, 2021

Exercise 2-5 (Continued) f.

Analysis

Assets increase. Equity increases.

Journal entry Debit the Accounts Receivable account by $5,400. analysis Credit the Revenue account by $5,400. Journal Entry Date

Account Titles and Explanation

Debit

Oct. 16

Accounts Receivable

5,400

Credit

Revenue

5,400

Customer billed for services provided.

Analysis

Assets decrease. Equity decreases.

Journal entry Debit the Rent Expense account for $3,500. analysis Credit the Cash account for $3,500. Journal Entry Date

Account Titles and Explanation

Debit

Oct. 18

Rent Expense

3,500

Credit

Cash

3,500

Paid October rent with cash.

Analysis

Assets increase. Assets decrease.

Journal entry Debt the Cash account for $5,400. analysis Credit the Accounts Receivable account for $5,400. Journal Entry Date

Account Titles and Explanation

Debit

Oct. 26

Cash

5,400

Credit

Accounts Receivable

5,400

Collected amounts owing on account.

2-94

Last revised: September, 2021

Exercise 2-5 (Concluded) i.

Analysis

Assets decrease. Equity decreases.

Journal entry Debit the William Curtis, Withdrawal account for $5,000. analysis Credit the Cash account for $5,000. Journal Entry Date

Account Titles and Explanation

Debit

Oct. 31

William Curtis, Withdrawals

5,000

Credit

Cash

5,000

Withdrawal of cash by owner. Exercise 2-6 (20 minutes) Cash (a) 32,600 925 (d) 3,000 13,600 (h) 5,400 3,500 5,000 Balance 17,975

(f) Balance

(b) (e) (g) (i)

Accounts Receivable 5,400 5,400 (h) 0

(b) Balance

Office Supplies 925 925

Office Equipment 13,600 13,600

(e)

Accounts Payable 13,600 13,600 (c) 0 Balance William Curtis, Capital 32,600 (a) 32,600 Balance

William Curtis, Withdrawals (i) 5,000 Balance 5,000 Revenue 3,000 (d) 5,400 (f) 8,400 Balance

(g) Balance

Rent Expense 3,500 3,500

2-95

Last revised: September, 2021

Exercise 2-7 (20 minutes) b.

Accounts Receivable ................................................................ Services Revenue ............................................................ Provided services on credit.

2,700

Cash......................................................................................... Services Revenue ............................................................ Provided services for cash.

3,150

2,700

3,150

Revenues are inflows of assets (or decreases in liabilities) received in exchange for goods or services provided to customers. The other transactions did not create revenues for the following reasons: a.

This transaction brought in cash, but it was an owner investment in the company.

This transaction brought in cash, but it also created a liability because the services have not yet been provided to the client. This transaction changed the form of the asset from accounts receivable to cash. Total assets were not increased. Revenue was not generated.

e. f.

This transaction brought cash into the company and increased assets, but it also increased a liability by the same amount.

Exercise 2-8 (20 minutes) b.

Salaries Expense ................................................................... Cash ............................................................................... Paid the salary of the receptionist.

1,125

Utilities Expense ..................................................................... Cash ............................................................................... Paid the utilities bill for the office.

930

1,125

930

Expenses are outflows or using up of assets (or the creation of liabilities) that occur in the process of providing goods or services to customers. The transactions labelled a, c, and e were not expenses for the following reasons: a.

This transaction decreased assets in settlement of a previously existing liability. Thus, the using up of assets did not reduce equity.

This transaction was the purchase of an asset. The form of the company‘s assets changed, but total assets did not change, and the equity did not decrease.

This transaction was a distribution of cash to the owner. Even though equity decreased, the decrease did not occur in the process of providing goods or services to customers.

2-96

Last revised: September, 2021

Exercise 2-9 (45 minutes) Part 2 Date 2023 July

GENERAL JOURNAL Account Titles and Explanation PR 1

Page 1 Credit

Debit

Cash ...................................................... Manny Gill, Capital ............................. To record investment by owner.

101 301

5,200

Equipment.............................................. Accounts Payable .............................. Purchased equipment on credit.

150 201

2,700

Cash ...................................................... Revenue ............................................ Performed services for cash.

101 401

12,000

Expenses ............................................... Cash .................................................. Paid expenses.

501 101

3,700

Accounts Receivable ............................. Revenue ............................................ Completed services on account.

106 401

1,600

Manny Gill, Withdrawals......................... Cash .................................................. Owner withdrew cash.

302 101

270

5,200

2,700

12,000

3,700

1,600

270

Note: The account numbers in the PR column above would be included only during the posting of these journal entries into the ledger accounts in Part 3 of this exercise.

2-97

Last revised: September, 2021

Exercise 2-9 (continued) *Note: The student could use T-accounts or balance column format accounts as their general ledger. Both are shown in this solution. Part 1 and 3 July

1 12 Balance

Cash 101 5,200 3,700 July 14 12,000 270 31 13,230 Accts. Receivable 1,600

106

July 15

Equipment 2,700

150

July 10

July 31

Accounts Payable 2,700

201 July 10

Manny Gill, Capital 5,200

301 July 1

Manny Gill, Withdrawals 270

Revenue

July 14

302

401 12,000 July 12 1,600 15 13,600 Balance

Expenses 3,700

501

2-98

Last revised: September, 2021

Exercise 2-9 (continued) Part 1 and 3 Date 2023 July

Cash Explanation 1 12 14 31

Date 2023 July 15

Date 2023 July 10

Date 2023 July

G1 G1 G1 G1 Accounts Receivable Explanation

Equipment Explanation

PR G1

Accounts Payable Explanation

Debit

PR G1

Revenue Explanation

Debit

PR G1

Credit

Debit

1,600

Credit

Account No. 150 Balance

2,700

Debit

2,700

Credit

Account No. 201 Balance

2,700

Debit

2,700

Account No. 301 Credit Balance 5,200

Debit

5,200 17,200 13,500 13,230

Account No. 106 Balance

1,600

5,200

Account No. 302 Credit Balance

270

Debit

G1 G1

Expenses Date Explanation 2023 July 14 Exercise 2-9 (continued)

Account No. 101 Balance

3,700 270

G1 Manny Gill, Withdrawals Explanation

Credit

5,200 12,000

Date 2023 July 12 15

PR G1

Manny Gill, Capital Explanation

Date 2023 July 31

270

Credit

Account No. 401 Balance

12,000 1,600

Debit

Credit

12,000 13,600

Account No. 501 Balance

3,700

Part 4

2-99

Last revised: September, 2021

Trial Balance July 31, 2023 Acct. No. Account Title 101 Cash ....................................................... 106 Accounts receivable ............................... 150 Equipment ............................................... 201 Accounts payable .................................... 301 Manny Gill, capital ................................... 302 Manny Gill, withdrawals ........................... 401 Revenue.................................................. 501 Expenses ................................................ Totals ..................................................

Debit $13,230 1,600 2,700

Credit

$ 2,700 5,200 270 13,600 3,700 $21,500

$21,500

2-100

Last revised: September, 2021

Exercise 2-9 (concluded) Part 5

West Secure Income Statement For Month Ended July 31, 2023 Revenue.............................................................. Expenses ............................................................ Profit ...................................................................

$13,600 3,700 $ 9,900

West Secure Statement of Changes in Equity For Month Ended July 31, 2023 Manny Gill, capital, July 1 ....................................

Investments by owner ......................................... Profit .................................................................. Total .................................................................. Less: Withdrawals by owner ................................ Manny Gill, capital, July 31 ..................................

$5,200 9,900

15,100 15,100 270 $14,830

The arrows are imaginary but emphasize the link between statements.

West Secure Balance Sheet July 31, 2023 Assets Cash ........................................... Accounts receivable .................... Equipment...................................

$13,230 1,600 2,700

Total assets ................................

$17,530

Liabilities Accounts payable ...............................$ 2,700 Equity Manny Gill, capital .............................. 14,830 Total liabilities and equity ..............................................$17,530

Analysis component: Accounts receivable result from credit sales to customers (debit accounts receivable and credit a revenue). Sales, or revenue, is part of equity. As revenues on account are recorded, assets on the left side of the accounting equation increase and equity on the opposite side of the accounting equation also increases. Therefore, accounts receivable are financed by, or created by, an equity transaction.

2-101

Last revised: September, 2021

Exercise 2-10 (10 minutes) Note: Students could choose any account number within the specified range. Account Number 101 115 160 210 215 310 320 410 510 520 530

Account Name Cash Accounts Receivable Office Equipment Accounts Payable Unearned Revenue Aaron Paquette, Capital Aaron Paquette, Withdrawals Consulting Revenues Salaries Expense Rent Expense Utilities Expense

2-102

Last revised: September, 2021

Exercise 2-11 (30 minutes) 1. Date 2023 Feb.

General Journal Account Titles and Explanation 1

Debit

Cash .......................................................................................................... 101 8,500 Consulting Revenues ............................................................................. 410 Performed work for cash.

Accounts Payable ...................................................................................... 210 5,000 Cash ...................................................................................................... 101 Paid account.

8,500

5,000

Cash .......................................................................................................... 101 3,600 Unearned Revenue ................................................................................ 215 Received cash in advance.

No entry.

Aaron Paquette, Withdrawals ..................................................................... 320 3,000 Cash ...................................................................................................... 101 Owner withdrew cash.

Page G1 Credit

3,600

3,000

Salaries Expense ....................................................................................... 510 10,000 Cash ...................................................................................................... 101 Paid salaries.

10,000

Note: The account numbers in the PR column above would be included only during the posting of these journal entries into the ledger accounts in Part 2 of this exercise. Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw Hill

2-103

Last revised: September, 2021

Exercise 2-11 (Continued) 2.

Accounts Receivable Cash 101 Bal 15,000 5,000 Feb 5 17 Feb 1 8,500 3,000 28 10 3,600 10,000 Bal 9,100

Unearned Revenue 215 2,600 Bal 3,600 Feb 10 6,200 Bal

Salaries Expense Bal 10,000 Feb 28 10,000 Bal 20,000

510

115 Bal

3,800

Aaron Paquette, Capital 9,500

Rent Expense Bal 7,500

310 Bal

520

Office Equipment Bal 22,500

Aaron Paquette, Withdrawals Bal 2,000 Feb 17 3,000 Bal 5,000

Utilities Expense Bal 1,000

160

Accounts Payable 210 Feb 5 5,000 8,000 Bal 3,000 Bal

320

Consulting Revenues 410 41,700 Bal 8,500 Feb 1 50,200 Bal

530

2-104

Last revised: September, 2021

Exercise 2-11 (Continued) 3. Paquette Advisors Trial Balance February 28, 2023 Acct. No. 101 115 160 210 215 310 320 410 510 520 530

Account Title Cash .................................................................. Accounts receivable .......................................... Office equipment................................................ Accounts payable............................................... Unearned revenue ............................................. Aaron Paquette, capital...................................... Aaron Paquette, withdrawals ............................. Consulting revenues .......................................... Salaries expense ............................................... Rent expense ..................................................... Utilities expense ................................................. Totals .................................................................

Debit $ 9,100 3,800 22,500

Credit

$ 3,000 6,200 9,500 5,000 50,200 20,000 7,500 1,000 $68,900

$68,900

2-105

Last revised: September, 2021

Exercise 2-11 (Concluded) 4. Paquette Advisors Income Statement For Two Months Ended February 28, 2023 Revenues: Consulting revenues....................................... Operating expenses: Salaries expense ............................................ Rent expense ................................................. Utilities expense ............................................. Total operating expenses .......................... Profit ...................................................................

$50,200 $20,000 7,500 1,000

The arrows are imaginary but emphasize the link between statements.

28,500 $21,700

5. Paquette Advisors Statement of Changes in Equity For Two Months Ended February 28, 2023 Aaron Paquette, capital, March 1 ........................ Investments by owner ......................................... $ 9,500 Profit 21,700 Total .................................................................. Less: Withdrawals by owner ................................ Aaron Paquette, capital, February 28 ..................

31,200 $31,200 5,000 $26,200

6. Paquette Advisors Balance Sheet February 28, 2023 Assets Cash ......................................... Accounts receivable .................. Office equipment ......................

Total assets............................

$ 9,100 3,800 22,500

Liabilities Accounts payable........................ Unearned revenue ...................... Total liabilities .............................

$35,400

Equity Aaron Paquette, capital............... Total liabilities and equity ........................................

$ 3,000 6,200 $ 9,200

26,200 $35,400

Analysis component: Unearned revenue occurs when cash is received from a customer in advance of the work being done. The collection is not recorded as revenue because it has not been earned until the work is done. Unearned revenue is therefore a liability because the business owes the customer a service (or work). For example, Recipe Unlimited Corporation receives cash from customers in advance of the providing service and records it as gift card liability, a type of unearned revenue. This would represent a future obligation. When Paquette Advisors collected the cash in advance it created a future obligation to provide their customers with consulting services worth the value of the cash collected. Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw Hill

2-106

Last revised: September, 2021

Exercise 2-12 (30 minutes) a.

Cash....................................................................................... Equipment .............................................................................. Automobiles ........................................................................... Jerry Steiner, Capital ...................................................... The owner invested cash, an automobile, and equipment.

7,000 5,600 11,000

Prepaid Insurance .................................................................. Cash ............................................................................... Purchased insurance coverage in advance.

3,600

Office Supplies ....................................................................... Cash ............................................................................... Purchased supplies with cash.

600

Office Supplies ....................................................................... Equipment .............................................................................. Accounts Payable ........................................................... Purchased supplies and equipment on credit.

200 9,400

Cash....................................................................................... Delivery Services Revenue ............................................. Received cash from customer for work done.

2,500

Accounts Payable................................................................... Cash ............................................................................... Made payment on payables.

2,400

Gas and Oil Expense ............................................................. Cash ............................................................................... Paid for gas and oil.

700

23,600

3,600

600

9,600

2,500

2,400

700

2-107

Last revised: September, 2021

Exercise 2-13 (20 minutes) 2023 April 5 Cash .................................................................................. Surgical Revenues ........................................................ Performed surgery and collected cash. 8 Supplies ............................................................................. Accounts Payable .......................................................... Purchased surgical supplies on credit.

5,200 5,200

19,600 19,600

10 No entry. 18 Salaries Expense ............................................................... Cash .............................................................................. Paid salaries.

47,000

20 Accounts Receivable ......................................................... Surgical Revenues ........................................................ Performed six surgeries on credit; $4,400 x 6 = $26,400

26,400

21 Accounts Payable .............................................................. Cash .............................................................................. Paid for the credit purchase of April 8.

19,600

22 Utilities Expense ................................................................ Cash .............................................................................. Paid the April utilities.

2,100

29 Cash .................................................................................. Accounts Receivable ................................................. Collection from four credit customers of April 20; $4,400 x 4 = $17,600.

17,600

47,000

26,400

19,600

2,100

17,600

2-108

Last revised: September, 2021

Exercise 2-14 (25 minutes)

Parts a and b: Cash Explanation

Date 2022 Dec. 2023 Jan.

Debit

Credit

Account No. 101 Balance

31 Beginning balance

850

1 20 31

Accounts Receivable Date Explanation 2022 Dec. 31 Beginning balance 2023 Jan. 12 31 Equipment Date Explanation 2022 Dec. 31 Beginning balance 2023 Jan. 20 Accounts Payable Date Explanation 2022 Dec. 31 Beginning balance 2023 Jan. 20 Toshi Sato, Capital Date Explanation 2022 Dec. 31 Beginning balance 2023 Jan. 1

G1 G1 G1

3,500

4,350 2,350 7,350

2,000 5,000

Debit

Credit

Account No. 106 Balance 300

G1 G1

9,000

Debit

5,000

Credit

9,300 4,300

Account No. 167 Balance 1,500

12,000

13,500

Debit

Account No. 201 Credit Balance 325

10,000

Debit

10,325

Account No. 301 Credit Balance 2,325

3,500

5,825

2-109

Last revised: September, 2021

Exercise 2-14 (Parts a and b continued) Toshi Sato, Withdrawals Explanation

Date 2022 Dec.

Debit

Account No. 302 Credit Balance

31 Beginning balance Revenue Explanation

Date 2022 Dec. 2023 Jan.

300

Debit

Account No. 401 Credit Balance

31 Beginning balance 12

Date 2022 Dec.

1,800 G1

Salaries Expense Explanation

9,000

Debit

10,800

Account No. 622 Credit Balance

31 Beginning balance

1,500

2-110

Last revised: September, 2021

Exercise 2-14 (Parts a and b continued) Note: After posting the journal entries, the PR column in the General Journal would appear as follows: General Journal Account Titles and Explanation

Date PR 2023 Jan. 1 Cash ................................................................................... 101 Toshi Sato, Capital ......................................................... 301 Additional owner investment.

Page 1 Credit

Debit 3,500

3,500

12 Accounts Receivable .......................................................... 106 Revenue ......................................................................... 401 Performed work for a customer on account.

9,000

20 Equipment .......................................................................... 167 Cash ............................................................................... 101 Accounts Payable ........................................................... 201 Purchased equipment by paying cash and the balance on credit.

12,000

31 Cash ................................................................................... 101 Accounts Receivable ...................................................... 106 Collected cash from credit customer.

5,000

9,000

2,000 10,000

5,000

Analysis component: All of the details regarding a transaction, such as serial numbers or invoice numbers, form part of the journal entry recorded in the journal and provide a chronological picture of what has happened in the business. The general ledger does not accommodate these kinds of very necessary details. Therefore, we need to journalize to ensure important details are readily available. The general ledger summarizes by account all of the transactions recorded in the journal. For example, without the ledger, we would not be able to determine the balance in cash without going through the journal and adding/subtracting all of the individual transactions. The ledger allows us to have account balance information. In summary, although it appears that journalizing and posting are recording the same information twice, the journal and ledger each serve different and important functions in the accounting system.

2-111

Last revised: September, 2021

Exercise 2-15 (25 minutes) Date 2023 Aug. 1

General Journal Account Titles and Explanation

Debit

Cash .............................................................. Photography Equipment ................................. Joseph Eagle, Capital ................................ Investment by owner.

101 167 301

20,000 42,000

Prepaid Rent .................................................. Cash .......................................................... Rented studio space for 3 months in advance.

131 101

12,000

Office Supplies ............................................... Cash .......................................................... Purchased office supplies.

124 101

1,800

Cash............................................................... Photography Revenue................................ Collected cash for photography services.

101 401

9,200

Utilities Expense .......................................... Cash .......................................................... Paid for August utilities.

690 101

1,400

Page G1 Credit

62,000

12,000

1,800

9,200

1,400

Note: The account numbers in the PR column above would be included only during the posting of these journal entries into the ledger accounts in Exercise 2-16.

2-112

Last revised: September, 2021

Exercise 2-16 (30 minutes) Date 2023 Aug. 1 1 5 20 31

Date 2023 Aug. 5

Date 2023 Aug. 1

Date 2023 Aug. 20

Date 2023 Aug. 31

Cash Explanation

Office Supplies Explanation

Debit

G1 G1 G1 G1 G1

20,000

PR G1

Prepaid Rent Explanation

Photography Equipment Explanation

Joseph Eagle, Capital Explanation

12,000 1,800 9,200 1,400

Debit

12,000

Debit

42,000

Debit

PR G1

Utilities Expense Explanation

PR G1

1,800 Account No. 131 Credit Balance 12,000 Account No. 167 Credit Balance 42,000 Account No. 301 Credit Balance 62,000

Debit

62,000

Account No. 401 Credit Balance 9,200

Debit

20,000 8,000 6,200 15,400 14,000

Account No. 124 Credit Balance

1,800

G1 Photography Revenue Explanation

Account No. 101 Credit Balance

9,200

Account No. 690 Credit Balance

1,400

2-113

Last revised: September, 2021

Exercise 2-16 (concluded)

FOR THE LOVE OF PIXELS Trial Balance August 31, 2023 Acct No. 101 124 131 167 301 401 690

Account Title Cash........................................... Office supplies ........................... Prepaid rent ............................... Photography equipment ............. Joseph Eagle, capital ................. Photography revenue ................. Utilities expense ......................... Totals .........................................

Debit $ 14,000 1,800 12,000 42,000

Credit

$62,000 9,200 1,400 $71,200

$71,200

Analysis component: The trial balance is not a financial statement; it is an internal working paper used to verify that debits and credits in the general ledger are equal and to review account balances. The trial balance format does not readily communicate information such as financial performance and financial position, information that is desired by external decision makers. Financial statements are used for external reporting because the formats of these communicate information desired by external users. For example, the income statement reports financial performance while the balance sheet reports financial position.

2-114

Last revised: September, 2021

Exercise 2-17 (20 minutes) Aug. 1 20 Bal

Cash 101 20,000 12,000 Aug. 1 9,200 1,800 5 1,400 31 14,000

Photography Equipment Aug. 1 42,000

167

Photography Revenue 401 9,200 Aug. 20

Aug. 5

Office Supplies 1,800

124 Aug. 1

Prepaid Rent 12,000

131

Joseph Eagle, Capital 301 62,000 Aug. 1

Utilities Expense Aug. 31 1,400

690

FOR THE LOVE OF PIXELS Trial Balance August 31, 2023 Acct. No. 101 124 131 167 301 401 690

Account Title Debit Cash........................................................... Office supplies............................................ Prepaid rent................................................ Photography equipment ............................. Joseph Eagle, capital ................................. Photography revenue ................................. Utilities expense ......................................... Totals .........................................................

Credit $14,000 1,800 12,000 42,000 $62,000 9,200 1,400 $71,200

$71,200

2-115

Last revised: September, 2021

Analysis component: The trial balance is an internal working paper used to verify that debits and credits in the general ledger are equal and to review account balances. The trial balance format does not readily communicate information such as financial performance and financial position, information that is desired by external decision makers. Financial statements are used for external reporting because the formats of these communicate information desired by external users. For example, the income statement reports financial performance while the balance sheet reports financial position

2-116

Last revised: July 1, 2018

Exercise 2-18 (20 minutes) Extreme Hockey Income Statement For Year Ended December 31, 2023 Revenues: Training revenue ............................................ Operating expenses: Wages expense ............................................. Rent expense ................................................. Total operating expenses .......................... Loss ....................................................................

$18,000 $29,000 8,000

Extreme Hockey Statement of Changes in Equity For Year Ended December 31, 2023 Ryan Roy, capital, January 1............................... Investments by owner ......................................... Total .................................................................. Less: Withdrawals by owner ................................ $2,000 Loss .......................................................... 19,000 Ryan Roy, capital, December 31 .........................

37,000 $19,000

0 50,000 $50,000

The arrows are imaginary but emphasize the link between statements.

21,000 $29,000

Extreme Hockey Balance Sheet December 31, 2023 Assets Cash ........................................... Accounts receivable .................... Prepaid rent ................................ Machinery ...................................

$18,000 5,200 13,000 57,100

Total assets ................................

$93,300

Liabilities Accounts payable ............................... $ 17,300 Notes payable .................................... 47,000 Total liabilities..................................... $ 64,300 Equity Ryan Roy, capital ............................... 29,000 Total liabilities and equity .............................................. $ 93,300

Analysis component: Losses cause equity to decrease. If equity decreases, either assets have to decrease and/or liabilities must increase to keep the balance sheet in balance. Therefore, if Extreme Hockey‘s continues to experience losses, there are two short-term alternatives available to prevent a decrease in assets. First, the business could borrow which would increase liabilities and temporarily increase assets until payments had to be made. Second, Ryan Roy, the owner, could invest additional assets into the business which would increase equity and assets. However, for the long-term, the owner does not want to support the business through continual investments; the business must be able to support itself through positive performance (profit).

2-117

Last revised: July 1, 2018

Exercise 2-19 (20 minutes) CYCLE TRAVEL TOURS Income Statement For Month Ended March 31, 2023 Revenues: Service revenue .............................................................................. Operating expenses: Salaries expense ............................................................................. Interest expense.............................................................................. Total operating expenses ............................................................ Profit ....................................................................................................

$1,510 $ 730 10 740 $ 770

CYCLE TRAVEL TOURS Statement of Changes in Equity For Month Ended March 31, 2023 Francois Laneuv, capital, March 1 ........................................................ Investment by owner ............................................................................ Profit .................................................................................................... Total ................................................................................................ Less: Withdrawal by owner ................................................................. Francois Laneuv, capital, March 31 ......................................................

$ $1,980 770

2,750 $2,750 1,430 $1,320

CYCLE TRAVEL TOURS Balance Sheet March 31, 2023 Assets Cash ........................................ Accounts receivable ................. Prepaid insurance .................... Equipment ................................

Total assets..............................

$ 430 1,880 230 630

Liabilities Accounts payable ................................... $ 430 Unearned service revenue ..................... 390 Notes payable ........................................ 1,030 Total liabilities ................................... $1,850

$3,170

Equity Francois Laneuv, capital ........................ 1,320 Total liabilities and equity ....................... $3,170 The arrows are imaginary but emphasize the link between statements.

2-118

Last revised: July 1, 2018

Exercise 2-20 (20 minutes) Media Marketing Services Income Statement For Month Ended March 31, 2023 Revenues: Revenue.................................................................................. Operating expenses: Wages expense ...................................................................... Office supplies expense .......................................................... Total operating expenses ................................................... Loss ............................................................................................

$126,000 $146,000 7,000 153,000 $ 27,000

Media Marketing Services Statement of Changes in Equity For Month Ended March 31, 2023 Sam Smith, capital, March 1 ....................................................... Investment by owner ................................................................... Total ...................................................................................... Less: Withdrawal by owner ........................................................ Loss ................................................................................. Sam Smith, capital, March 31......................................................

Assets Cash ............................. Accounts receivable ...... Office supplies .............. Building ......................... Land .............................. Machinery...................... Total assets...................

$87,000* 35,000 $122,000 $ 18,000 27,000

Media Marketing Services Balance Sheet March 31, 2023 Liabilities $ 17,000 Accounts payable ............................... 3,000 Notes payable ..................................... 3,000 Total liabilities ................................... 80,000 84,000 Equity 50,000 Sam Smith, capital ................................. $237,000 Total liabilities and equity .......................

45,000 $77,000

$ 46,000 114,000 $ 160,000

77,000 $237,000

The arrows are imaginary but emphasize the link between statements.

*$122,000 March 31, 23 Balance - $35,000 invested in March = $87,000 March 1, 23 Balance

2-119

Last revised: July 1, 2018

Exercise 2-21 (20 minutes)

Description a. A $2,400 debit to Rent Expense was posted as a $1,590 debit. b. A $42,000 debit to Machinery was posted as a debit to Accounts Payable.

(1) (2) Difference Column Between Debit With the and Credit Larger Columns Total $810 Credit $0

—

c. A $4,950 credit to Services Revenue was posted as a $495 credit. d. A $1,440 debit to Store Supplies was not posted at all.

$4,455

Debit

$1,440

Credit

e. A $2,250 debit to Prepaid Insurance was posted as a debit to Insurance Expense.

A $4,050 credit to Cash was posted twice as two credits to the Cash account. g. A $9,900 debit to the owner‘s withdrawals account was debited to the owner‘s capital account.

$4,050

—

Credit —

(3) (4) Identify Amount That Account(s) Account(s) is Incorrectly Overstated or Stated Understated Rent Rent Expense is Expense understated by $810 Machinery Machinery is understated by $42,000 and Accounts Accounts Payable is Payable understated by $42,000 Services Services Revenue is Revenue understated by $4,455 Store Store Supplies is Supplies understated by $1,440 Prepaid Prepaid Insurance is Insurance understated by $2,250 and Insurance Expense Insurance is overstated by Expense $2,250 Cash Cash is understated by $4,050 Owner‘s Capital

Owner‘s Capital account is understated by $9,900

Owner‘s Withdrawals

Owner‘s Withdrawals is understated by $9,900

2-120

Last revised: July 1, 2018

Exercise 2-22 (15 minutes) a. 1. Dr = Cr 2. Accounts Receivable is understated (too low) by $3,500 and Revenue is understated by $3,500. b. 1. Dr = Cr 2. Accounts Payable is overstated (too high) by $600 and Cash is overstated by $600. c. 1. Dr  Cr 2. Cash is overstated by $180. d. 1. Dr  Cr 2. Accounts Receivable is overstated by $750. e. 1. Dr = Cr 2. Accounts Payable is understated by $2,000 and Equipment is understated by $2,000.

Exercise 2-23 (15 minutes) Case A: 1. Subtract total debits in the trial balance from total credits 5,010 – 4,290 = 720 2. Divide the difference by 9 720  9 = 80 3. The quotient equals the difference between the two transposed numbers. 80 is the difference between the two transposed numbers. 4. The number of digits in the quotient tells us the location of the transposition. Look for a difference of 8 between the second number from the right and the third number from the right. Through a process of elimination, the incorrect value is Accounts Payable of $190. The correct value must be $910. Proof: Recalculate the trial balance replacing $910 for the incorrect $190 and the trial balance now balances at $5,010.

2-121

Last revised: July 1, 2018

Exercise 2-23 (concluded) Case B: 1. Subtract total debits in the trial balance from total credits 34,400 – 28,100 = 6,300 2. Divide the difference by 9 to reveal a slide error 6,300  9 = 700 3. The quotient identifies a slide error and equals the correct value. Through a process of elimination, the incorrect value is Withdrawals for $7,000. The correct value must be $700. Proof: Recalculate the trial balance replacing $700 for the incorrect $7,000 and the trial balance now balances at $28,100.

Case C: 1. Subtract total debits in the trial balance from total credits 942 – 906 = 36 2. Divide the difference by 9 36  9 = 4 3. The quotient equals the difference between the two transposed numbers. 4 is the difference between the two transposed numbers. 4. The number of digits in the quotient tells us the location of the transposition. Look for a difference of 4 between the first number from the right and the second number from the right. Through a process of elimination, the incorrect value is Cash for $59. The correct value must be $95. Proof: Recalculate the trial balance replacing $95 for the incorrect $59 and the trial balance now balances at $942.

2-122

Last revised: July 1, 2018

For Month Ended December 31 Revenues Consulting revenue ...................................... Expenses Salaries expense........................................... Rent expense ................................................ Telephone expense....................................... Miscellaneous expenses .............................. Total expenses .............................................. Net income .............................................................

$14,000 $7,000 3,550 760 580 11,890 $ 2,110

Exercise 2-25 (15 minutes) ERNST CONSULTING Statement of Owner‘s Equity For Month Ended December 31 J. Ernst, Capital, December 1 ...................................... Add:

Owner‘s investment .................................... Net income (from Exercise 2-24) ................

Less: Withdrawals by owner ................................ J. Ernst, Capital, December 31 ....................................

84,000 2,110 86,110 2,000 $84,110

2-123

Last revised: July 1, 2018

Exercise 2-26 (15 minutes)

Assets Cash ..................................... Accounts receivable ........... Office supplies .................... Office equipment ................ Land ..................................... Total assets .........................

ERNST CONSULTING Balance Sheet December 31 Liabilities $11,360 Accounts payable ......................... 14,000 3,250 Equity 18,000 J. Ernst, Capital* ........................... 46,000 $92,610 Total liabilities and equity ............

$ 8,500

84,110 _______ $92,610

* For computation of this amount see Exercise 2-25.

Exercise 2-27 (15 minutes) ERNST CONSULTING Statement of Cash Flows For Month Ended December 31 Cash flows from operating activities Cash received from customers ............................................................ a Cash paid to employees ...................................................................... Cash paid for rent ................................................................................. Cash paid for telephone expenses ...................................................... Cash paid for miscellaneous expenses .............................................. Net cash used by operating activities .................................................

0 (1,750) (3,550) (760) (580) ( 6,640)

Cash flows from investing activities Cash paid for office equipment ........................................................... Net cash used by investing activities ..................................................

(18,000) (18,000)

Cash flows from financing activities Cash investments by owner ................................................................. Cash withdrawals by owner ................................................................. Net cash provided by financing activities ...........................................

38,000 (2,000) 36,000

Net increase in cash ............................................................................. Cash balance, December 1 ................................................................... Cash balance, December 31 .................................................................

$11,360 0 $11,360

$7,000 Salaries Expense - $5,250 still owed = $1,750 paid to employees.

2-124

Last revised: July 1, 2018

PROBLEMS Problem 2-1A (30 minutes) Nov 1

Analysis

Assets increase. Equity increases.

Journal entry Debit the Cash account for $200,000. Debit the Aircraft Equipment analysis account for $50,000. Credit the Tobias Eaden, Capital account for $250,000. Journal Entry Date Nov 1

Account Titles and Explanation

Debit

Cash

200,000

Aircraft Equipment

50,000

Tobias Eaden, Capital Owner investment equipment.

Nov 3

Analysis

Credit

250,000 cash

and

Assets increase and assets decrease. Liabilities increase.

Journal entry Debit the Land account for $400,000. analysis Debit the Building account for $100,000. Credit the Cash account for $125,000. Credit the Long-Term Notes Payable account for 375,000. Journal Entry Date Nov 3

Account Titles and Explanation

Debit

Land

400,000

Building

100,000

Credit

Cash

125,000

Long-Term Notes Payable

375,000

Purchased Land and Building with Cash and a long-term Notes Payable.

2-125

Last revised: July 1, 2018

Problem 2-1A (Continued) Nov 7

Analysis

Assets increase. Equity increase.

Journal entry Debit the Aircraft Equipment account for $200,000. analysis Credit the Tobias Eaden, Capital account for $200,000. Journal Entry Date

Account Titles and Explanation

Debit

Nov 7

Airplane

200,000

Tobias Eaden, Capital

Credit

200,000

Owner investment of asset.

Nov 9

Analysis

Assets increase. Liabilities increase.

Journal entry Debit the Supplies account for $5,000. analysis Credit the Accounts Payable account for $5,000. Journal Entry Date

Account Titles and Explanation

Debit

Nov 9

Supplies

5,000

Accounts Payable

Credit

5,000

Purchased supplies on credit.

Nov 13

Analysis

Assets increase. Equity increases.

Journal entry Debit the Accounts Receivable account for $16,000. analysis Credit the Revenue account for $16,000. Journal Entry Date

Account Titles and Explanation

Debit

Nov 13

Accounts Receivable

16,000

Revenue

Credit

16,000

Billed customer for services provided.

2-126

Last revised: July 1, 2018

Problem 2-1A (Continued) Nov 17

Analysis

Assets decrease. Equity decreases.

Journal entry Debit the Wages Expense account for $3,000. analysis Credit the Cash account for $3,000. Journal Entry Date

Account Titles and Explanation

Debit

Nov 17

Wages Expense

3,000

Cash

Credit

3,000

Paid wages.

Nov 21

Analysis

No Transaction required.

Journal entry analysis Journal Entry Date

Account Titles and Explanation

Debit

Credit

No Transaction required.

Nov 23

Analysis

Assets decrease. Liabilities decrease.

Journal entry Debit the Accounts Payable account for $2,500. analysis Credit the Cash account for $2,500. Journal Entry Date

Account Titles and Explanation

Debit

Nov 23

Accounts Payable

2,500

Cash

2,500

Paid accounts payable.

2-127

Last revised: July 1, 2018

Problem 2-1A (Concluded) Nov 27

Analysis

Assets increase. Assets decrease.

Journal entry Debit the Aircraft Equipment (new) account for $20,000. analysis Credit the Cash account for $15,000. Credit the Aircraft Equipment (old) account for $5,000. Journal Entry Date

Account Titles and Explanation

Debit

Nov 27

Aircraft Equipment (new)

20,000

Credit

Cash

15,000

Aircraft Equipment (old)

5,000

Purchase of aircraft equipment.

Nov 30

Analysis

Assets decrease. Equity decreases.

Journal entry Debit the Tobias Eaden, Withdrawal account for $3,200. analysis Credit the Cash account for $3,200. Journal Entry Date Nov 30

Account Titles and Explanation Tobias Eaden, Withdrawals

Debit

Credit

3,200

Cash

3,200

Withdrawal of cash by owner.

2-128

Last revised: July 1, 2018

Problem 2-2A (30 minutes) Parts 1 and 2

Generally accounts with only 1 debit or 1 credit do not have a Balance row. Nov 1

Cash 200,000 125,000 3,000 2,500 15,000 3,200

Tobias Eaden, Capital 250,000 Nov 1 200,000 Nov 7 450,000 Bal.

Nov 3 Nov 17 Nov 23 Nov 27 Nov 30 Nov 30

Bal

Nov 13

51,300

Tobias Eaden, Withdrawals 3,200 Revenue 16,000 Nov 13

Accounts Receivable 16,000

Nov 9

Supplies 5,000

Nov 17

Nov 7

Airplane 200,000

Nov 1 Nov 27

Aircraft Equipment 50,000 5,000 20,000

Bal.

65,000

Nov 3

Building 100,000

Nov 3

Land 400,000

Nov 23

Accounts Payable 2,500 5,000 Nov 9

Wages Expense 3,000

Nov 27

Note: There is no entry for November 27 since it is not a transaction.

2-129

Last revised: July 1, 2018

Problem 2-2A Continued (5 minutes) Part 3 Assets ($837,300) = Liabilities ($377,500) + Equity ($459,800)

Problem 2-3A (30 minutes) General Journal Date Account Titles and Explanation 2023 May 1 Equipment ............................................................................ Cash ................................................................................. Notes Payable .................................................................. Purchased new equipment paying cash and signing a 90-day note payable.

Debit

Page 1 Credit

53,700 14,700 39,000

2 Prepaid Insurance................................................................. Cash ................................................................................. Purchased 12 months of insurance to begin May 2.

28,200

3 Cash ..................................................................................... Fitness Contract Revenue ................................................ Completed a fitness contract for a group of customers and collected cash.

6,700

4 Office Supplies ..................................................................... Accounts Payable ............................................................. Purchased office supplies on account.

4,100

6 Accounts Payable ................................................................. Office Supplies ................................................................. Returned defective supplies to supplier.

820

10 Accounts Receivable ............................................................ Fitness Contract Revenue ................................................ Did work for a client today on account.

12,200

15 Accounts Payable ................................................................. Cash ................................................................................. Paid for the May 4 purchase less the return on May 6; $4,100 - $820 return = $3,280.

3,280

20 Cash ..................................................................................... Accounts Receivable ........................................................ Received payment from the client of May 10.

12,200

28,200

6,700

4,100

820

12,200

3,280

12,200

2-130

Last revised: July 1, 2018

Problem 2-3A (concluded) May 25 Cash ..................................................................................... Unearned Revenue........................................................... Received cash for work to be done in June.

3,200

31 Salaries Expense .................................................................. Cash ................................................................................. Paid month-end salaries.

54,000

31 Telephone Expense .............................................................. Cash ................................................................................. Paid the May telephone bill.

2,600

31 Utilities Expense ................................................................... Accounts Payable (or Utilities Payable) ............................ May electrical bill to be paid June 15.

3,800

3,200

54,000

2,600

3,800

Note: Assume that all entries were journalized on Page 1 of the General Journal.

2-131

Last revised: July 1, 2018

Problem 2-4A (90 minutes) Date 2023 Mar. 1

General Journal Account Titles and Explanation

Debit

Cash ......................................................................... 101 Office Equipment ...................................................... 163 Abe Factor, Capital ............................................... 301 Invested cash and equipment to start the business.

50,000 12,000

Prepaid Rent ............................................................. Cash ..................................................................... Prepaid three months’ rent.

131 101

9,000

Office Equipment ...................................................... Office Supplies .......................................................... Accounts Payable ................................................. Purchased equipment and supplies on credit.

163 124 201

6,000 1,200

Cash ......................................................................... Accounting Revenue ............................................. Received cash from client for completed work.

101 401

6,200

Accounts Receivable................................................. Accounting Revenue ............................................. Billed client for completed work.

106 401

4,000

Accounts Payable ..................................................... Cash ..................................................................... Paid balance due on accounts payable.

201 101

7,200

Prepaid Insurance ...................................................... Cash ...................................................................... Paid annual premium for insurance.

128 101

3,000

Cash ......................................................................... Accounts Receivable ............................................ Collected part of the amount owed by a client.

101 106

1,500

Page 1 Credit

62,000

9,000

7,200

6,200

4,000

7,200

3,000

1,500

2-132

Last revised: July 1, 2018

Problem 2-4A (concluded) Mar.

No entry.

Accounts Receivable................................................. Accounting Revenue ............................................. Billed client for completed work.

106 401

2,850

Abe Factor, Withdrawals ........................................... Cash ..................................................................... Owner’s withdrawal of cash.

302 101

3,600

Office Supplies .......................................................... Accounts Payable ................................................. Purchased supplies.

124 201

650

Utilities Expense ....................................................... Cash ..................................................................... Paid monthly utility bill.

690 101

860

2,850

3,600

650

860

Note: The account numbers in the PR column above would be included only when these journal entries are being posted in Problem 2-5A. Assume that all entries were journalized on Page 1 of the General Journal.

2-133

Last revised: July 1, 2018

Problem 2-5A (45 minutes) Parts 1 and 2 Cash Date 2023 Mar. 1 1 5 11 15 20 27 31

Date 2023 Mar. 9 20 23

Date 2023 Mar. 3 30

Date 2023 Mar. 15

Date 2023 Mar. 1

Date 2023 Mar. 1 3

Explanation

Accounts Receivable Explanation

Office Supplies Explanation

Prepaid Insurance Explanation

Prepaid Rent Explanation

Office Equipment Explanation

Debit

G1 G1 G1 G1 G1 G1 G1 G1

50,000

Debit

G1 G1 G1

4,000

Acct. No. 101 Credit Balance

3,600 860

50,000 41,000 47,200 40,000 37,000 38,500 34,900 34,040

Credit

Acct. No. 106 Balance

9,000 6,200 7,200 3,000 1,500

2,850

4,000 2,500 5,350

Debit

Acct. No. 124 Credit Balance

G1 G1

1,200 650

1,200 1,850

Debit

Acct. No. 128 Credit Balance

3,000

Debit

9,000

Debit

Acct. No. 163 Credit Balance

G1 G1

12,000 6,000

12,000 18,000

1,500

Credit

Acct. No. 131 Balance

2-134

Last revised: July 1, 2018

Problem 2-5A (continued) Date 2023 Mar. 3 11 30

Date 2023 Mar. 1

Date 2023 Mar. 27

Date 2023 Mar. 5 9 23

Date 2023 Mar. 31

Accounts Payable Explanation

Abe Factor, Capital Explanation

Debit

G1 G1 G1

7,200

Credit

Acct. No. 201 Balance

7,200

7,200 0 650

650

Debit

Acct. No. 301 Credit Balance 62,000

62,000

Abe Factor, Withdrawals Explanation PR

Debit

Acct. No. 302 Credit Balance

3,600

Debit

Accounting Revenue Explanation

Utilities Expense Explanation

Credit

Acct. No. 401 Balance

G1 G1 G1

6,200 4,000 2,850

6,200 10,200 13,050

Debit

Acct. No. 690 Credit Balance

860

2-135

Last revised: July 1, 2018

Problem 2-5A (concluded) Part 3 X-FACTOR ACCOUNTING Trial Balance March 31, 2023 Acct. No. 101 106 124 128 131 163 201 301 302 401 690

Account Title Cash ................................................................ Accounts receivable......................................... Office supplies ................................................. Prepaid insurance ............................................ Prepaid rent ..................................................... Office equipment ............................................. Accounts payable ............................................ Abe Factor, capital ........................................... Abe Factor, withdrawals................................... Accounting revenue ......................................... Utilities expense............................................... Totals...............................................................

Debit $34,040 5,350 1,850 3,000 9,000 18,000

Credit

650 62,000

3,600 13,050 860 $75,700

$75,700

2-136

Last revised: July 1, 2018

Problem 2-6A (20 minutes) X-FACTOR ACCOUNTING Income Statement For Month Ended March 31, 2023 Revenues: Accounting revenue ......................................... Operating expenses: Utilities expense ............................................... Profit ...................................................................

X-FACTOR ACCOUNTING Statement of Changes in Equity For Month Ended March 31, 2023 Abe Factor, capital, March 1 ............................... Investments by owner ......................................... $62,000 Profit .................................................................. 12,190 Total .................................................................. Less: Withdrawals by owner ................................ Abe Factor, capital, March 31..............................

Assets Cash ........................................... Accounts receivable .................... Office supplies ............................ Prepaid insurance ....................... Prepaid rent ................................ Office equipment......................... Total assets ..............................

$13,050 860 $12,190

74,190 74,190 3,600 $70,590

The arrows are imaginary but emphasize the link between statements.

X-FACTOR ACCOUNTING Balance Sheet March 31, 2023 Liabilities $34,040 Accounts payable ............................... $ 650 5,350 1,850 3,000 Equity 9,000 Abe Factor, capital ............................. 70,590 18,000 Total liabilities and $71,240 equity .............................................. $71,240

2-137

Last revised: July 1, 2018

Problem 2-7A (90 minutes) Part 1

Date 2023 May 1

General Journal Account Titles and Explanation

Debit

Cash ................................................................ 101 Office Equipment ............................................. 163 Elizabeth Wong, Capital ........................... 301 Invested cash and equipment to start the business.

78,000 51,000

Prepaid Rent .................................................... 131 Cash ........................................................ 101 Prepaid three months’ rent.

15,300

Office Equipment ............................................. 163 Office Supplies................................................. 124 Accounts Payable .................................... 201 Purchased equipment and supplies on credit.

25,500 5,100

Cash ................................................................ 101 Services Revenue .................................... 403 Received cash from client for services performed.

8,300

Accounts Receivable ....................................... 106 Services Revenue .................................... 403 Billed client for completed work.

16,300

Accounts Payable ............................................ 201 Cash ........................................................ 101 Paid one-half of balance due on accounts payable.

15,300

Prepaid Insurance ............................................ 128 Cash ........................................................ 101 Paid annual premium for insurance.

7,800

Cash ................................................................ 101 Accounts Receivable ................................ 106 Collected part of the amount owed by a client.

13,100

Accounts Receivable ....................................... 106 Services Revenue .................................... 403 Billed client for completed work.

5,580

Wages expense ............................................... 623 Cash ........................................................ 101 Paid wage expense.

35,500

Page 1 Credit

129,000

15,300

30,600

8,300

16,300

15,300

7,800

13,100

5,580

35,500

2-138

Last revised: July 1, 2018

Problem2-7A, Part 1 (continued) May

Elizabeth Wong, Withdrawals .......................... 302 Cash ........................................................ 101 Owner withdrew cash.

5,300

Office Supplies................................................. 124 Accounts Payable .................................... 201 Purchased supplies on credit.

1,750

Utilities Expense .............................................. 690 Cash ........................................................ 101 Paid monthly utility bill.

1,430

5,300

1,750

1,430

Note: Assume that all entries were journalized on Page 1 of the General Journal. Parts 2 and 3 Cash Date 2023 May 1 1 6 10 19 22 25 31 31

Date 2023 May 9 22 25

Date 2023 May

Explanation

Accounts Receivable Explanation

Office Supplies Explanation 2 31

Debit

G1 G1 G1 G1 G1 G1 G1 G1 G1

78,000

Debit

G1 G1 G1

16,300

Debit

G1 G1

5,100 1,750

Acct. No. 101 Credit Balance

15,300 8,300 15,300 7,800 13,100 35,500 5,300 1,430

78,000 62,700 71,000 55,700 47,900 61,000 25,500 20,200 18,770

Acct. No. 106 Credit Balance

13,100 5,580

16,300 3,200 8,780

Acct. No. 124 Credit Balance

5,100 6,850

2-139

Last revised: July 1, 2018

Problem 2-7A (continued) Parts 2 and 3 Date 2023 May 19

Prepaid Insurance Explanation

Debit

7,800

Prepaid Rent Date Explanation 2023 May 1

Date 2023 May 1 2

Date 2023 May 2 10 31

Date 2023 May 1

Date 2023 May 31

Date 2023 May 6 9 25 Date 2023 May 25

Office Equipment Explanation

Accounts Payable Explanation

Elizabeth Wong, Capital Explanation

Debit

15,300

Debit

G1 G1

51,000 25,500

Debit

G1 G1 G1

15,300

Debit

G1 Services Revenue Explanation

Acct. No. 131 Credit Balance 15,300 Acct. No. 163 Credit Balance 51,000 76,500 Acct. No. 201 Credit Balance

1,750

Debit

5,300 Acct. No. 403 Credit Balance 8,300 16,300 5,580

Debit

35,500

129,000

Acct. No. 302 Credit Balance

5,300

Debit

30,600 15,300 17,050

Acct. No. 301 Credit Balance 129,000

G1 G1 G1 Wages Expense Explanation

7,800

30,600

G1 Elizabeth Wong, Withdrawals Explanation PR

Acct. No. 128 Credit Balance

8,300 24,600 30,180

Acct. No. 623 Credit Balance 35,500

Problem 2-7A (continued) Parts 2 and 3 Utilities Expense

Acct. No. 690

2-140

Last revised: July 1, 2018

Date 2023 May 31

Explanation

Debit

1,430

Credit

Balance 1,430

Part 4 HR Solutions Trial Balance May 31, 2023 Acct. No. 101 106 124 128 131 163 201 301 302 403 623 690

Account Title

Debit

Cash......................................................... Accounts receivable ................................. Office supplies.......................................... Prepaid insurance .................................... Prepaid rent.............................................. Office equipment ...................................... Accounts payable ..................................... Elizabeth Wong, capital ............................ Elizabeth Wong, withdrawals.................... Services revenue...................................... Wages expense…………………………… Utilities expense ....................................... Totals .......................................................

$ 18,770 8,780 6,850 7,800 15,300 76,500

Credit

$ 17,050 129,000 5,300 30,180 35,500 1,430 $176,230

$176,230

Analysis component: Equity represents how much of HR Solutions‘ assets belong to the owner, Elizabeth Wong. Services Revenue is an equity account because as revenues are realized, the business‘s net worth (assets – liabilities, or equity) increases either through the receipt of an asset (cash or accounts receivable) or satisfying a liability (unearned revenues). Utilities Expense is an equity account because as expenses are realized, net worth (what belongs to the owner) decreases either through the use of an asset (such as prepaid insurance) or increase in a liability (such as rent payable). Elizabeth Wong, Withdrawals is an equity account because as the owner withdraws assets, Elizabeth Wong‘s equity in the business (what belongs to the owner) decreases. The owner‘s objective is for the business to generate sufficient revenues to cover all expenses, provide sufficient assets for the purpose of withdrawals, and at the same time maintain or preferably increase equity (because excess revenues remained after deducting expenses and withdrawals).

2-141

Last revised: July 1, 2018

Problem 2-8A HR Solutions Income Statement For Month Ended May 31, 2023 Revenues: Service revenue .................................................. Operating expenses: Wages expense ............................................... Utilities expense ............................................... Total operating expenses ............................... Loss ....................................................................

HR Solutions Statement of Changes in Equity For Month Ended May 31, 2023 Elizabeth Wong, capital, May 1 ........................... Investments by owner…………………….. Less: Withdrawals by owner ............................... Loss .......................................................... Elizabeth Wong, capital, May 31 .........................

$30,180 $35,500 1,430 36,930 $ 6,750

$ $5,300 6,750

0 129,000

12,050 $116,950

The arrows are imaginary but emphasize the link between statements.

HR Solutions Balance Sheet May 31, 2023 Assets Cash ........................................... $ 18,770 Accounts receivable .................... 8,780 Office supplies ............................ 6,850 Prepaid insurance ....................... 7,800 Prepaid rent ................................ 15,300 Office equipment......................... 76,500 Total assets .............................. $134,000

Liabilities Accounts payable ............................... $ 17,050

Equity Elizabeth Wong, capital...................... 116,950 Total liabilities and equity .............................................. $134,000

2-142

Last revised: July 1, 2018

Problem 2-9A (25 minutes) Hipster Optical Income Statement For Month Ended May 31, 2023 Revenues: Service revenue .................................................. Operating expenses: Wages expense ............................................... Rent expense …………………………………… Utilities expense ............................................... Total operating expenses ............................... Profit ...................................................................

$30,380 $16,000 5,300 1,500

Hipster Optical Statement of Changes in Equity For Month Ended May 31, 2023 Peeta Black, capital, May 1 ................................. Owner investment ............................................... $ 57,300 Profit .................................................................. 7,580 Total .................................................................. Less: Withdrawals by owner ................................ Peeta Black, capital, May 31 ...............................

22,800 $ 7,580

-0-

64,880 $64,880 1,580 $63,300

The arrows are imaginary but emphasize the link between statements.

Hipster Optical Balance Sheet May 31, 2023 Assets Cash ........................................... Accounts receivable .................... Office supplies ............................ Prepaid insurance ....................... Office equipment.........................

Total assets ..............................

$19,500 9,480 7,400 10,820 26,600

$73,800

Liabilities Accounts payable ............................... $ 1,700 Unearned service revenue ................. 8,800 Total liabilities.....................................$ 10,500

Equity Peeta Black, capital............................ 63,300 Total liabilities and equity .............................................. $73,800

2-143

Last revised: July 1, 2018

Problem 2-9A (Concluded) Analysis component: 2023 May 31 Utilities Expense............................................................ Cash ................................................................... Paid the May utilities.

1,500 1,500

OR 31 Utilities Expense............................................................ Accounts Payable ............................................... Received the May utility bill which will be paid next month.

1,500

2-144

Last revised: July 1, 2018

Problem 2-10A (90 minutes) Part 1 Date 2023 July

General Journal Account Titles and Explanation

Debit

1 Cash .............................................................. Office Equipment ........................................... Drafting Equipment ........................................ Bob Binbutti, Capital .................................. Investment by owner.

101 163 167 301

300,000 12,000 90,000

2 Land ............................................................... Cash .......................................................... Long-Term Notes Payable ......................... Purchased land.

183 101 251

108,000

3 Building .......................................................... Cash .......................................................... Purchased a building.

173 101

150,000

5 Prepaid Insurance .......................................... Cash .......................................................... Purchased two one-year insurance policies.

128 101

12,000

7 Cash .............................................................. Engineering Revenue ................................ Completed services for cash.

101 401

1,400

9 Drafting Equipment ...................................... Cash .......................................................... Long-Term Notes Payable ......................... Purchased drafting equipment.

167 101 251

45,000

10 Accounts Receivable ...................................... Engineering Revenue ................................ Completed services on credit.

106 401

4,000

Page 1 Credit

402,000

10,800 97,200

150,000

12,000

1,400

21,000 24,000

4,000

2-145

Last revised: July 1, 2018

Problem 2-10A (continued) July

12 Office Equipment ........................................... Accounts Payable ...................................... Purchased office equipment on credit.

163 201

4,500

15 Accounts Receivable ...................................... Engineering Revenue ................................ Completed services on credit.

106 401

7,000

16 Equipment Rental Expense ............................ Accounts Payable ...................................... Equipment rental to be paid in 30 days.

645 201

13,800

17 Cash .............................................................. Accounts Receivable ................................. Collection from credit customer.

101 106

400

19 Wages Expense ............................................ Cash .......................................................... Paid drafting assistants.

623 101

12,000

22 Accounts Payable .......................................... Cash .......................................................... Paid July 12 transaction.

201 101

4,500

25 Repairs Expense ............................................ Cash .......................................................... Paid for repairs on drafting equipment.

684 101

1,350

26 Bob Binbutti, Withdrawals .............................. Cash .......................................................... Owner withdrawal.

302 101

800

30 Wages Expense ............................................. Cash .......................................................... Paid drafting assistants.

623 101

12,000

31 Advertising Expense ...................................... Cash .......................................................... Paid for advertising in local newspaper.

655 101

6,000

4,500

7,000

13,800

400

12,000

4,500

1,350

800

12,000

6,000

Note: Assume all entries were journalized on Page 1 of the General Journal.

2-146

Last revised: July 1, 2018

Problem 2-10A (continued) Parts 2 and 3 Cash Date Explanation 2023 June 30 Beginning balance July 1 2 3 5 7 9 17 19 22 25 26 30 31 Accounts Receivable Date Explanation 2023 June 30 Beginning balance July 10 15 17 Prepaid Insurance Explanation

Date 2023 June 30 Beginning balance July 5

Office Equipment Explanation

Date 2023 June 30 Beginning balance July 1 12

Debit

G1 G1 G1 G1 G1 G1 G1 G1 G1 G1 G1 G1 G1

300,000

Debit

G1 G1 G1

G1 G1

Credit

Account No. 101 Balance

10,800 150,000 12,000 1,400 21,000 400 12,000 4,500 1,350 800 12,000 6,000

Credit

Account No. 106 Balance

4,000 7,000 400

Debit

Credit

26,000 326,000 315,200 165,200 153,200 154,600 133,600 134,000 122,000 117,500 116,150 115,350 103,350 97,350

3,000 7,000 14,000 13,600

Account No. 128 Balance

12,000

500 12,500

Debit

Account No. 163 Balance

Credit

12,000 4,500

1,700 13,700 18,200

2-147

Last revised: July 1, 2018

Problem 2-10A (continued) Parts 2 and 3 (continued) Drafting Equipment Date Explanation 2023 June 30 Beginning balance July 1 9 Building Date Explanation 2023 June 30 Beginning balance July 3 Land Date Explanation 2023 June 30 Beginning balance July 2 Accounts Payable Explanation

Date 2023 June 30 Beginning balance July 12 16 22

Long-Term Notes Payable Explanation

Date 2023 June 30 Beginning balance July 2 9

Bob Binbutti, Capital Date Explanation 2023 June 30 Beginning balance July 1

Debit

G1 G1

90,000 45,000

Debit

150,000

Debit

G1 G1 G1

Account No. 167 Balance 1,200 91,200 136,200

Credit

Account No. 173 Balance 42,000 192,000

Credit

Account No. 183 Balance 28,000 136,000

108,000

Debit

Credit

Account No. 201 Balance

4,500

1,740 6,240 20,040 15,540

Debit

Account No. 251 Balance

4,500 13,800

G1 G1

Credit

97,200 24,000

Debit

Credit

24,000 121,200 145,200

Account No. 301 Balance

402,000

54,000 456,000

2-148

Last revised: July 1, 2018

Problem 2-10A (continued) Parts 2 and 3 (continued) Bob Binbutti, Withdrawals Date Explanation 2023 June 30 Beginning balance July 26 Engineering Revenue Date Explanation 2023 June 30 Beginning balance July 7 10 15 Wages Expense Date Explanation 2023 June 30 Beginning balance July 19 30 Equipment Rental Expense Explanation

Date 2023 June 30 Beginning balance July 16

Advertising Expense Date Explanation 2023 June 30 Beginning balance July 31 Repairs Expense Date Explanation 2023 June 30 Beginning balance July 25

Debit

800

Debit

G1 G1 G1

Account No. 302 Balance 1,000 1,800

Credit

Account No. 401 Balance

1,400 4,000 7,000

Debit

G1 G1

12,000 12,000

Credit

Debit

13,800

Debit

6,000

Debit

1,350

Credit

29,600 31,000 35,000 42,000

Account No. 623 Balance 4,000 16,000 28,000

Credit

Account No. 645 Balance 1,000 14,800

Credit

Account No. 655 Balance 640 6,640

Credit

Account No. 684 Balance

300 1,650

2-149

Last revised: July 1, 2018

Problem 2-10A (concluded) Part 4 BINBUTTI ENGINEERING Trial Balance July 31, 2023 Acct. No. 101 106 128 163 167 173 183 201 251 301 302 401 623 645 655 684

Account Title Cash .................................................................... Accounts receivable ............................................. Prepaid insurance ................................................ Office equipment ................................................. Drafting equipment .............................................. Building ................................................................ Land..................................................................... Accounts payable................................................. Long-term notes payable ..................................... Bob Binbutti, capital ............................................. Bob Binbutti, withdrawals ..................................... Engineering revenue ............................................ Wages expense ................................................... Equipment rental expense ................................... Advertising expense............................................. Repairs expense .................................................. Totals ...................................................................

Debit $ 97,350 13,600 12,500 18,200 136,200 192,000 136,000

Credit

$ 15,540 145,200 456,000 1,800 42,000 28,000 14,800 6,640 1,650 $658,740

$658,740

2-150

Last revised: July 1, 2018

Problem 2-11A (25 minutes) BINBUTTI ENGINEERING Income Statement For Three Months Ended July 31, 2023 Revenues: Engineering revenue ........................................... Operating expenses: Wages expense ............................................... Equipment rental expense ................................ Advertising expense ......................................... Repairs expense .............................................. Total operating expenses .............................. Loss ....................................................................

$42,000 $28,000 14,800 6,640 1,650

BINBUTTI ENGINEERING Statement of Changes in Equity For Three Months Ended July 31, 2023 Bob Binbutti, capital, May 1 ................................. Investments by owner ......................................... Total .................................................................. Less: Withdrawals by owner ................................ $1,800 Loss ......................................................... 9,090 Bob Binbutti, capital, July 31 ...............................

51,090 $ 9,090

0 456,000 456,000

The arrows are imaginary but emphasize the link between statements.

10,890 $445,110

BINBUTTI ENGINEERING Balance Sheet July 31, 2023 Assets Cash ........................................... $ 97,350 Accounts receivable .................... 13,600 Prepaid insurance ....................... 12,500 Office equipment......................... 18,200 Drafting equipment ..................... 136,200 Building ....................................... 192,000 Land............................................ 136,000 Total assets .............................. $605,850

Liabilities Accounts payable ............................... $ 15,540 Long-term notes payable.................... 145,200 Total liabilities.................................. 160,740 Equity Bob Binbutti, capital ........................... 445,110 Total liabilities and equity .............................................. $605,850

2-151

Last revised: July 1, 2018

Problem 2-12A (45 minutes) Part 1 Date 2023 July

General Journal Account Titles and Explanation

Debit

1 Supplies ........................................................ Accounts Payable ................................ Purchased supplies on credit.

126 201

100

2 Cash .............................................................. Unearned Teaching Revenue .................... Collected cash for teaching services in August.

101 233

4,000

3 Cash .............................................................. Teaching Revenue ............................... Collected cash for teaching services in July.

101 401

2,000

4 Rent Expense ................................................ Cash .......................................................... Paid July rent.

640 101

3,000

5 Accounts Payable .......................................... Cash .................................................... Paid for supplies purchased on account.

201 101

500

15 Taylor Smith, Withdrawals .......................... Cash .......................................................... The owner withdrew cash.

302 101

500

20 Wages Expense ............................................. Cash .................................................... Paid wages.

623 101

1,300

31 Equipment ...................................................... Accounts Payable ................................ Purchased equipment on credit.

161 201

300

Page 1 Credit

100

4,000

2,000

3,000

500

1,300

300

2-152

Last revised: July 1, 2018

Problem 2-12A (continued) Parts 2 and 3 Cash 101 Bal. 6,000 Jul. 2 4,000 3,000 Jul. 4 3 2,000 500 Jul. 5 500 Jul. 15 1,300 Jul. 20 Bal. 6,700

Unearned Teaching 233 Rev 9,800 Bal. 4,000 Jul. 2 13,800 Bal.

Wages Expense Bal. 26,350 Jul. 20 1,300 Bal. 27,650

623

Supplies 950 100 1,050

126

Taylor Smith, Capital

301

Bal. Jul. 1 Bal.

Bal. Jul. 31 Bal.

3,000 Bal.

Rent Expense Bal. 6,000 Jul. 4 3,000 Bal. 9,000

Equipment 161 8,000 300 8,300

Taylor Smith, Withdrawals Bal. 13,000 Jul. 15 500 Bal. 13,500

302

Accounts Payable 201 1,500 Bal. Jul. 5 500 100 Jul. 1 300 Jul. 31 1,400 Bal.

Teaching Revenue

401

46,000 Bal. 2,000 Jul. 3 48,000 Bal.

640

2-153

Last revised: July 1, 2018

Problem 2-12A (continued) Part 4 Glitter and Gold Studio Trial Balance July 31, 2023 Acct. No. 101 126 161 201 233 301 302 401 623 640

Account Title Cash ................................................................ Supplies ........................................................... Furniture .......................................................... Accounts payable ............................................ Unearned teaching revenue............................. Taylor Smith, capital ........................................ Taylor Smith, withdrawals ................................ Teaching revenue ............................................ Wages expense ............................................... Rent expense .................................................. Totals...............................................................

Debit $ 6,700 1,050 8,300

Credit

$ 1,400 13,800 3,000 13,500 48,000 27,650 9,000 $66,200

$66,200

2-154

Last revised: July 1, 2018

Problem 2-12A (concluded) Part 5 Glitter and Gold Studio Income Statement For Three Months Ended July 31, 2023 Teaching revenue ............................................... Operating expenses: Wages expense ............................................... Rent expense ................................................... Total operating expenses ............................... Profit ...................................................................

$48,000 $27,650 9,000

Glitter and Gold Studio Statement of Changes in Equity For Three Months Ended July 31, 2023 Taylor Smith, capital, May 1 ................................ Owner investment ............................................... $ 3,000 Profit .................................................................. 11,350 Total .................................................................. Less: Withdrawals by owner ................................ Taylor Smith, capital, July 31...............................

36,650 $11,350

$ 0 14,350 $14,350 13,500 $ 850

The arrows are imaginary but emphasize the link between statements.

Glitter and Gold Studio Balance Sheet July 31, 2023 Assets Cash ........................................... Supplies ...................................... Furniture .....................................

Total assets ..............................

$ 6,700 1,050 8,300

$16,050

Liabilities Accounts payable ............................... Unearned teaching revenue ............... Total liabilities..................................... Equity Taylor Smith, capital ........................... Total liabilities and equity ..............................................

$ 1,400 13,800 $15,200 850 $16,050

2-155

Last revised: July 1, 2018

Problem 2-13A (45 minutes) Part 1 Date 2023 Mar.

General Journal Account Titles and Explanation

Debit

1 Supplies ........................................................ Accounts Payable ................................ Purchased supplies on credit.

126 201

200

2 Cash .............................................................. Unearned Wedding Planning Revenue ...... Collected cash for wedding planning in May.

101 233

4,400

3 Cash .............................................................. Wedding Planning Revenue................. Collected cash for wedding planning services in March.

101 401

2,200

4 Rent Expense ................................................ Cash .......................................................... Paid March rent.

640 101

3,200

5 Accounts Payable .......................................... Cash .................................................... Paid for supplies purchased on account.

201 101

600

15 Ranjeet Gill, Withdrawals ............................ Cash .......................................................... The owner withdrew cash.

302 101

450

20 Wages Expense ............................................. Cash .................................................... Paid wages.

623 101

1,500

31 Equipment ...................................................... Accounts Payable ................................ Purchased equipment on credit.

161 201

400

Page 1 Credit

200

4,400

2,200

3,200

600

450

1,500

400

2-156

Last revised: July 1, 2018

Problem 2-13A (continued) Parts 2 and 3 Cash 101 Bal. 6,200 Mar 2 4,400 3,200 Mar. 4 3 2,200 600 Mar. 5 450 Mar. 15 1,500 Mar. 20 Bal. 7,050

Supplies 1,050 200 1,250

126

Unearned Wedding 233 Planning Revenue 10,000 Bal. 4,400 Mar. 2 14,400 Bal.

Ranjeet Gill, Capital

301

Wages Expense Bal. 26,650 Mar. 20 1,500 Bal. 28,150

Rent Expense Bal. 6,200 Mar. 4 3,200 Bal. 9,400

623

Bal. Mar 1 Bal.

Bal. Mar. 31 Bal.

3,200 Bal.

Equipment 161 8,200 400 8,600

Ranjeet Gill, Withdrawals Bal. 13,200 Mar. 15 450 Bal. 13,650

302

Accounts Payable 201 1,700 Bal. Mar 5 600 200 Mar. 1 400 Mar. 31 1,700 Bal.

Wedding Planning 401 Revenue 46,600 Bal. 2,200 Mar. 3 48,800 Bal.

640

2-157

Last revised: July 1, 2018

Problem 2-13A (continued) Part 4 Everything Wedding Planning Trial Balance March 31, 2023 Acct. No. 101 126 161 201 233 301 302 401 623 640

Account Title Cash ................................................................ Supplies ........................................................... Equipment ....................................................... Accounts payable ............................................ Unearned wedding planning revenue .............. Ranjeet Gill, capital .......................................... Ranjeet Gill, withdrawals.................................. Wedding planning revenue .............................. Wages expense ............................................... Rent expense .................................................. Totals...............................................................

Debit $ 7,050 1,250 8,600

Credit

$ 1,700 14,400 3,200 13,650 48,800 28,150 9,400 $68,100

$68,100

2-158

Last revised: July 1, 2018

Problem 2-13A (concluded) Part 5 Everything Wedding Planning Income Statement For Three Months Ended March 31, 2023 Wedding planning revenue.................................. Operating expenses: Wages expense ............................................... Rent expense ................................................... Total operating expenses ............................... Profit ...................................................................

$48,800 $28,150 9,400

Everything Wedding Planning Statement of Changes in Equity For Three Months Ended Mar 31, 2023 Ranjeet Gill, capital, January 1 ............................ Owner investment ............................................... $3,200 Profit .................................................................. 11,250 Total .................................................................. Less: Withdrawals by owner ................................ Ranjeet Gill, capital, March 31.............................

37,550 $11,250

14,450 $14,450 13,650 $ 800

The arrows are imaginary but emphasize the link between statements.

Everything Wedding Planning Balance Sheet March 31, 2023 Assets Liabilities Cash ........................................... $ 7,050 Accounts payable ............................... $ 1,700 Supplies ...................................... 1,250 Unearned teaching revenue ............... 14,400 Equipment................................... 8,600 Total liabilities..................................... $16,100 Equity Ranjeet Gill, capital ............................ 800 Total liabilities and Total assets .............................. $16,900 equity .............................................. $16,900

2-159

Last revised: July 1, 2018

Problem 2-14A (25 minutes) FELINE PET CARE Income Statement For Year Ended July 31, 2023 Revenues: Revenue.............................................................. Operating expenses: Wages expense ............................................... Equipment rental expense ................................ Pet food expense ............................................ Advertising expense ......................................... Total operating expenses .............................. Loss ....................................................................

$111,900 $56,000 32,000 17,600 9,000

FELINE PET CARE Statement of Changes in Equity For Year Ended July 31, 2023 Dwight Turnbull, capital, August 1 ....................... Investments by owner ......................................... Total .................................................................. Less: Withdrawals by owner ................................ $ 4,800 Loss ......................................................... 2,700 Dwight Turnbull, capital, July 31 ..........................

114,600 $ 2,700

0 290,760 290,760

The arrows are imaginary but emphasize the link between statements.

7,500 $283,260

FELINE PET CARE Balance Sheet July 31, 2023 Assets Cash ........................................... Accounts receivable .................... Prepaid insurance ....................... Equipment................................... Building ....................................... Land............................................

$ 22,800 11,400 12,300 18,000 190,000 134,000

Total assets .............................. $388,500

Liabilities Accounts payable ............................... $ 14,240 Unearned revenue ............................. 91,000 Total liabilities.................................. 105,240 Equity Dwight Turnbull, capital ...................... 283,260 Total liabilities and equity .............................................. $388,500

2-160

Last revised: July 1, 2018

Problem 2-14A (concluded)

Analysis component: 2023 July 31 Cash ............................................................................. Revenue.............................................................. Received cash for completing work for clients. 31 Accounts Receivable ..................................................... Revenue.............................................................. Completed work for clients on account.

111,900 111,900

Problem 2-15A (15 minutes) Wilm‘s Window Washing Services Trial Balance January 31, 2023 Cash (11,600 + 2,800b – 4,400d) ...................................... Accounts receivable (9,240 – 2,800b + 3,600c) ............... Prepaid insurance ........................................................... Equipment (24,000 + 4,000a) ........................................... Accounts payable (5,400 + 4,000a) ................................. Wilm Schmidt, capital ..................................................... Wilm Schmidt, withdrawals............................................ Service revenues (60,400 + 3,600e) ................................ Salaries expense ............................................................. Insurance expense .......................................................... Maintenance expense (13,000 + 3,600e)......................... Utilities expense ............................................................. Totals ...............................................................................

Debit $ 10,000 10,040 2,400 28,000

Credit

$ 9,400 45,000 8,960 64,000 32,000 5,200 16,600 5,200 $118,400

$118,400

Note: The superscripts (a) to (e) are references to items (a) to (e) listed in Problem 215A.

ALTERNATE PROBLEMS Problem 2-1B (30 minutes) June 2

Analysis

Assets increase. Equity increases.

Journal entry Debit the Cash account for $46,000. Debit the Office Equipment account analysis for $24,000. Credit the Trevor Peters, Capital account for $70,000. Journal Entry Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw Hill

2-161

Last revised: July 1, 2018

Date Jun 2

Account Titles and Explanation

Debit

Cash

46,000

Office Equipment

24,000

Trevor Peters, Capital

Credit

70,000

Owner investment of cash and equipment. Jun 4

Analysis

Assets increase and assets decrease. Liabilities increase.

Journal entry Debit the Land account for $268,000. analysis Debit the Building account for $66,000. Credit the Cash account for $30,000. Credit the Long-Term Notes Payable account for 304,000. Journal Entry Date Jun 4

Account Titles and Explanation

Debit

Land

268,000

Building

66,000

Credit

Cash

30,000

Long-Term Notes Payable

304,000

Purchased Land and Building with Cash and a Long-Term Notes Payable. Jun 8

Analysis

Assets increase. Equity increase.

Journal entry Debit the Vehicle account for $7,000. analysis Credit the Trevor Peters, Capital account for $7,000. Journal Entry Date

Account Titles and Explanation

Debit

Jun 8

Vehicle

7,000

Trevor Peters, Capital

Credit

7,000

Owner investment of asset. Problem 2-1B (Continued) Jun 10

Analysis

Assets increase. Liabilities increase.

Journal entry Debit the Office Supplies account for $600. analysis Credit the Accounts Payable account for $600. Journal Entry Date

Account Titles and Explanation

Debit

Credit

2-162

Last revised: July 1, 2018

Jun 10

Office Supplies

600

Accounts Payable

600

Purchased supplies on credit. Jun 14

Analysis

Assets increase. Equity increases.

Journal entry Debit the Accounts Receivable account for $2,400. analysis Credit the Revenue account for $2,400. Journal Entry Date

Account Description

Debit

Jun 14

Accounts Receivable

2,400

Revenue

Credit

2,400

Billed customer for services provided. Jun 18

Analysis

Assets decrease. Equity decreases.

Journal entry Debit the Salaries Expense account for $1,800. analysis Credit the Cash account for $1,800. Journal Entry Date

Account Titles and Explanation

Debit

Jun 18

Salaries Expense

1,800

Cash

Credit

1,800

Paid salary.

2-163

Last revised: July 1, 2018

Problem 2-1B (Continued) Jun 22

Analysis

Assets decrease. Liabilities decrease.

Journal entry Debit the Accounts Payable account for $600. analysis Credit the Cash account for $600. Journal Entry Date

Account Titles and Explanation

Jun 22

Accounts Payable

Debit

Credit

600

Cash

600

Paid accounts payable. Jun 24

Analysis

Assets increase. Assets decrease.

Journal entry Debit the Office Equipment (new) account for $4,000. analysis Credit the Cash account for $2,400. Credit the Office Equipment (old) account for $1,600. Journal Entry Date

Account Titles and Explanation

Debit

Jun 24

Office Equipment (new)

4,000

Credit

Cash

2,400

Equipment (old)

1,600

Purchase of office equipment. Jun 28

Analysis

Assets increase. Assets decrease.

Journal entry Debit the Cash account for $1,000. analysis Credit the Accounts Receivable account for $1,000. Journal Entry Date

Account Titles and Explanation

Debit

Jun 28

Cash

1,000

Accounts Receivable

Credit

1,000

Collected cash from a customer.

2-164

Last revised: July 1, 2018

Problem 2-1B (Concluded) Jun 30

Analysis

Assets decrease. Equity decreases.

Journal entry Debit the Trevor Peters, Withdrawal account for $1,050. analysis Credit the Cash account for $1,050. Journal Entry Date

Account Titles and Explanation

Debit

Jun 30

Trevor Peters, Withdrawals

1,050

Cash

Credit

1,050

Withdrawal of cash by owner.

2-165

Last revised: July 1, 2018

Problem 2-2B (30 minutes) Part 1 and 2

Part 3

Jun 2 Jun 28

Cash 46,000 30,000 Jun 4 1,000 1,800 Jun 18 600 Jun 22

Jun 4

Land 268,000

Jun 22

Accounts Payable 600 600 Jun 10

2,400 Jun 24 1,050 Jun 30 Balance

11,150

Jun 14 Balance

Accounts Receivable 2,400 1,000 1,400

Jun 10

Office Supplies 600

Jun 8

Jun 2 Jun 24 Balance

0 Balance Long-Term Notes Payable 304,000 Jun 4

Jun 28

Vehicle 7,000 Office Equipment 24,000 1,600 4,000 26,400

Trevor Peters, Capital 70,000 Jun 2 7,000 Jun 8 77,000 Balance

Jun 30

Revenue 2,400

Jun 14

Jun 24

Jun 18 Jun 4

Trevor Peters, Withdrawals 1,050

Salaries Expense 1,800

Building 66,000

Assets ($380,550) = Liabilities ($304,000) + Equity ($76,550)

2-166

Last revised: July 1, 2018

Problem 2-3B Date 2023 March

General Journal Accounts Titles and Explanations

Debit

1 Building ............................................................................... Cash ................................................................................. Long-Term Note Payable .................................................. Purchased new portable building paying cash and signing a five-year note payable.

375,000

1 Prepaid Insurance ................................................................. Cash ................................................................................. Purchased six months of insurance to begin March 1.

5,700

Page 1 Credit

75,000 300,000

5,700

2 No entry. 4 Cleaning Supplies ................................................................. Accounts Payable ............................................................. Purchased cleaning supplies on account.

450

19 Accounts Receivable ............................................................. Advertising Revenue (or other revenue account) .............. Performed work for a client on account.

35,000

20 Cash ..................................................................................... Unearned Revenue ........................................................... Collected cash from a customer for work to be done in April.

8,000

28 Hotel Expense or Travel Expense ......................................... Cash .............................................................................. Paid for a hotel regarding a business meeting.

240

450

35,000

8,000

240

2-167

Last revised: July 1, 2018

Problem 2-3B (concluded) March

29 Cash ..................................................................................... Advertising Revenue (or other revenue account) .............. Provided advertising services and collected cash.

5,000

30 Salaries Expense .................................................................. Cash ................................................................................. Paid month-end salaries.

25,600

30 Telephone Expense .............................................................. Accounts Payable ............................................................ March telephone bill to be paid on April 14.

1,300

30 Cash ..................................................................................... Accounts Receivable......................................................... Collected half of the amount owed by the customer of March 19.

17,500

5,000

25,600

1,300

17,500

Note: Assume all entries were journalized on Page 1 of the General Journal.

2-168

Last revised: July 1, 2018

Problem 2-4B (60 minutes) Date 2023 Sept.

General Journal Account Titles and Explanation 1

Debit

Cash .............................................................. Office Equipment ........................................... Francis Dhami, Capital............................... Investment by owner.

101 163 301

48,000 11,800

Prepaid Rent .................................................. Cash .......................................................... Paid three months’ rent.

131 101

8,700

Office Supplies ............................................... Office Equipment ........................................... Accounts Payable ...................................... Purchased items on credit.

124 163 201

1,180 5,800

Cash .............................................................. Accounting Revenue .................................. Sold accounting services for cash.

101 401

6,000

Accounts Receivable...................................... Accounting Revenue .................................. Sold accounting services on credit.

106 401

3,800

Accounts Payable .......................................... Cash .......................................................... Paid for credit purchase.

201 101

6,980

Prepaid Insurance .......................................... Cash ......................................................... Paid annual insurance premium.

128 101

2,800

Page 1 Credit

59,800

8,700

6,980

6,000

3,800

6,980

2,800

No entry.

2-169

Last revised: July 1, 2018

Problem 2-4B (concluded) Sept.

Cash .............................................................. Accounts Receivable ................................. Received cash from credit customer.

101 106

1,400

Accounts Receivable...................................... Accounting Revenue .................................. Sold accounting services on credit.

106 401

2,750

Francis Dhami, Withdrawals .......................... Cash .......................................................... Owner withdrew cash.

302 101

3,400

Office Supplies ............................................... Accounts Payable ...................................... Purchased supplies on credit.

124 201

630

1,400

2,750

3,400

630

Utilities Expense ............................................ 690 840 Cash .......................................................... 101 840 Paid utilities bill. Note: The account numbers in the PR column above would be included only when these journal entries are being posted in Problem 2-4B. Assume that all entries were journalized on Page 1 of the General Journal.

2-170

Last revised: July 1, 2018

Problem 2-5B Parts 1 and 2 Cash Date 2023 Sept.

Explanation 1 1 4 10 14 18 28 30

Date 2023 Sept. 8 18 24

Date 2023 Sept. 2 29

Date 2023 Sept.

Prepaid Insurance Explanation 14

Date 2023 Sept. 1

Date 2023 Sept. 1 2

Debit

G1 G1 G1 G1 G1 G1 G1 G1

48,000

Accounts Receivable Explanation PR

Office Supplies Explanation

48,000 39,300 45,300 38,320 35,520 36,920 33,520 32,680

8,700 6,000 6,980 2,800 1,400 3,400 840

Debit

Acct. No. 106 Credit Balance

G1 G1 G1

3,800

Debit

G1 G1

1,180 630

Debit

2,800

Debit

Acct. No. 131 Credit Balance

8,700

Debit

Acct. No. 163 Credit Balance

G1 G1

11,800 5,800

11,800 17,600

Prepaid Rent Explanation

Office Equipment Explanation

Acct. No. 101 Credit Balance

3,800 2,400 5,150

1,400 2,750

Credit

Acct. No. 124 Balance 1,180 1,810

Credit

Acct. No. 128 Balance

2-171

Last revised: July 1, 2018

Parts 1 and 2 Date 2023 Sept. 2 10 29

Date 2023 Sept. 1

Date 2023 Sept. 28

Date 2023 Sept. 4 8 24

Accounts Payable Explanation

Debit

G1 G1 G1

6,980

Francis Dhami, Capital Explanation PR

Date 2023 Sept. 30

Acct. No. 201 Balance

6,980

6,980 0 630

630

Debit

Acct. No. 301 Credit Balance 59,800

59,800

Francis Dhami, Withdrawals Explanation PR

Debit

Acct. No. 302 Credit Balance

3,400

Accounting Revenue Explanation PR

Debit

G1 G1 G1 Professional Development Expense Explanation PR

Date 2023

Credit

Utilities Expense Explanation

Debit

Credit

Acct. No. 401 Balance

6,000 3,800 2,750

6,000 9,800 12,550

Credit

Acct. No. 680 Balance

Debit

Acct. No. 690 Credit Balance

840

2-172

Last revised: July 1, 2018

Problem 2-5B (concluded) Part 3 FRANCIS DHAMI, PUBLIC ACCOUNTANT Trial Balance September 30, 2023 Acct. No. 101 106 124 128 131 163 201 301 302 401 690

Account Title Cash ........................................................................ Accounts receivable................................................. Office supplies ......................................................... Prepaid insurance .................................................... Prepaid rent ............................................................. Office equipment ..................................................... Accounts payable .................................................... Francis Dhami, capital ............................................. Francis Dhami, withdrawals ..................................... Accounting revenue ................................................. Utilities expense....................................................... Totals.......................................................................

Debit $ 32,680 5,150 1,810 2,800 8,700 17,600

Credit

630 59,800

3,400 12,550 840 $72,980

$72,980

2-173

Last revised: July 1, 2018

Problem 2-6B (25 minutes) FRANCIS DHAMI, PUBLIC ACCOUNTANT Income Statement For Month Ended September 30, 2023 Revenues: Accounting revenue ............................................ Operating expenses: Utilities expense ............................................... Total operating expenses .............................. Profit ...................................................................

$12,550 $840 840 $ 11,710

FRANCIS DHAMI, PUBLIC ACCOUNTANT Statement of Changes in Equity For Month Ended September 30, 2023 Francis Dhami, capital, September 1 .................. Investments by owner ......................................... Profit ................................................................... Total .................................................................. Less: Withdrawals by owner ................................ Francis Dhami, capital, September 30.................

The arrows are imaginary but emphasize the link between statements.

$ $59,800 11,710

71,510 $71,510 3,400 $68,110

FRANCIS DHAMI, PUBLIC ACCOUNTANT Balance Sheet September 30, 2023 Assets Liabilities Cash ........................................... $ 32,680 Accounts payable ...............................$ 630 Accounts receivable .................... 5,150 Office supplies ............................ 1,810 Prepaid insurance ....................... 2,800 Equity Prepaid rent ................................ 8,700 Francis Dhami, capital ........................ 68,110 Office equipment......................... 17,600 Total liabilities and Total assets .............................. $68,740 equity ...............................................$68,740

2-174

Last revised: July 1, 2018

Problem 2-7B (90 minutes) Part 1 Date 2023 Nov.

General Journal Account Titles and Explanation 1

Debit

Cash ................................................................ 101 Office Equipment ............................................. 163 Tait Unger, Capital ................................... 301 Owner invested in the business.

62,000 19,000

Prepaid Rent .................................................... 131 Cash ........................................................ 101 Prepaid three months’ rent.

21,000

9,000 1,650

Cash ................................................................ 101 Service Revenue ...................................... 401 Received cash from client for completed work.

5,200

Accounts Receivable ....................................... 106 Service Revenue ...................................... 401 Billed client for completed work.

4,800

Accounts Payable ............................................ 201 Cash ........................................................ 101 Paid balance due on accounts payable.

10,650

Prepaid Insurance ............................................ 128 Cash ........................................................ 101 Paid annual premium for insurance.

3,750

Cash ................................................................ 101 Accounts Receivable ................................ 106 Collected part of the amount owed by a client.

2,000

Accounts Receivable ....................................... 106 Service Revenue ...................................... 401 Billed client for completed work.

3,600

Page 1 Credit

81,000

21,000

10,650

5,200

4,800

10,650

3,750

2,000

3,600

2-175

Last revised: July 1, 2018

Problem 2-7B (continued) Part 1 Nov.

Tait Unger, Withdrawals .................................. 302 Cash ........................................................ 101 Owner withdrew cash for personal use.

5,300

Office Supplies................................................. 124 Accounts Payable .................................... 201 Purchased supplies on credit.

1,700

Wages Expense .............................................. 680 Cash ........................................................ 101 Paid wages.

19,000

Utilities Expense .............................................. 690 Cash ........................................................ 101 Paid monthly utility bill.

1,650

5,300

1,700

19,000

1,650

Note: Assume all entries were journalized on Page 1 of the General Journal.

2-176

Last revised: July 1, 2018

Problem 2-7B (continued) Parts 2 and 3 Cash Date 2023 Nov. 1 2 8 13 19 22 28 30 30

Date 2023 Nov. 12 22 24

Date 2023 Nov. 4 29

Date 2023 Nov. 19

Date 2023 Nov. 2

Explanation

Accounts Receivable Explanation

Office Supplies Explanation

Prepaid Insurance Explanation

Prepaid Rent Explanation

Debit

G1 G1 G1 G1 G1 G1 G1 G1 G1

62,000

Debit

G1 G1 G1

4,800

Credit

Acct. No. 101 Balance

21,000 5,200 10,650 3,750 2,000 5,300 19,000 1,650

Credit

62,000 41,000 46,200 35,550 31,800 33,800 28,500 9,500 7,850

Acct. No. 106 Balance

3,600

4,800 2,800 6,400

Debit

Acct. No. 124 Credit Balance

G1 G1

1,650 1,700

1,650 3,350

Debit

Acct. No. 128 Credit Balance

3,750

Debit

21,000

2,000

Credit

Acct. No. 131 Balance

21,000

2-177

Last revised: July 1, 2018

Problem 2-7B (continued) Parts 2 and 3 Date 2023 Nov. 1 4

Date 2023 Nov. 4 13 29

Date 2023 Nov. 1

Date 2023 Nov. 28

Date 2023 Nov. 8 12 24

Date 2023 Nov. 30

Office Equipment Explanation

Accounts Payable Explanation

Tait Unger, Capital Explanation

Debit

G1 G1

19,000 9,000

19,000 28,000

Debit

Acct. No. 201 Credit Balance

G1 G1 G1

10,650

Debit

10,650 1,700

G1 Tait Unger, Withdrawals Explanation

Service Revenue Explanation

Utilities Expense Explanation

Credit

81,000

Acct. No. 302 Balance

Debit

5,300

Debit

Acct. No. 401 Credit Balance

Credit

10,650 0 1,700

Acct. No. 301 Balance

81,000

G1 G1 G1 Wages Expense Explanation

Credit

Acct. No. 163 Balance

5,200 4,800 3,600

Debit

19,000

Debit

1,650

Credit

5,200 10,000 13,600

Acct. No. 680 Balance 19,000

Credit

Acct. No. 690 Balance

1,650

2-178

Last revised: July 1, 2018

Problem 2-7B (concluded) Part 4 WiCOM SERVICING Trial Balance November 30, 2023 Acct. No. 101 106 124 128 131 163 201 301 302 401 680 690

Account Title Cash...................................................... Accounts receivable .............................. Office supplies....................................... Prepaid insurance ................................. Prepaid rent........................................... Office equipment ................................... Accounts payable .................................. Tait Unger, capital ................................. Tait Unger, withdrawals ......................... Service revenue .................................... Wages expense .................................... Utilities expense .................................... Totals ....................................................

Debit $ 7,850 6,400 3,350 3,750 21,000 28,000

Credit

$ 1,700 81,000 5,300 13,600 19,000 1,650 $96,300

$96,300

Analysis component: The November 29 purchase of office supplies is recorded as a debit to an asset account because they have not yet been used. Assets are economic resources held by the business. The supplies will remain on the books as an asset until they are used. Once used, the supplies will become an expense.

2-179

Last revised: July 1, 2018

Problem 2-8B (25 minutes) WiCOM SERVICING Income Statement For Month Ended November 30, 2023 Revenues: Service revenue .................................................. Operating expenses: Wages expense ............................................... Utilities expense ............................................... Total operating expenses .............................. Loss ....................................................................

$13,600 $19,000 1,650

WiCOM SERVICING Statement of Changes in Equity For Month Ended November 30, 2023 Tait Unger, capital, November 1 .......................... Investments by owner ......................................... Total .................................................................. Less: Withdrawals by owner ................................ $5,300 Loss ......................................................... 7,050 Tait Unger, capital, November 30 ........................

20,650 $ 7,050

0 81,000 81,000

The arrows are imaginary but emphasize the link between statements.

12,350 $68,650

WiCOM SERVICING Balance Sheet November 30, 2023 Assets Cash ........................................... Accounts receivable .................... Office supplies ............................ Prepaid insurance ....................... Prepaid rent ................................ Office equipment......................... Total assets ..............................

$ 7,850 6,400 3,350 3,750 21,000 28,000 $70,350

Liabilities Accounts payable……………..

$ 1,700

Equity Tait Unger, capital .............................. 68,650 Total liabilities and equity ...............................................$70,350

2-180

Last revised: July 1, 2018

Problem 2-9B (25 minutes) RUSH INNOVATIONS Income Statement For Month Ended November 30, 2023 Service revenue .................................................. Operating expenses: Wages expense ............................................... Utilities expense ............................................... Total operating expenses .............................. Loss ....................................................................

$15,800 $16,000 2,920

RUSH INNOVATIONS Statement of Changes in Equity For Month Ended November 30, 2023 Jay Rush, capital, November 1............................ Investments by owner ......................................... Total .................................................................. Less: Withdrawals by owner ................................ $10,600 Loss ......................................................... 3,120 Jay Rush, capital, November 30 ..........................

18,920 $ 3,120

0 146,000 146,000

The arrows are imaginary but emphasize the link between statements.

13,720 $132,280

RUSH INNOVATIONS Balance Sheet November 30, 2023 Assets Cash ........................................... $ 23,480 Accounts receivable .................... 7,000 Office supplies ............................ 5,800 Prepaid insurance ....................... 10,400 Prepaid rent ................................ 21,000 Office equipment......................... 68,000 Total assets .............................. $135,680

Liabilities Accounts payable ............................... $ 3,400

Equity Jay Rush, capital ................................132,280 Total liabilities and equity ............................................... $135,680

2-181

Last revised: July 1, 2018

Problem 2-9B (concluded) Analysis component: 2020 Nov. 30 Accounts Receivable ..................................................... Service Revenue ................................................. Did work for a customer on account. 30 Cash ............................................................................. Accounts Receivable ........................................... Collected an amount owing from a credit customer.

XXX XXX

XXX

2-182

Last revised: July 1, 2018

Problem 2-10B (90 minutes) Part 1 General Journal Date Account Titles and Explanation 2023 July 1 Office Equipment ................................................ Trucks ................................................................... Long-Term Notes Payable ................................ Purchased assets on credit.

Debit

163 153 251

9,000 56,000

2 Land...................................................................... Cash ................................................................. Long-Term Notes Payable ................................ Purchased land.

183 101 251

124,000

3 Building ................................................................. Cash ................................................................. Purchased a building.

173 101

21,000

5 Prepaid Insurance ................................................. Cash ................................................................. Purchased two one-year insurance policies.

128 101

9,600

9 Cash ..................................................................... Revenue ........................................................... Performed services for cash.

101 401

3,200

12 Office Equipment .................................................. Cash ................................................................. Long-Term Notes Payable ................................ Purchased office equipment.

163 101 251

6,500

15 Accounts Receivable ............................................ Revenue ........................................................... Performed services on credit.

106 401

3,750

20 Accounts Receivable ............................................ Revenue ........................................................... Performed services on credit.

106 401

9,200

Page 1 Credit

65,000

40,800 83,200

21,000

9,600

3,200

700 5,800

3,750

9,200

2-183

Last revised: July 1, 2018

Problem 2-10B (continued) Part 1 General Journal Account Titles and Explanation

Date 2023 July 21 Truck Rental Expense........................................... Accounts Payable ............................................. Rented truck on credit.

Debit

645 201

1,300

22 Cash ..................................................................... Accounts Receivable ...................................... Collected cash from credit customer.

101 106

5,000

23 Wages Expense.................................................... Cash ................................................................. Paid wages to assistant.

623 101

1,600

24 Accounts Payable ............................................... Cash ................................................................. Paid for July 21 rental on account.

201 101

1,300

25 Repairs Expense................................................... Cash ................................................................. Paid for truck repairs.

684 101

1,425

26 Brett Wilson, Withdrawals ..................................... Cash ................................................................. Owner withdrawal.

302 101

3,875

27 Wages Expense.................................................... Cash ................................................................. Paid wages to assistant.

623 101

1,600

28 Advertising Expense ............................................. Cash ................................................................. Paid for advertising in local newspaper.

655 101

800

29 Cash ..................................................................... Unearned Revenue ........................................... Received cash for services to be performed in August.

101 233

1,400

Page 2 Credit

1,300

5,000

1,600

1,300

1,425

3,875

1,600

800

1,400

2-184

Last revised: July 1, 2018

Problem 2-10B (continued) Parts 2 and 3 Cash Explanation

Date 2023 June 30 Beginning balance July 2 3 5 9 12 22 23 24 25 26 27 28 29

Date 2023 June 30 July 15 20 22

Accounts Receivable Explanation

G1 G1 G1 G1 G1 G2 G2 G2 G2 G2 G2 G2 G2

Debit

Account No. 101 Credit Balance

40,800 21,000 9,600 3,200 700 5,000 1,600 1,300 1,425 3,875 1,600 800 1,400

Debit

Account No. 106 Credit Balance

Beginning balance

Prepaid Insurance Date Explanation 2023 June 30 Beginning balance July 5 Trucks Date Explanation 2023 June 30 Beginning balance July 1

G1 G1 G2

3,750 9,200

Debit

9,600

Debit

56,000

75,000 34,200 13,200 3,600 6,800 6,100 11,100 9,500 8,200 6,775 2,900 1,300 500 1,900

5,000

950 4,700 13,900 8,900

Account No. 128 Credit Balance 275 9,875 Account No. 153 Credit Balance

20,800 76,800

2-185

Last revised: July 1, 2018

Problem 2-10B (continued) Parts 2 and 3 Office Equipment Explanation

Date 2023 June 30 Beginning balance July 1 12

Date 2023 June 30 July 3

Date 2023 June 30 July 2

Building Explanation

G1 G1

Debit

1,200 10,200 16,700

9,000 6,500

Debit

Account No. 173 Credit Balance

21,000

-021,000

Debit

Account No. 183 Credit Balance

124,000

Beginning balance

Land Explanation Beginning balance

Accounts Payable Explanation

Date 2023 June 30 Beginning balance July 21 24

Date 2023 June 30 July 29

Account No. 163 Credit Balance

Unearned Revenue Explanation

G1 G2

Debit

-0124,000 Account No. 201 Credit Balance 725 2,025 725

1,300 1,300

Debit

Account No. 233 Credit Balance

Beginning balance G2 Long-Term Notes Payable Explanation

Date 2023 June 30 Beginning balance July 1 2 12

G1 G1 G1

0 1,400

1,400

Debit

Account No. 251 Credit Balance

65,000 83,200 5,800

7,000 72,000 155,200 161,000

2-186

Last revised: July 1, 2018

Problem 2-10B (continued) Parts 2 and 3 Date 2023 June 30

Date 2023 June 30 July 26

Brett Wilson, Capital Explanation

Date 2023 June 30 July 21

Date 2023 June 30 July 28

Date 2023 June 30 July 25

Debit

Account No. 301 Credit Balance

Beginning balance Brett Wilson, Withdrawals Explanation

83,825

Debit

Account No. 302 Credit Balance

3,875

600 4,475

Debit

Account No. 401 Credit Balance

Beginning balance G2

Revenue Date Explanation 2023 June 30 Beginning balance July 9 15 20

Date 2023 June 30 July 23 27

Wages Expense Explanation

G1 G1 G1

3,200 3,750 9,200

Debit

Account No. 623 Credit Balance

G2 G2

1,600 1,600

780 2,380 3,980

Beginning balance

Truck Rental Expense Explanation

Debit

Account No. 645 Credit Balance

Beginning balance

Advertising Expense Explanation

8,400 11,600 15,350 24,550

1,300

230 1,530

Debit

Account No. 655 Credit Balance

800

75 875

Debit

Account No. 684 Credit Balance

1,425

40 1,465

Beginning balance

Repairs Expense Explanation Beginning balance

2-187

Last revised: July 1, 2018

FROG BOX COMPANY Trial Balance July 31, 2023 Acct. No. 101 106 128 153 163 173 183 201 233 251 301 302 401 623 645 655 684

Account Title Cash .............................................................. Accounts receivable ....................................... Prepaid insurance .......................................... Trucks............................................................ Office equipment ........................................... Building .......................................................... Land .............................................................. Accounts payable .......................................... Unearned revenue ......................................... Long-term notes payable ............................... Brett Wilson, capital ....................................... Brett Wilson, withdrawals ............................... Revenue ........................................................ Wages expense ............................................. Truck rental expense ..................................... Advertising expense....................................... Repairs expense ............................................ Totals .............................................................

Debit 1,900 8,900 9,875 76,800 16,700 21,000 124,000

Credit

725 1,400 161,000 83,825

4,475 24,550 3,980 1,530 875 1,465 $271,500

$271,500

2-188

Last revised: July 1, 2018

Problem 2-11B FROG BOX COMPANY Income Statement For Two Months Ended July 31, 2023 Revenues: Revenue.............................................................. Operating expenses: Wages expense ............................................... Truck rental expense ........................................ Repairs expense .............................................. Advertising expense ......................................... Total operating expenses ............................... Profit ...................................................................

$24,550 $3,980 1,530 1,465 875 7,850 $16,700

FROG BOX COMPANY Statement of Changes in Equity For Two Months Ended July 31, 2023 Brett Wilson, capital, June 1 ................................ Investments by owner ......................................... Profit .................................................................. Total .............................................................. Less: Withdrawals by owner ................................ Brett Wilson, capital, July 31 ...............................

$ 83,825 $

0 16,700

The arrows are imaginary but emphasize the link between statements.

16,700 $100,525 4,475 $ 96,050

FROG BOX COMPANY Balance Sheet July 31, 2023 Assets Cash .......................................... Accounts receivable ................... Prepaid insurance ...................... Trucks ........................................ Office equipment ........................ Building ...................................... Land ........................................... Total assets ...............................

1,900 8,900 9,875 76,800 16,700 21,000 124,000

$259,175

Liabilities Accounts payable ...............................$ 725 Unearned revenue.............................. 1,400 Long-term notes payable .................... 161,000 Total liabilities .....................................$163,125 Equity Brett Wilson, capital ........................... 96,050 Total liabilities and equity ..............................................$259,175

2-189

Last revised: July 1, 2018

Problem 2-12B (45 minutes) Part 1 Date 2023 Nov.

General Journal Account Titles and Explanation

Debit

1 Accounts Payable ........................................ Cash .................................................... Paid for purchase made on account.

201 101

10,000

2 Office Equipment ........................................... Cash .................................................... Notes Payable ...................................... Purchased a photocopier.

163 101 205

34,000

3 Office Supplies ............................................... Cash .................................................... Purchased supplies for cash.

124 101

800

14 Wages Expense ............................................. Cash .......................................................... Paid wages.

623 101

6,000

20 Cash .............................................................. Travel Revenue .................................... Collected cash for November travel.

101 401

14,000

25 Ike Petrov, Withdrawals ............................... Cash .......................................................... The owner withdrew cash.

302 101

2,000

30 Interest Expense ............................................ Cash .................................................... Paid interest on notes payable.

633 101

150

Page 1 Credit

10,000

6,000 28,000

800

6,000

14,000

2,000

150

Note: There is no entry to record for November 4 as this does not represent an economic exchange.

2-190

Last revised: July 1, 2018

Problem 2-12B (continued) Parts 2 and 3 Bal. Nov. 20

Bal.

Cash 26,000 10,000 14,000 6,000 800 6,000 2,000 150 15,050

101 Nov. 1 2 3 14 25 30

Notes Payable

205

Office Supplies Bal. 900 Nov. 3 800

Bal.

20,00 0 28,00 0 48,00 0

Bal. Nov. 2

Wages Expense Bal. 38,00 Nov. 14 0 6,000 Bal. 44,00 0

623

124

Office Equipment Bal. 36,000 Nov. 2 34,000

1,700

Bal.

Ike Petrov, Capital

301

8,000

Bal.

Bal. 6,000

Interest Expense Bal. 100 Nov. 30 150 Bal.

Accounts Payable 201 Nov. 1 10,000 43,000 Bal.

70,000

Ike Petrov, Withdrawals Bal. 4,000 Nov. 25 2,000

Bal.

163

33,000 302

Travel Revenue

Bal.

401

34,000 14,000

Bal. Nov. 20

48,000

Bal.

633

250

2-191

Last revised: July 1, 2018

Problem 2-12B (continued) Part 4 TOUR-ALONG Trial Balance November 30, 2023 Acct. No. 101 124 163 201 205 301 302 401 623 633

Account Title Cash ................................................................ Office supplies ................................................. Office equipment ............................................. Accounts payable ............................................ Notes payable .................................................. Ike Petrov, capital ............................................ Ike Petrov, withdrawals .................................... Travel revenue ................................................. Wages expense ............................................... Interest expense .............................................. Totals...............................................................

Debit $ 15,050 1,700 70,000

Credit

$ 33,000 48,000 8,000 6,000 48,000 44,000 250 $137,000

$137,000

2-192

Last revised: July 1, 2018

Problem 2-12B (continued) Part 5 TOUR-ALONG Income Statement For Two Months Ended November 30, 2023 Travel revenue .................................................... Operating expenses: Wages expense ............................................... Interest expense............................................... Total operating expenses ............................... Profit ...................................................................

$48,000 $44,000 250 44,250 $ 3,750

TOUR-ALONG Statement of Changes in Equity For Two Months Ended November 30, 2023 Ike Petrov, capital, October 1 .............................. Owner investment ............................................... Profit ................................................................... Total .................................................................. Less: Withdrawals by owner ................................ Ike Petrov, capital, November 30 ........................

$ $8,000 3,750

-0-

11,750 $11,750 6,000 $ 5,750

The arrows are imaginary but emphasize the link between statements.

TOUR-ALONG Balance Sheet November 30, 2023 Assets Cash .......................................... Office supplies ........................... Office equipment ........................

$15,050 1,700 70,000

Total assets ...............................

$86,750

Liabilities Accounts payable ............................... $33,000 Notes payable .................................... 48,000 Total liabilities ..................................... $81,000 Equity Ike Petrov, capital ............................... 5,750 Total liabilities and equity .............................................. $86,750

Analysis component: The $8,000 October 31 balance in Ike Petrov, Capital represents investments made by the owner, Ike Petrov, into the business.

2-193

Last revised: July 1, 2018

Problem 2-13B (45 minutes) Part 1 Date 2023 July

General Journal Account Titles and Explanation

Debit

1 Supplies ........................................................ Accounts Payable ................................ Purchased supplies on credit.

126 201

400

2 Cash .............................................................. Unearned Travel Deposit Revenue ............ Collected cash for travel planning services in August.

101 233

7,000

3 Cash .............................................................. Travel Planning Revenue ..................... Collected cash for travel planning services in July.

101 401

13,500

4 Rent Expense ................................................ Cash .......................................................... Paid July rent.

640 101

4,500

5 Accounts Payable .......................................... Cash .................................................... Paid for supplies purchased on account.

201 101

700

15 Tom Keenan, Withdrawals .......................... Cash .......................................................... The owner withdrew cash.

302 101

650

20 Wages Expense ............................................. Cash .................................................... Paid wages.

623 101

1,400

31 Equipment ...................................................... Accounts Payable ................................ Purchased equipment on credit.

161 201

1,000

Page 1 Credit

400

7,000

13,500

4,500

700

650

1,400

1,000

2-194

Last revised: July 1, 2018

Problem 2-13B (continued) Parts 2 and 3 Cash 101 Bal. 17,500 Jul. 2 7,000 4,500 Jul. 4 3 13,500 700 Jul. 5 650 Jul. 15 1,400 Jul. 20 Bal. 30,750

Unearned Travel 233 Deposit Revenue 11,300 Bal. 7,000 Jul. 2 18,300 Bal.

Wages Expense Bal. 28,600 Jul. 20 1,400 Bal. 30,000

623

Supplies 1,700 400 2,100

126

Tom Keenan, Capital

301

Bal. Jul. 1 Bal.

Bal. Jul. 31 Bal.

4,500 Bal.

Rent Expense Bal. 7,500 Jul. 4 4,500 Bal. 12,000

Equipment 161 9,500 1,000 10,500

Tom Keenan, Withdrawals Bal. 14,500 Jul. 15 650 Bal. 15,150

302

Accounts Payable 201 3,000 Bal. Jul. 5 700 400 Jul. 1 1,000 Jul. 31 3,700 Bal.

Travel Planning 401 Revenue 60,500 Bal. 13,500 Jul. 3 74,000 Bal.

640

2-195

Last revised: July 1, 2018

Problem 2-13B (continued) Part 4 Epic Adventures Trial Balance July 31, 2023 Acct. No. 101 126 161 201 233 301 302 401 623 640

Account Title Cash ................................................................ Supplies ........................................................... Equipment ....................................................... Accounts payable ............................................ Unearned travel deposit revenue ..................... Tom Keenan, capital ........................................ Tom Keenan, withdrawals................................ Travel planning revenue .................................. Wages expense ............................................... Rent expense .................................................. Totals...............................................................

Debit $ 30,750

Credit

2,100 10,500 $ 3,700 18,300 4,500 15,150 74,000 30,000 12,000 $100,500

$100,500

2-196

Last revised: July 1, 2018

Problem 2-13B (concluded) Part 5 Epic Adventures Income Statement For Three Months Ended July 31, 2023 Travel planning revenue ...................................... Operating expenses: Wages expense ............................................... Rent expense ................................................... Total operating expenses ............................... Profit ...................................................................

$74,000 $30,000 12,000 42,000 $32,000

Epic Adventures Statement of Changes in Equity For Three Months Ended July 31, 2023 Tom Keenan, capital, May 1 ................................ $ 0 Owner investment ............................................... $ 4,500 Profit .................................................................. 32,000 36,500 Total .................................................................. $36,500 Less: Withdrawals by owner ................................ 15,150 Tom Keenan, capital, July 31 .............................. $ 21,350

The arrows are imaginary but emphasize the link between statements.

Epic Adventures Balance Sheet July 31, 2023 Assets Cash ........................................... $ 30,750 Supplies ...................................... 2,100 Equipment................................... 10,500

Total assets ..............................

$43,350

Liabilities Accounts payable ............................... $ 3,700 Unearned travel deposit revenue ....... 18,300 Total liabilities..................................... $22,000 Equity Tom Keenan, capital .......................... 21,350 Total liabilities and equity .............................................. $43,350

2-197

Last revised: July 1, 2018

Problem 2-14B LINCOLN LANDSCAPING Income Statement For Three Months Ended July 31, 2023 Revenues: Revenue.............................................................. Operating expenses: Wages expense ............................................... Advertising expense ......................................... Rental expense ................................................ Repairs expense .............................................. Total operating expenses .............................. Loss ....................................................................

$29,100 $59,000 1,750 1,100 930

LINCOLN LANDSCAPING Statement of Changes in Equity For Three Months Ended July 31, 2023 Brielle Lincoln, capital, May 1 .............................. Investments by owner ......................................... Total .................................................................. Less: Withdrawals by owner ............................... $ 8,950 Loss .......................................................... 33,680 Brielle Lincoln, capital, July 31 ............................

62,780 $33,680

0 65,000 65,000

The arrows are imaginary but emphasize the link between statements.

42,630 $22,370

LINCOLN LANDSCAPING Balance Sheet July 31, 2023 Assets Liabilities Cash ........................................... $ 23,720 Accounts payable ............................... $ 37,500 Accounts receivable .................... 18,600 Unearned revenue ............................. 2,800 Prepaid insurance ....................... 13,750 Long-term notes payable.................... 58,000 Equipment................................... 64,600 Total liabilities..................................$98,300

Total assets ................................ $120,670

Equity Brielle Lincoln, capital......................... 22,370 Total liabilities and equity .............................................. $120,670

Analysis component: a) Assets financed by debt = ($98,300/$120,670) x 100 = 81.5% b) Assets financed by equity = ($22,370/$120,670) x 100 = 18.5%

2-198

Last revised: July 1, 2018

Problem 2-15B Wicked Dance Trial Balance December 31, 2023 Account Title Cash ($37,175a - $30,540a) ............................................. Accounts receivable ($7,900 - $275b) ............................. Office supplies ($2,650 + 400c) ....................................... Office equipment............................................................. Accounts payable ($9,465 + 400c) .................................. Paula Fernandes, capital (a credit balance account) ....... d Services revenue ($23,250 not $22,350) ....................... Wages expense (a debit balance account) ..................... Rent expense (a debit balance account) ......................... Advertising expense (a debit balance account) ............... Totals ..............................................................................

Debit

Credit $ 6,635 7,625 3,050 20,500 $ 9,865 16,745 23,250 6,000 4,800 1,250 $49,860

$49,860

Note: The superscripts (a) to (d) are references to items (a) to (d) listed in Problem 2-15B.

ANALYTICAL AND REVIEW PROBLEMS A&R Problem 2-1 (35 minutes) YOUNG ENGINEERING Trial Balance March 31, 2023 Account Title Cash ................................................................................... Office supplies .................................................................... Prepaid insurance ............................................................... Office equipment................................................................. Accounts payable................................................................ Carlos Young, capital .......................................................... Carlos Young, withdrawals .................................................. Consulting revenue ............................................................. Rent expense ...................................................................... Totals .................................................................................. 1.

Purchased $660 of office supplies for cash.

Paid $3,200 insurance premium in advance.

Purchased $16,500 office equipment on credit.

Carlos Young invested $17,000 cash in the business.

Debit $26,660 660 3,200 16,500

Credit

$16,500 17,000 3,740 24,000 6,740 $57,500

$57,500

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Carlos Young withdrew $3,740 cash from the business for personal use.

Earned $24,000 in consulting services and was paid in cash.

Paid $6,740 rent expense with cash.

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A&R 2-2 (30 minutes) Designer Dry Cleaning Statement of Changes in Equity For Months Ended April 30, 2023 Christopher Dior, capital, beginning .................... $ 34,400 Investment by owner ........................................... 0 4 Profit .................................................................. 48,500 Total .................................................................. $ 82,900 Less: Withdrawals by owner ................................ 25,100 Christopher Dior, capital, ending ......................... $57,800

April 30, Assets 2023 Cash .......................................... $ 7,000 Cleaning supplies ....................... 3,500 Prepaid rent ............................... 12,000 Equipment.................................. 76,000

Total assets ............................... $98,500

March 31, 2023 $ 0 10,000 3 25,400 $35,400 1,000 $34,400

Designer Dry Cleaning Balance Sheet March 31, April 30, March 31, 2023 Liabilities 2023 2023 $ 3,000 Accounts payable ............................... $ 700 $ 500 900 Notes payable .................................... 40,000 15,000 16,000 Total liabilities ..................................... $40,700 $15,500 30,000 Equity 2 1 Christopher Dior, 57,800 34,400 capital ................................................. Total liabilities and $49,900 equity ............................................... $98,500 $49,900

Calculations: 1. 49,900 – 15,500 = 34,400 2. 98,500 – 40,700 = 57,800 3. 34,400 + 1,000 – 10,000 = 25,400 4. 57,800 + 25,100 – 34,400 = 48,500 Analysis component: a. Liabilities increased because of the $200 increase in accounts payable and the $25,000 increase in notes payable used, most probably, to finance the purchase of equipment (equipment increased by $46,000). b. Equity increased by a larger amount in March than April because the owner invested $10,000 during March and nothing during April. Also, during April, the owner made a withdrawal of $25,100 and only $1,000 in March. Profit in April was almost twice as much as that reported for March but the large withdrawal and no investments during April caused equity to increase by a smaller amount than in March.

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1. There are advantages to the process proposed by the manager. They include improved customer service, less delays, and less work for you. However, you should have serious concerns about the potential for fraud. In particular, there is no control over the possibility of embezzlement by the manager because there are no source documents* being prepared at the time of sale. The manager could steal cash and simply prepare sales receipts to match the remaining cash. This case involves a conflict between the need for efficiency and the need for control in the form of source documents*. While it makes sense to take and process sales receipts quickly, this efficiency is being accomplished by a shortcut that greatly weakens control over cash receipts. That is, cash could be received and lost because there would be no source documents to verify the sales and cash received. *Recall from Chapter 1 that source documents identify and describe transactions entering the accounting process and are the source of accounting information, whether in paper or electronic form. 2. The manager‘s explanation that the owner does not arrive until 3:00 p.m. suggests that the owner does not know about the proposed shortcut. Thus, the new employee is faced with the dilemma of deciding whether to accept the manager‘s instructions, to confront the manager with the argument that the shortcut seems wrong, or to ask the owner to confirm the instructions. Each of these alternatives involves personal risk. Initially, the best thing may be to simply work as instructed for a while in order to get an idea of whether the shortcut is being abused by the manager and perhaps to find out discreetly whether the owner knows about it. The relationship that develops between you and the manager may be of a nature that will allow you to explain your concern and convince the manager that the shortcut should be avoided. Even if the manager is not abusing this shortcut, there are other reasons for doing away with it, such as maintaining accurate records for tax reports and gathering marketing information. Also, the shortcut may result in fraud by other employees who might not be as honest as you and the manager. If you conclude that the manager is committing fraud, you should report the situation to the owner as quickly as possible.

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FFS 2-1 McALLISTER SURVEYING Income Statement For Month Ended May 31, 2023 Revenue: Surveying fees earned ........................................................ Operating expenses: Advertising expense ............................................................ Rent expense ...................................................................... Salaries expense................................................................. Insurance expense .............................................................. Telephone expense ............................................................. Utilities expense .................................................................. Total operating expenses .............................................. Profit .........................................................................................

$18,000 $3,200 3,100 3,000 900 600 300 11,100 $ 6,900

McALLISTER SURVEYING Statement of Changes in Equity For Month Ended May 31, 2023 Travis McAllister, capital, May 1 ................................................ Investments by owner ............................................................... Profit ..................................................................................... ... Total ....................................................................................... Less: Withdrawals by owner .................................................... Travis McAllister, capital, May 31 ..............................................

$75,000 $3,000 6,900

9,900 $84,900 6,000 $78,900

McALLISTER SURVEYING Balance Sheet May 31, 2023 Assets Cash ......................................... Accounts receivable .................. Office supplies .......................... Prepaid insurance ..................... Prepaid rent .............................. Surveying equipment ................ Buildings ................................... Land ......................................... Total assets ..............................

3,900 2,700 300 1,800 4,200 5,400 81,000 36,000 $135,300

Liabilities Accounts payable .................................... Unearned surveying fees ......................... Short-term notes payable......................... Total liabilities ....................................

$ 2,400 6,000 48,000 $ 56,400

Equity Travis McAllister, capital .......................... Total liabilities and equity .........................

78,900 $135,300

Analysis component: Withdrawals are how an owner takes assets out of the business for personal use. McAllister Surveying realized a $6,900 profit during the month which caused equity to increase. It is reasonable for the owner to benefit from that profit by making a withdrawal even though withdrawals cause equity to decrease. Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw Hill

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FFS 2-2 1(a)(i) Accounts Receivable ..................................................... Guest Revenues ................................................. Provided services to customers on account.

XXX

Cash ............................................................................. Guest Revenues ................................................. Provided services to customers for cash.

XXX

1(a)(ii) Revenues affect the balance sheet because they cause equity to increase. 1(a)(iii) The Revenue Recognition Principle assures us that revenues on the income statement are for the year ended December 27, 2020. 1(b)(i) Interest Expense ........................................................... Cash ................................................................... Paid interest expense..

XXX XXX

1(b)(ii) Yes, expenses affect the balance sheet because they cause equity to decrease. 2(a) Gift Card Liability represent gift cards sold in advance to customers to eat at the restaurants. 2(b) Cash ............................................................................. Gift Card Liability ................................................. Cash received in advance from customers for gift cards sold for restaurant meals

XXX

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Critical Thinking Question CT 2-1 Note to instructor: Student responses will vary and therefore the answer here is only suggested and not inclusive of all possibilities; it is presented in point form for brevity. Problem(s): — information that is available does not provide adequate detail to enable analysis and resulting decision making (from the Western Canadian Sales Division Manager‘s perspective; from the perspective of the sales and admin staff, the limited detail would make recording information very straightforward/easy since there are only 2 accounts — 1 revenue and 1 expense) Goal(s)*: — Sales Division Manager would want to maximize sales, minimize costs, and at the same time accurately record and report with sufficient detail to assist decision making process Assumption(s)/Principle(s): — division results have been deteriorating but because of a lack of detail, appropriate questions were not being asked and consequently inappropriate decisions were likely being made — the disclosure principle (introduced in Chapter 6) requires that appropriate detail be provided and the materiality principle (introduced in Chapter 7) suggests that anything of significance be disclosed/reported Facts: — as presented in the sales reports — by converting the dollars to percentages, we see that from July to September, although profit is increasing in total dollars, expenses are increasing as a percentage of sales causing profit to shrink as a percentage of sales which is unfavourable

Sales revenue Expenses Profit

Prairie Insurance – Western Canadian Division Sales Report Month Ended Sept. 30, 2023 Aug. 31, % 2023 % $680,000 100 $510,000 100 544,000 80 382,500 75 $136,000 20 $127,500 25

July 31, 2023 % $440,000 100 321,200 73 $118,800 27

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CT 2-1 (concluded) Conclusion(s)/Consequence(s): — more revenue and expense accounts are required to provide sufficient detail to allow appropriate monitoring/questions and resulting decisions; this will require a restructuring of the accounting including submission of expense reports which requires resources including expertise

*The goal is highly dependent on ―perspective.‖

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Cumulative Problem, Echo Systems (120 minutes) Part A 2. General Journal Date 2023 Oct. 1

Page 1 Account Titles and Explanation

Debit

Cash ................................................................ 101 Office Equipment ............................................. 163 Computer Equipment ....................................... 167 Mary Graham, Capital .............................. 301 Owner invested in the business.

90,000 18,000 36,000

Prepaid Rent .................................................... 131 Cash ........................................................ 101 Paid rent in advance.

9,000

Computer Supplies .......................................... 126 Accounts Payable .................................... 201 Purchased supplies on credit.

2,640

Prepaid Insurance ............................................ 128 Cash ........................................................ 101 Paid 12 months’ premium in advance.

4,320

Accounts Receivable ....................................... 106 Computer Services Revenue.................... 403 Billed customer for services.

6,600

Accounts Payable ............................................ 201 Cash ........................................................ 101 Paid balance due on account payable.

2,640

144,000

9,000

2,640

4,320

6,600

2,640

No entry recorded in the journal.

Accounts Receivable ....................................... 106 Computer Services Revenue.................... 403 Billed customer for services.

2,400

Cash ................................................................ 101 Accounts Receivable ................................ 106 Collected accounts receivable.

6,600

Repairs Expense, Computer ............................ 684 Cash ........................................................ 101 Paid for computer repairs.

1,410

Advertising Expense ........................................ 655 Cash ........................................................ 101 Purchased ad in local newspaper.

3,720

Cash ................................................................ 101 Accounts Receivable ................................ 106 Collected accounts receivable.

2,400

Credit

2,400

6,600

1,410

3,720

2,400

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Cumulative Problem, Echo Systems (continued) Part A General Journal Account Titles and Explanation

Date 2023 Oct.

Debit

Accounts Receivable ....................................... 106 Computer Services Revenue.................... 403 Billed customer for services.

6,450

Wages Expense .............................................. 623 Cash ........................................................ 101 Paid employee for part-time work.

1,400

Mary Graham, Withdrawals ............................. 302 Cash ........................................................ 101 Owner withdrew cash.

7,200

Page 2 Credit

6,450

1,400

7,200

1 and 3. Cash Date 2023 Oct. 1 2 5 8 15 17 20 22 31 31

Date 2023 Oct. 6 12 15 22 28

Explanation

Accounts Receivable Explanation

Debit

G1 G1 G1 G1 G1 G1 G1 G1 G2 G2

90,000

Debit

G1 G1 G1 G1 G2

Acct. No. 101 Credit Balance

9,000 4,320 2,640 6,600 1,410 3,720 2,400 1,400 7,200

90,000 81,000 76,680 74,040 80,640 79,230 75,510 77,910 76,510 69,310

Acct. No. 106 Credit Balance

6,600 2,400 6,600 2,400 6,450

6,600 9,000 2,400 0 6,450

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Cumulative Problem, Echo Systems (continued) Part A Computer Supplies Explanation

Date 2023 Oct. 3

PR G1

Prepaid Insurance Explanation

Date 2023 Oct. 5

Prepaid Rent Explanation

Date 2023 Oct. 2

Office Equipment Explanation

Date 2023 Oct. 1

Computer Equipment Explanation

Date 2023 Oct. 1

Accounts Payable Explanation

Date 2023 Oct. 3 8

Mary Graham, Capital Explanation

Date 2023 Oct. 1

Date 2023 Oct. 31

Mary Graham, Withdrawals Explanation

Debit

Acct. No. 126 Credit Balance

2,640

Debit

4,320

Debit

9,000

Debit

18,000

Debit

36,000

Debit

G1 G1

2,640

Debit

2,640 Acct. No. 128 Credit Balance 4,320 Acct. No. 131 Credit Balance 9,000 Acct. No. 163 Credit Balance 18,000 Acct. No. 167 Credit Balance 36,000 Acct. No. 201 Credit Balance 2,640

2,640 0

Acct. No. 301 Credit Balance

144,000

Debit

Acct. No. 302 Credit Balance

7,200

144,000

7,200

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Cumulative Problem, Echo Systems (continued) Part A Date 2023 Oct. 6 12 28

Date 2023 Oct. 31

Date 2023 Oct. 20

Date 2023

Date 2023 Oct. 17

Date 2023

Computer Services Revenue Explanation

Debit

G1 G1 G2 Wages Expense Explanation

Advertising Expense Explanation

Mileage Expense Explanation

Repairs Expense, Computer Explanation

Charitable Donations Expense Explanation

Acct. No. 403 Credit Balance 6,600 2,400 6,450

6,600 9,000 15,450

Acct. No. 623 Credit Balance

Debit

1,400

Debit

Acct. No. 655 Credit Balance

3,720

Debit

Acct. No. 676 Credit Balance

Debit

Acct. No. 684 Credit Balance

1,410

Debit

Acct. No. 699 Credit Balance

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Cumulative Problem, Echo Systems (continued) Part A 4. ECHO SYSTEMS Trial Balance October 31, 2023 Acct. No. 101 106 126 128 131 163 167 201 301 302 403 623 655 676 684 699

Account Title Cash .............................................................. Accounts receivable ....................................... Computer supplies ......................................... Prepaid insurance .......................................... Prepaid rent ................................................... Office equipment ........................................... Computer equipment ..................................... Accounts payable .......................................... Mary Graham, capital..................................... Mary Graham, withdrawals ............................ Computer services revenue ........................... Wages expense ............................................. Advertising expense....................................... Mileage expense ............................................ Repairs expense, computer ........................... Charitable donations expense........................ Totals .............................................................

Debit $ 69,310 6,450 2,640 4,320 9,000 18,000 36,000

Credit

$ -0144,000 7,200 15,450 1,400 3,720 -01,410 -0$159,450

$159,450

NOTE: Accounts with zero balance may be omitted.

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Cumulative Problem, Echo Systems (continued) Part A 5. ECHO SYSTEMS Income Statement For Month Ended October 31, 2023 Revenues: Computer services revenue................................. Operating expenses: Advertising expense ......................................... Repairs expense, computer ............................. Wages expense ............................................... Total operating expenses .............................. Profit ...................................................................

$15,450 $3,720 1,410 1,400

ECHO SYSTEMS Statement of Changes in Equity For Month Ended October 31, 2023 Mary Graham, capital, October 1 ........................ Investments by owner ......................................... $144,000 Profit .................................................................. 8,920 Total .................................................................. Less: Withdrawals by owner ................................ Mary Graham, capital, October 31 ......................

6,530 $ 8,920

The arrows are imaginary but emphasize the link between statements.

152,920 $152,920 7,200 $145,720

ECHO SYSTEMS Balance Sheet October 31, 2023 Assets Cash ........................................... $ 69,310 Accounts receivable .................... 6,450 Computer supplies ...................... 2,640 Prepaid insurance ....................... 4,320 Prepaid rent ................................ 9,000 Office equipment......................... 18,000 Computer equipment .................. 36,000 Total assets .............................. $ 145,720

Liabilities Accounts payable ............................... $

-0-

Equity Mary Graham, capital ......................... 145,720 Total liabilities and equity ............................................... $145,720

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Cumulative Problem, Echo Systems (continued) Part B 6. 2023 Nov.

Mileage Expense ............................................. 676 Cash ........................................................ 101 Reimbursed Mary Graham for business usage.

1,000

Cash ................................................................ 101 Computer Services Revenue.................... 403 Collected cash revenue from customer.

9,300

Computer Supplies .......................................... 126 Cash ........................................................ 101 Purchased computer supplies for cash.

1,920

Accounts Receivable ....................................... 106 Computer Services Revenue.................... 403 Billed customer for services.

8,700

1,000

9,300

1,920

8,700

No entry recorded in the journal.

Cash ................................................................ 101 Accounts Receivable ................................ 106 Collected accounts receivable.

3,750

Charitable Donations Expense ......................... 699 Cash ........................................................ 101 Made a donation.

1,500

Accounts Receivable ....................................... 106 Computer Services Revenue.................... 403 Billed customer for services.

7,500

3,750

1,500

7,500

No entry recorded in the journal.

Mileage Expense ............................................. 676 Cash ........................................................ 101 Reimbursed Mary Graham for business usage.

1,200

Wages Expense .............................................. 623 Cash ........................................................ 101 Paid employee for part-time work.

2,800

Mary Graham, Withdrawals ............................. 302 Cash .......................................................... 101 Owner withdrew cash.

3,600

1,200

2,800

3,600

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Cumulative Problem, Echo Systems (continued) Part B 7. General Ledger accounts: Cash Date 2023 Oct. 1 2 5 8 15 17 20 22 31 31 Nov. 1 2 5 18 22 28 30 30

Date 2023 Oct. 6 12 15 22 28 Nov. 8 18 24

Explanation

Accounts Receivable Explanation

Debit

G1 G1 G1 G1 G1 G1 G1 G1 G2 G2 G2 G2 G2 G2 G2 G2 G2 G2

90,000

Debit

G1 G1 G1 G1 G2 G2 G2 G2

Acct. No. 101 Credit Balance

9,000 4,320 2,640 6,600 1,410 3,720 2,400 1,400 7,200 1,000 9,300 1,920 3,750 1,500 1,200 2,800 3,600

90,000 81,000 76,680 74,040 80,640 79,230 75,510 77,910 76,510 69,310 68,310 77,610 75,690 79,440 77,940 76,740 73,940 70,340

Acct. No. 106 Credit Balance

6,600 2,400 6,600 2,400 6,450 8,700 3,750 7,500

6,600 9,000 2,400 0 6,450 15,150 11,400 18,900

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Last revised: July 1, 2018

Cumulative Problem, Echo Systems (continued) Part B Computer Supplies Explanation

Date 2023 Oct. 3 Nov. 5

PR G1 G2

Prepaid Insurance Explanation

Date 2023 Oct. 5

Prepaid Rent Explanation

Date 2023 Oct. 2

Office Equipment Explanation

Date 2023 Oct. 1

Computer Equipment Explanation

Date 2023 Oct. 1

Accounts Payable Explanation

Date 2023 Oct. 3 8

Mary Graham, Capital Explanation

Date 2023 Oct. 1

Date 2023 Oct. 31 Nov. 30

Mary Graham, Withdrawals Explanation

Debit

Acct. No. 126 Credit Balance

2,640 1,920

Debit

4,320

Debit

9,000

Debit

18,000

Debit

36,000

Debit

G1 G1

2,640

Debit

2,640 4,560 Acct. No. 128 Credit Balance 4,320 Acct. No. 131 Credit Balance 9,000 Acct. No. 163 Credit Balance 18,000 Acct. No. 167 Credit Balance 36,000 Acct. No. 201 Credit Balance 2,640

2,640 0

Acct. No. 301 Credit Balance

144,000

Debit

Acct. No. 302 Credit Balance

G2 G3

7,200 3,600

144,000

7,200 10,800

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Cumulative Problem, Echo Systems (continued) Part B Date 2023 Oct. 6 12 28 Nov. 2 8 24

Date 2023 Oct. 31 Nov. 30

Date 2023 Oct. 20

Date 2023 Nov. 1 28

Date 2023 Oct. 17

Date 2023 Nov. 22

Computer Services Revenue Explanation

Debit

G1 G1 G2 G2 G2 G2 Wages Expense Explanation

Advertising Expense Explanation

Mileage Expense Explanation

Repairs Expense, Computer Explanation

Charitable Donations Expense Explanation

Acct. No. 403 Credit Balance 6,600 2,400 6,450 9,300 8,700 7,500

6,600 9,000 15,450 24,750 33,450 40,950

Acct. No. 623 Credit Balance

Debit

G2 G2

1,400 2,800

1,400 4,200

Debit

Acct. No. 655 Credit Balance

3,720

Debit

Acct. No. 676 Credit Balance

G2 G2

1,000 1,200

1,000 2,200

Debit

Acct. No. 684 Credit Balance

1,410

Debit

Acct. No. 699 Credit Balance

1,500

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Cumulative Problem, Echo Systems (continued) Part B 8. ECHO SYSTEMS Trial Balance November 30, 2023 Acct. No. 101 106 126 128 131 163 167 201 301 302 403 623 655 676 684 699

Debit $ 70,340 18,900 4,560 4,320 9,000 18,000 36,000

Credit

$ -0144,000 10,800 40,950 4,200 3,720 2,200 1,410 1,500 $184,950

$184,950

Cumulative Problem, Echo Systems (concluded) Part B 9. ECHO SYSTEMS Income Statement For Two Months Ended November 30, 2023 Computer services revenue................................. Operating expenses: Wages expense ............................................... Advertising expense ......................................... Mileage expense .............................................. Charitable donations expense .......................... Repairs expense, computer ............................. Total operating expenses .............................. Profit ...................................................................

$40,950 $4,200 3,720 2,200 1,500 1,410 13,030 $27,920

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Last revised: December 2021.

ECHO SYSTEMS Statement of Changes in Equity For Two Months Ended November 30, 2023 Mary Graham, capital, October 1 ........................ Investments by owner ......................................... $144,000 Profit .................................................................. 27,920 Total .................................................................. Less: Withdrawals by owner ................................ Mary Graham, capital, November 30 ...................

-0-

171,920 $171,920 10,800 $161,120

ECHO SYSTEMS Balance Sheet November 30, 2023 Assets Cash ........................................... $ 70,340 Accounts receivable .................... 18,900 Computer supplies ...................... 4,560 Prepaid insurance ....................... 4,320 Prepaid rent ................................ 9,000 Office equipment......................... 18,000 Computer equipment .................. 36,000 Total assets ............................. $161,120

Liabilities Accounts payable ...............................

Equity Mary Graham, capital .........................

161,120

Total liabilities and equity ..............................................

$161,120

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Last revised: December 2021.

SOLUTIONS MANUAL to accompany

Fundamental Accounting Principles th

17 Canadian Edition by Larson/Dieckmann/Harris

Revised for the 17th Edition by: John Harris, Seneca College

Technical checks by: Rhonda Heninger, SAIT

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Last revised: December 2021.

Chapter 3

Adjusting Accounts for Financial Statements

Chapter Opening Critical Thinking Challenge Questions* Riot Micro should consider the matching principle discussed in Chapter 1, where a company will match the expenses relating to the revenue it generated in the period in which the revenue is recorded. These expenses would include a portion of any development costs that were capitalized as well as any direct manufacturing costs of building the product. *The Chapter 3 Critical Thinking Challenge questions are asked at the beginning of this chapter. Students are reminded at the conclusion of the chapter, to refer to the Critical Thinking Challenge questions at the beginning of the chapter. The solutions to the Critical Thinking Challenge questions are available here in the Solutions Manual as well as the print book and ebook. Knowledge Check-Up Questions 3. d) 8. c)

2. c) 7. a)

3. b) 8. b)

4. c) 9. a)

5. b) 10. d)

Concept Review Questions 1.

The cash basis reports revenues when cash is received while the accrual basis reports revenues when they are earned. The cash basis reports expenses when cash is paid while the accrual basis reports expenses when economic benefits are used. Accrual basis of accounting provides a better picture of a company‘s performance. This is because it records revenue and expenses in the period they most closely relate to. The timing of when cash is received or paid can vary. These timing differences can distort the true picture of a company‘s performance. Also, accrual accounting increases the comparability of the financial statements from one period to another. Accrual basis of accounting follows generally accepted accounting principles (GAAP) and is based on the GAAP principles of revenue recognition, matching, and timeliness. Cash basis accounting is not allowed under GAAP.

Revenue should be recorded in the period it is earned. Earning revenue is when services are provided or products are delivered. For example, you should record revenue when you complete a graphic design project, such as designing cards for a customer. Once you deliver your design service, you can record revenue, even if you have not received the cash payment. Expenses should be recorded in the period they are incurred. Expenses are incurred when they are used. For example, you need to use your cell phone to discuss design projects with customers. Your cell phone expense should be recorded in the month you used the service. The expense can be recorded even if you do not need to pay the bill until the next month. Answers will vary for examples.

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3. Hannah, you have identified most of the revenues and expenses correctly. However, here are two errors to correct. (1) Unearned revenue is not a revenue. Revenue is recorded on the Income Statement to reflect services that have been provided or products delivered. Unearned revenue is a liability that is recorded on the Balance Sheet. Unearned revenue is recorded for cash that has been received in advance for services or goods to be provided or delivered in the future. (2) Prepaid expense (also called Prepaids) is not an expense recorded on the Income Statement. Prepaid expense is an asset recorded on the balance sheet. Prepaid expense represents payments in advance for future benefit. An expense is something that has already been used up and does not have future benefit. 4. Answers will vary, but may include: 

Prepaying for a one-year gym membership.



Prepaying for a one-year magazine subscription.



Prepaying for one-year of car insurance.

Companies want customers to prepay because it decreases the risk of not receiving payment later. Prepaying guarantees companies revenue for a certain length of time. Receiving cash earlier also allows companies to have more cash to run their operations. 5. Not posting year-end adjusting entries means that the financial statements are missing information and are not accurate. Adjusting entries impact Revenue and Expenses and thus, impact profit. Since the Marketing and Human Resources department are basing their decision partly on the financial statements, they risk making the wrong decision. The Marketing department could spend too much or too little on the advertising campaign and the Human Resource department could hire too many or too few employees. Posting the year-end adjusting journal entries ensure complete information to make good business decisions. 6. The accumulated depreciation contra account is used. It is used to provide statement users with additional information about the cost of assets and the total amount of depreciation charged to date. Without the contra account information, the reader would not be able to determine the amount of depreciation expense for all prior periods when the assets were being used. 7. An accrued revenue is a revenue that is not recorded until end-of-period adjustments are made because cash is not received or the customer is not billed prior to the end of the period. An example is interest income that has been earned but not collected. 8. For Spin Master, property, plant and equipment require adjustment for depreciation. Depreciation expense would be understated on the income statement if Spin Master fails to adjust this asset account resulting in profit being overstated. 9. The depreciation recorded during the year equals the depreciation of $102,782,000 shown on Recipe Unlimited Corporation‘s income statement for the year ended December 27, 2020. Recipe would depreciate property, plant and equipment such as equipment, buildings and leasehold improvements. Recipe could also depreciate (or amortize) intangible assets. *10. If prepaid expenses are initially recorded with debits to expense accounts, asset accounts are debited in the adjusting entries. QUICK STUDY Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw-Hill Education Ltd.

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Quick Study 3-1 Cash Accounting Revenues (cash receipts) ...................................................................... Expenses (cash payments: $20,250 + $6,750)...................................... Net income .............................................................................................

$37,000 27,000 $10,000

Accrual Accounting Revenues (earned) ................................................................................ Expenses (incurred) .............................................................................. Net income..............................................................................................

$45,000 25,500 $19,500

Quick Study 3-2 1. The timeliness principle has been violated since businesses must report at regular intervals which is normally in one year intervals or less. 2. The matching principle has been violated because the supplies purchased on September 30 will probably not have been used entirely on that date. Allard has not accurately matched the expense of using the supplies to the accounting period in which they were/will be used. 3. The revenue recognition principle has been violated. Although Nikos has collected the cash it is not revenue until it has been earned. The $3,000 will not begin to be earned until June 1, therefore, it should not be recorded as a revenue on May 3. Therefore, the $3,000 should be recorded as a liability (i.e., unearned revenue). 4. The matching principle has been violated. Scooter Town has rented the equipment therefore an expense has been incurred although cash will not be paid until sometime in the future. Quick Study 3-3 1. March – Revenue should be recorded in March because that is when Starbucks earns revenue by delivering coffee to their customer. Unearned revenue should be recorded in February. 2. September to December – Tuition revenue should be recorded each month as the professor delivers the classes. Quick Study 3-4 1. Cash basis: Revenues (cash receipts) ............................................................ Expenses (cash payments) ($22,500 – $2,250 + $3,750) ............ Profit ............................................................................................. 2. Accrual basis: Revenues (earned) ....................................................................... Expenses (incurred) ..................................................................... Profit .............................................................................................

$33,000 24,000 $ 9,000 $39,000 22,500 $16,500

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Quick Study 3-5 a.

$1,000 ($12,000 / 12 months)

b. 6 months Date

Account Titles and Explanation

Debit

Credit

2023 c.

Jul. 1

Prepaid Insurance ..................................................

12,000

Cash ..............................................................

12,000

To record purchase of prepaid insurance for one year. d.

Dec. 31

Insurance expense .................................................

6,000

Prepaid Insurance .........................................

6,000

To record expired insurance ($12,000 / 12 months X 6 months = $6,000). Quick Study 3-6 a.

$2,000 ($24,000 / 12 months)

b. 6 months Date

Account Titles and Explanation

Debit

Credit

2023 c.

Jul. 1

Prepaid Insurance ..................................................

24,000

Cash ..............................................................

24,000

To record purchase of prepaid insurance for one year. d.

Dec. 31

Insurance expense ................................................. Prepaid Insurance .........................................

12,000 12,000

To record expired insurance ($24,000 / 12 months X 6 months = $12,000).

3-223

Last revised: December 2021.

Quick Study 3-7 Date

Account Titles and Explanation

Debit

Credit

2023 a.

Jul.

Supplies .................................................................

12,000

Cash ..............................................................

12,000

To record purchase of supplies. b.

Dec.

Supplies expense ...................................................

7,000

Supplies .........................................................

7,000

To record supplies used. c. On January 1, 2024, Organic Market has $5,000 of Supplies.

Quick Study 3-8

Date 2023 Apr. 1

15,000

Insurance Expense ................................................................. Prepaid Insurance ........................................................... To record the use of nine months of prepaid insurance; $15,000/24 = $625/month × 9 months = $5,625.

5,625

Insurance Expense ................................................................ Prepaid Insurance .......................................................... To record the use of 12 months of prepaid insurance; $625/month × 12 months = $7,500 OR $15,000/2 = $7,500.

7,500

Credit

15,000

5,625

12 months 2024 Dec. 31

Debit

9 months 2023 Dec. 31

Account Titles and Explanation

2025

7,500

3 months or $1,875 calculated as 3 months × $625 = $1,875.

3-224

Last revised: December 2021.

Quick Study 3-9

Date 2023 Apr. 1

7,680

2,880

Insurance Expense ................................................................ Prepaid Insurance .......................................................... To record the use of 12 months of prepaid insurance; $320/month × 12 months = $3,840 OR $7,680/2 = $3,840.

3,840

7,680

2,880

2025

3,840

3 months or $960 calculated as 3 months × $320 = $960.

Quick Study 3-10 2023 a) Mar. 1 Vehicle ............................................................................................... 40,000 Cash ............................................................................................ To record purchase of vehicle.

40,000

40,000 – 4,000 = 36,000; 36,000/4 yrs = 9,000/yr; 9,000/12 = 750/month; 750/month × 10 months = 7,500 OR 36,000 × 10/48 = 7,500.

Credit

12 months 2024 Dec. 31

Debit

9 months 2023 Dec. 31

Account Titles and Explanation

Dec. 31

Depreciation Expense, Vehicle ........................................................ 7,500 Accumulated Depreciation, Vehicle ............................................. To record 10 months of depreciation on the vehicle; 40,000 – 4,000 = 36,000; 36,000/4 yrs = 9,000/yr; 9,000/12 = 750/month; 750/month × 10 months = 7,500 OR 36,000 × 10/48 = 7,500.

7,500

(40,000 – 4,000)/4 years = $9,000

3-225

Last revised: December 2021.

Dec. 31

Depreciation Expense, Vehicle ........................................................ 9,000 Accumulated Depreciation, Vehicle .............................................

9,000

Quick Study 3-11

2023 a.

Jan.

Equipment ..............................................................

12,000

Cash ..............................................................

12,000

To record the purchase of equipment. b. = (Cost of asset – Estimated value at end of estimated useful life) / estimated useful life c. = (Cost of asset – Estimated value at end of estimated useful life) / estimated useful life = ($12,000 - $2,000) / 5 years = $2,000 annual depreciation

2023 d.

Dec.

31 Depreciation expense, Equipment ..........................

2,000

Accumulated Depreciation, Equipment ..........

2,000

To record annual depreciation on equipment. Quick Study 3-12 a)

2023 Mar. 1

32,000

32,000 – 8,000 = 24,000; 24,000/4 yrs = 6,000/yr; 6,000/12 = 500/month; 500/month × 10 months = 5,000 OR 24,000 × 10/48 = 5,000.

Vehicle ............................................................................................... 32,000 Cash ............................................................................................ To record purchase of vehicle.

Dec. 31

Depreciation Expense, Vehicle ........................................................ 5,000 Accumulated Depreciation, Vehicle ............................................. To record 10 months of depreciation on the vehicle; 32,000 – 8,000 = 24,000; 24,000/4 yrs = 6,000/yr; 6,000/12 = 500/month; 500/month × 10 months = 5,000 OR 24,000 × 10/48 = 5,000.

5,000

(32,000 – 8,000)/4 years = $6,000

Quick Study 3-12 (Continued) e) 2024 Dec. 31 Depreciation Expense, Vehicle ........................................................ 6,000 Accumulated Depreciation, Vehicle ......................................... To record annual depreciation on the vehicle;

6,000

3-226

Last revised: December 2021.

(32,000 – 8,000)/4 years.)

Quick Study 3-13 2023 a.

Oct.

Cash ......................................................................

300

Unearned Revenue .......................................

300

To record collection of cash for future services. b. $25 ($300 / 12 months) c. 3 months

2023 d.

Dec.

Unearned Revenue ................................................

Revenue ........................................................

To record the earned portion of revenue received in advance ($25 x 3 months). Quick Study 3-14 a)

2023 Nov. 1

12,000 12,000

$12,000 - $3,000 (unearned) = $9,000 (earned)

b) c)

Cash .................................................................................................. Unearned Revenue .................................................................... To record cash received for services to be performed in the future.

Dec. 31

Unearned Revenue ........................................................................... Revenue ..................................................................................... To record earned portion of revenue received in advance.

9,000 9,000

Quick Study 3-15 a. Interest expense = Principal x interest rate x number of months / 12 months b. 10 months

Date

Account Titles and Explanation

Debit

Credit

2023 c.

Dec.

31 Interest Expense.................................................... Interest Payable ............................................

800 800

3-227

Last revised: December 2021.

To record accrued interest expense ($12,000 x 8% x 10/12 = $800). Quick Study 3-16 a. 10 months Date

Account Titles and Explanation

Debit

Credit

2023 b.

Dec.

31 Interest Expense....................................................

1,600

Interest Payable ............................................

1,600

To record accrued interest expense ($24,000 x 8% x 10/12 = $1,600). Formula - Interest expense = Principal x interest rate x number of months / 12 months

Quick Study 3-17 a. Cash……………………………………..

10,000

Notes Payable ..................................................................... b. Interest Expense………………………………. 400 Cash .................................................................................... c. Interest Expense………………………………. 400 Interest Payable…………………………………200 Cash ....................................................................................

10,000

400

600

Quick Study 3-18 a. $400 ($5,600/14 days) b. 5 days

Date

Account Titles and Explanation

Debit

Credit

3-228

Last revised: December 2021.

2023 c.

Dec.

Wages Expense .....................................................

2,000

Wages Payable .............................................

2,000

To record five day’s accrued wages. 2024 d.

Jan.

11 Wages Payable ......................................................

2,000

Wages Expense

3,600

Cash ..............................................................

5,600

To record payment of two weeks‘ wages including five days accrued in December (5 days at $400; 9 days at 400 = $3,600 + 2,000 = $5,600)

Quick Study 3-19 a)

2023 Dec.

2024 Jan.

Cell Phone Expense .................................................................. Accounts Payable or Cell Phone Payable ...................... To accrue the December cell phone bill.

2,000

15 Accounts Payable or Cell Phone Payable ................................ Cash .................................................................................. To record payment of December 31 accrual.

2,000

Quick Study 3-20 a.

Unearned Revenue ..................................................................... Legal Revenue .................................................................... Recognize legal revenue earned (10,000 x 3/4).

7,500

Unearned Subscription Revenue ............................................... Subscription Revenue ....................................................... Recognize subscription revenue earned. [100 x ($24 / 12 months) x 6 months]

1,200

7,500

1,200

Quick Study 3-21 Salaries Expense ............................................................................... Salaries Payable ................................................................. Record salaries incurred but not yet paid. [One student earns, $100 x 4 days, Monday—Thursday]

400 400

3-229

Last revised: December 2021.

Quick Study 3-22

a) Tiger Computer has earned the $17,000 of revenue because the company has provided the service to their customer. Based on the accrual basis of accounting, revenue is recorded when it is earned and not when the customer is billed or when the cash is received. b)

2023 Mar.

Apr.

31 Accounts Receivable .................................................................... 17,000 Revenues................................................................................ To record accrued revenues.

17,000

16 Cash............................................................................................... 12,000 Accounts Receivable ............................................................. To record collection of receivables.

12,000

Quick Study 3-23 a. b. c. d. e.

Debits 4 11 5 7 4

Credits 3 10 10 8 2

Quick Study 3-24 a.

Debit Credit

Depreciation Expense Accumulated Depreciation

Income Statement Balance Sheet

Debit Credit

Wages Expense Wages Payable

Income Statement Balance Sheet

Debit Credit

Unearned Revenue Revenue Account

Balance Sheet Income Statement

Debit Credit

Insurance Expense Prepaid Insurance

Income Statement Balance Sheet

Debit Credit

Accounts Receivable Revenue Account

Balance Sheet Income Statement

Quick Study 3-25

3-230

Last revised: December 2021.

If adjustment is not recorded: Profit will be Assets will be Liabilities will be Equity will be overstated, overstated, overstated, overstated, understated, or understated, or understated, or understated, or no no effect no effect no effect effect

a. b. c. d. e.

Type of Adjustment Prepaid Expenses Overstated Depreciation Overstated Unearned Understated Revenues Accrued Overstated Expenses Accrued Understated Revenues

Overstated Overstated No effect

No effect No effect Overstated

Overstated Overstated Understated

No effect

Understated

Overstated

Understated

No effect

Understated

3-231

Last revised: December 2021.

Quick Study 3-26 2023 Oct. 31

Insurance Expense ............................................................................

750

Prepaid Insurance ..................................................................... To record expired prepaid insurance. 31

Interest Expense ................................................................................ Interest Payable......................................................................... To record accrual of interest.

750

750 750

Quick Study 3-27 HAPP COMPANY Income Statement For Year Ended December 31 Plumbing revenue ..................................................................

$84,000

Expenses Depreciation expense—Trucks ....................................... $6,500 Salaries expense .............................................................. 46,700 Rent expense .................................................................... 13,000 Total expenses .................................................................

66,200

Net income..............................................................................

$ 17,800

HAPP COMPANY Statement of Owner‘s Equity For Year Ended December 31 E. Happ, Capital, Dec. 31 prior year ...................................... $65,500 Add:

Less:

Investments by owner...............................................

Net income................................................................. 83,300

17,800

Withdrawals by owner ..............................................

(15,400)

E. Happ, Capital, Dec. 31 current year .................................. $67,900

3-232

Last revised: December 2021.

HAPP COMPANY Balance Sheet December 31 Assets Cash .................................................................... $ 7,000 Accounts receivable ................................................... 27,200 Trucks ...................................................... $ 42,000 Accumulated depreciation-Trucks ............................. (17,500) 24,500 Land .................................................................... 32,000 Total assets ................................................................. $ 90,700 Liabilities Accounts payable ........................................................ Salaries payable .......................................................... Unearned revenue ....................................................... Total liabilities .............................................................

$ 15,000 4,200 3,600 $ 22,800

Equity E. Happ, Capital ........................................................... Total liabilities and equity ..........................................

67,900 $ 90,700

*Quick Study 3-28 Nov. 30

Supplies Expense ............................................................................ Salaries Expense ..................................................................... To correct the incorrect November 14 entry.

14,800 14,800

OR 30

Cash ............................................................................................... Salaries Expense .................................................................... To reverse the incorrect November 14 entry.

14,800 14,800

AND 30

Supplies Expense ............................................................................ Cash ......................................................................................... To record the correct entry for November 14.

14,800 14,800

3-233

Last revised: December 2021.

Jan. 31

Accounts Payable ........................................................................... Office Furniture ....................................................................... To reverse the incorrect January 10 entry.

25,000

Computer Equipment...................................................................... Notes Payable .........................................................................

25,000

AND 31

25,000

To record the correct entry for January 10.

*Quick Study 3-30 a)

2023 Nov.

Salaries Expense ..................................................... Salaries Payable ............................................... To accrue salaries.

3,000

30 Office Supplies ........................................................ Office Supplies Expense.................................. To record unused supplies.

800

30 Accounts Receivable............................................... Consulting Revenue ......................................... To accrue revenues.

2,300

30 Consulting Revenue .................................................. Unearned Revenue ........................................... To record unearned revenue.

4,200

3,000

800

2,300

4,200

3-234

Last revised: December 2021.

EXERCISES Exercise 3-1 (20 minutes)

Balance Sheet

Income Statement

Prepaid Insurance

Insurance Expense

Accrual Basis*

Cash Basis

Accrual Basis**

Cash Basis

Dec. 31, Year 1..................... $13,000

Year 1................................... $ 5,000

$18,000

Dec. 31, Year 2..................... 7,000

Year 2................................... 6,000

Dec. 31, Year 3..................... 1,000

Year 3................................... 6,000

Dec. 31, Year 4..................... 0

Year 4................................... 1,000

Total ..................................... $18,000

$18,000

Explanations: *

Accrual asset balance equals months left in the policy x $500 per month (monthly cost is computed as $18,000 / 36 months). Months Left Balance Dec. 31, Year 1 ..

$13,000

Dec. 31, Year 2 ..

7,000

Dec. 31, Year 3 ..

1,000

Dec. 31, Year 4 ..

Accrual insurance expense equals months covered in the year x $500 per month. Months Covered Expense

Year 1 .................................. 10

$ 5,000

Year 2 .................................. 12

6,000

Year 3 .................................. 12

6,000

Year 4 .................................. 2

1,000 $18,000

Exercise 3-2 (10 minutes)

3-235

Last revised: December 2021.

a. Aritzia should record revenue once the leather jacket has been delivered and received by you, the customer after 14 days. b. Telus Communications should record revenue in March as this is the period Telus delivered their cell phone service. c. Toronto Transit Commission should record revenue in September after it has provided the bus services. Exercise 3-3 (10 minutes) 1. 2. 3. 4. 5. 6.

a e c b f b

7. 8. 9. 10. 11. 12.

c f f f d f

Exercise 3-4 (15 minutes) Date

Account Titles and Explanation

Debit

Credit

2023 a.

Oct. 1

Prepaid Rent .........................................................

8,000

Cash .............................................................

8,000

To record prepaid rent. Dec. 31

Rent expense ........................................................

6,000

Prepaid Rent .................................................

6,000

To record rent expense ($8,000/4 months x 3 months = $6,000). b.

Nov. 1

Prepaid Magazine Subscription .............................

480

Cash .................................................................

480

To record a prepaid magazine subscription.

Exercise 3-4 (Concluded) Dec. 31

Magazine Subscription expense ............................

3-236

Last revised: December 2021.

Prepaid Magazine Subscription ........................

To record the expiration of the magazine subscriptions ($480 / 12 months x 2 months = 80). c.

Dec. 1

Supplies.................................................................

3,000

Cash .................................................................

3,000

To record the purchase of supplies. Dec. 31

Supplies Expense ..................................................

1,000

Supplies ............................................................

1,000

To record supplies used ($3,000-$2,000 = $1,000).

Exercise 3-5 (15 minutes) Part 1 a. = (Cost of asset – Estimated value at end of estimated useful life) / estimated useful life = ($15,000 - $0) / 5 years = $3,000 depreciation expense

Date

Account Titles and Explanation

Debit

Credit

2023 Dec.

Depreciation Expense, Equipment.........................

3,000

Accumulated Depreciation, Equipment .........

3,000

To record annual depreciation on equipment. b. = (Cost of asset – Estimated value at end of estimated useful life) / estimated useful life = ($12,000 - $2,000) / 10 years x (6/12 months) = $500 depreciation expense

3-237

Last revised: December 2021.

Exercise 3-5 (Continued)

Date

Account Titles and Explanation

Debit

Depreciation Expense, Furniture ...........................

500

Credit

2023 Dec.

Accumulated Depreciation, Furniture ............

500

To record annual depreciation on Furniture. c. = (Cost of asset – Estimated value at end of estimated useful life) / estimated useful life = ($25,000 - $5,000) / 8 years = $2,500 depreciation expense

Date

Account Titles and Explanation

Debit

2023

Depreciation expense, Car .....................................

2,500

Dec.

Credit

31 Accumulated Depreciation, Car .....................

2,500

To record annual depreciation on a Car ............. Part 2 $7,500 ($2,500 x 3 years) Part 3 $17,500* *Cost $25,000 Accumulated Depreciation 7,500 Carrying Amount $17,500

3-238

Last revised: December 2021.

Exercise 3-6 (15 minutes) Date

Account Titles and Explanation

2023 a.

Sept.

Cash ......................................................................

Debit

Credit

15,000

1 Unearned Revenue .......................................

15,000

To record cash received for future dance lessons. Dec.

31 Unearned Revenue ................................................

15,000

Revenue .......................................................

15,000

To record annual adjusting entries for earned revenue received in advance. b.

Oct.

Cash ......................................................................

5,000

Unearned Revenue ...........................................

5,000

To record cash received for stage rental. Dec.

31 Unearned Revenue ................................................

2,500

Revenue ...........................................................

2,500

To record the earned portion of revenue received in advance. c.

Oct.

Cash ......................................................................

5,000

Unearned Revenue ...........................................

5,000

To record cash received in advance for future music lessons. Dec.

31 Unearned Revenue ................................................ Revenue ...........................................................

3,750 3,750

To record the earned portion of revenue received in advance. ($5,000 / 4 months = $1,250 x 3 months = $3,750)

3-239

Last revised: December 2021.

Exercise 3-7 (15 minutes) Date a.

Account Titles and Explanation

2023 Dec.

Interest Expense ....................................................

Debit

Credit

1,250

31 Interest Payable ............................................

1,250

To record accrued interest expense ($500,000 x 3% x 1/12 = $1,250). b.

Dec.

31 Interest Receivable ................................................

1,000

Interest Income .............................................

1,000

To record accrued interest income ($50,000 x 4% x 6/12 = $1,000). c.

Dec.

31 Accounts Receivable .............................................

2,000

Revenue ...........................................................

2,000

To record accrue revenue. Exercise 3-8 (30 minutes) Part 1: Initial journal entries Date

Account Titles and Explanation

Debit

Credit

2023 a.

Jan.

Computer ...............................................................

1,500

Cash ..............................................................

1,500

To record purchase of computer.

Feb.

Prepaid insurance ..................................................

1,200

Cash ..............................................................

1,200

To record purchase of prepaid insurance.

Mar.

Supplies ................................................................. Cash ..................................................................

650 650

To record purchase of supplies.

3-240

Last revised: December 2021.

Exercise 3-8 (Continued) d.

Nov. 1

Cash ......................................................................

720

Unearned revenue..............................................

720

To record collection of cash in advance for tutoring services. (8 hours x $30 x 3 months = $720). Part 2: Adjusting journal entries Date

Account Titles and Explanation

Debit

Credit

2023 a.

Dec.

Depreciation expense.............................................

500

Accumulated depreciation, Computer .................

500

To record depreciation expense for the computer. ($1,500/3 years = $500) b.

Dec. 31

Insurance expense .................................................

1,100

Prepaid insurance ..............................................

1,100

To record prepaid insurance expired ($1,200 / 12 months x 11 months = $1,100). c.

Dec. 31

Supplies expense ...................................................

420

Supplies ............................................................

420

To record supplies used ($650 - $230 = $420). d.

Dec. 31

Unearned revenue .................................................

480

Tutoring revenue ...............................................

480

To record revenue earned (8 hours x $30 x 2 months = $480). e.

Dec. 31

Accounts Receivable .............................................. Tutoring Revenue ..............................................

120 120

To record accrued revenue earned (4 hours x $30 = $120).

3-241

Last revised: December 2021.

Exercise 3-8 (Concluded) f.

Dec. 31

Cell phone expense ...............................................

Accounts payable ...............................................

To record accrued telephone expense. Exercise 3-9 (20 minutes) a)

2023 Dec.

2024 Jan.

31 Unearned Revenue ........................................................... Revenue .................................................................... To record earned revenue; $18,500 - $3,050 = $15,450.

15,450

31 Depreciation Expense, Building ......................................... Accumulated Depreciation, Building ...................... To record depreciation expense.

14,600

31 Spare Parts Expense ....................................................... Spare Parts Inventory .............................................. To record the use of spare parts inventory; $1200 - $980 = $220.

220

31 Accounts Receivable ...................................................... Revenue .................................................................... To record accrued revenue.

14,600

31 Utilities Expense.............................................................. Utilities Payable (or Accounts Payable).................. To record accrued utilities.

2,100

4 Cash ................................................................................. Accounts Receivable .............................................. To record collection of accrued revenues.

14,600

14 Utilities Payable (or Accounts Payable)......................... Cash ......................................................................... To record payment of accrued utilities.

2,100

15,450

14,600

220

14,600

2,100

14,600

2,100

3-242

Last revised: December 2021.

Exercise 3-10 (15 minutes) Date 1.

Jan.

Account Titles and Explanation 1

Prepaid Insurance ..................................................

Debit

Credit

12,000

Cash ..............................................................

12,000

Purchase of prepaid insurance. ......................... 2 a.

Jan.

Insurance expense .................................................

1,000

Prepaid Insurance .........................................

1,000

Record monthly adjusting entries for prepaid insurance ($12,000 / 12 months = $1,000). ....................... 2 b.

Mar.

Insurance expense .................................................

3,000

Prepaid Insurance .........................................

3,000

Record quarterly adjusting entries for prepaid insurance ($12,000 / 12 months x 3 months = $3,000). ........................................................................... 2 c.

Jun.

Insurance expense .................................................

6,000

Prepaid Insurance .........................................

6,000

Record semi-annual adjusting entries for prepaid insurance ($12,000 / 12 months x 6 months = $6,000). 2 d.

Dec.

Insurance expense ................................................. Prepaid Insurance .............................................

12,000 12,000

Record annual adjusting entries for prepaid insurance ($12,000 / 12 months x 12 months = $12,000). .

3-243

Last revised: December 2021.

Exercise 3-11 (20 minutes)

Date

Account Title and Explanation

Debit

Credit

2023 a.

Sept. 30

Interest expense

250

Interest payable ($60,000 x 5% x 1/12)

250

To record accrued interest expense. b.

Sept.

Unearned revenue .................................................

10,000

Teaching revenue ..............................................

10,000

To record revenue earned. c.

Sept. 30

Supplies expense...................................................

4,000

Supplies .............................................................

4,000

To record supplies used. d.

Sept. 30

Depreciation expense ............................................

Accumulated depreciation, Refrigerator ............

To record depreciation expense ($2,400 / 5 years x 1/12 = $40) e.

Sept. 30

Accounts receivable ...............................................

9,350

Teaching revenue .............................................

9,350

To record accrued revenue earned. f.

Sept. 30

Salaries expense ...................................................

2,160

Salaries payable.................................................

2,160

To record accrued wages expense ($3,360 / 14 days x 9 days = $2,160).

3-244

Last revised: December 2021.

Exercise 3-12 (25 minutes) a)

2023 Mar.

Apr.

31 Unearned Rent ....................................................................... 11,000 Rent Revenue ................................................................. Earned five months’ rent previously paid in advance; $2,200 x 5 = $11,000. 31 Rent Receivable..................................................................... Rent Revenue ................................................................. Earned two months’ rent that has not yet been collected; $2,650 x 2 = $5,300.

5,300

22 Cash ....................................................................................... Rent Receivable ............................................................. Rent Revenue ................................................................. Collected rent for February, March, and April.

7,950

11,000

5,300

5,300 2,650

Exercise 3-13 (15 minutes) a)

2023 Dec.

31 Accounts Receivable........................................................ Revenue ..................................................................... To record accrued revenue.

1,750

31 Rent Expense .................................................................... Prepaid Rent .............................................................. To record expired rent.

5,500

31 Depreciation Expense, Machinery................................... Accumulated Depreciation, Machinery .................... To record depreciation expense.

3,450

31 Unearned Revenue ........................................................... Revenue ..................................................................... To record revenue.

4,050

31 Salaries Expense .............................................................. Salaries Payable ........................................................ To record accrued salaries.

3,100

1,750

5,500

3,450

4,050

3,100

3-245

Last revised: December 2021.

Exercise 3-14 (15 minutes) a. b. c. d.

$1,110 (210 + 2,000 – 1,100 = 1,100) $2,260 (810 + 2,200 – 750 = 2,260) $25,800 (25,100 + 2,400 – 1,700 = 25,800) $15,400 (85,100 + 8,200 – 77,900 = 15,400)

Proof: Supplies on hand—January 1 ........................... Supplies purchased during the year ................ Total supplies available ..................................... Supplies on hand—December 31 ..................... Supplies expense for the year ..........................

(a) $ 210 2,000 $2,210 (1,100) $1,110

(b) $ 810 2,200 $3,010 (2,260) $ 750

(d) $15,400 77,900 $93,300 (8,200) $85,100

Exercise 3-15 (15 minutes) Adjusting entry: 2023 Dec.

Wages Expense .................................................................... Wages Payable .............................................................. Adjusting entry to record accrued wages for three days; 5 employees × 4 days × $210.

4,200

Wages Payable ...................................................................... Cash ............................................................................... Paid employees' accrued and current wages; 5 employees x $210/day x 4 days = $4,200.

4,200

Payday entry: 2024 Jan.

4,200

3-246

Last revised: December 2021.

Exercise 3-16 (25 minutes) a)

2023 Apr.

May

2023 Apr.

May

2023 Apr.

May

30 Interest Expense ........................................................... Interest Payable ....................................................... To record accrued interest expense; 0.3% × $370,000 × 10/30.

370

20 Interest Payable .............................................................. Interest Expense ............................................................. Cash ........................................................................ To record payment of accrued and current expense; 0.3% × $370,000 × 20/30.

370 740

30 Salaries Expense ............................................................ Salaries Payable ...................................................... To record accrued salaries; $13,600/5 days = $2,720/day; 4 days x $2,720 = $10,880.

10,880

1 Salaries Payable ............................................................. Salaries Expense ............................................................ Cash ........................................................................ To record payment of accrued and current salaries; 1 days x $2,720 = $2,720.

10,880 2,720

30 Legal Fees Expense........................................................ Legal Fees Payable.................................................. To record accrued legal fees.

3,600

12 Legal Fees Payable......................................................... Cash ........................................................................ To pay accrued legal fees.

3,600

370

1,110

10,880

13,600

3,600

3-247

Last revised: December 2021.

Exercise 3-17 (25 minutes) 2023 Dec.

Accounts Receivable ............................................................ Revenue ......................................................................... To record unbilled revenue; 30% × $12,000.

3,600

Unearned Revenue ............................................................... Revenue ......................................................................... To record earned revenue that had been collected in advance; 70% × $12,000.

8,400

Depreciation Expense, Computers ...................................... Accumulated Depreciation, Computers....................... To record depreciation on computers.

3,000

Depreciation Expense, Office Furniture .............................. Accumulated Depreciation, Office Furniture ......................................................... To record depreciation on office furniture.

3,500

Salaries Expense .................................................................. Salaries Payable ............................................................ To record accrued salaries.

4,900

Insurance Expense ............................................................... Prepaid Insurance ......................................................... To record expired prepaid insurance.

2,600

Office Supplies Expense ...................................................... Office Supplies .............................................................. To record use of office supplies.

960

Utilities Expense ..................................................................... Utilities Payable............................................................... To record unpaid utility costs.

140

3,600

8,400

3,000

3,500

4,900

2,600

960

140

Analysis component: The GAAP of matching and revenue recognition requires that adjusting entries be recorded at the end of each accounting period to ensure revenues and expenses are allocated to the period in which they were incurred. If the December 31, 2023 adjustments for Javelin Company were not recorded, revenues would be understated by $12,000 ($145,000 - $133,000); expenses would be understated by $15,100 ($57,600 $42,500); and profit would be overstated by the difference of $3,100 ($15,100 - $12,000 = $3,100).

3-248

Last revised: December 2021.

Nuna Music Trial Balances February 28, 2023 Unadjusted Trial Adjusted Trial Account Balance Adjustments Balance Debit Credit Debit Credit Debit Credit Cash ................................................... $ 14,000 $ 14,000 c)$31,000 Accounts receivable ......................... 32,000 63,000 b)$12,000 Prepaid insurance ............................. 16,800 4,800 Equipment ......................................... 102,000 102,000 Accumulated depreciation, equipment .......................................... $ 23,000 a)11,500 $ 34,500 Accounts payable .............................. 19,000 19,000 Abraham Nuna, capital ..................... 213,000 213,000 Abraham Nuna, withdrawals ............ 102,000 102,000 Revenues ........................................... 214,000 c)31,000 245,000 Depreciation expense, 0 a) 11,500 11,500 equipment Salaries expense ............................... 187,700 187,700 Insurance expense ............................ 14,500 b)12,000 26,500 Totals ................................................. $469,000 $469,000 $54,500 $54,500 $511,500 $511,500

3-249

Last revised: December 2021.

Exercise 3-19 (25 minutes) Nuna Music Income Statement For Year Ended February 28, 2023 Revenue ............................................................................................ Operating expenses: Salaries expense ......................................................................... Insurance expense ...................................................................... Depreciation expense, equipment ............................................. Total operating expenses ....................................................... Profit .................................................................................................

$245,000

$187,700 26,500 11,500 225,700 $ 19,300

Nuna Music Statement of Changes in Equity For Year Ended February 28, 2023 Abraham Nuna, capital, March 1 ..................................................... Profit ................................................................................................. Total ............................................................................................. Less: Withdrawal by owner ............................................................ Abraham Nuna, capital, February 28 ..............................................

$213,000 19,300 $232,300 102,000 $130,300

Nuna Music Balance Sheet February 28, 2023 Assets Cash .................................................................................................. Accounts receivable ........................................................................ Prepaid insurance ............................................................................ Office equipment ............................................................................. Less: Accumulated depreciation, office equipment ................

$ 14,000 63,000 4,800 $102,000 34,500

Total assets ......................................................................................

67,500 $149,300

Liabilities Accounts payable ............................................................................

$ 19,000

Equity Abraham Nuna, capital .................................................................... Total liabilities and equity ...............................................................

130,300 $149,300

3-250

Last revised: December 2021.

Exercise 3-19 (concluded) Analysis component: The GAAP that requires the preparation of financial statements is the timeliness principle. The timeliness principle assumes that an organization‘s activities can be divided into specific time periods. Since information must reach decision makers frequently and promptly, the accounting system needs to produce reports regularly. The standard reporting period is one year although many companies report quarterly. Exercise 3-20* a)

Cash ............................................................................... Accounts Payable ...................................................

1,800 1,800

3-251

Last revised: December 2021.

To correct the original entry.

OR 1,800

Cash ................................................................................ 1,800

Office Supplies .........................................................

To reverse the incorrect entry.

1,800

Office Supplies ................................................................

3-252

Last revised: December 2021.

1,800

Accounts Payable .....................................................

To journalize the correct entry. b)

Revenue......................................................................... Accounts Receivable .............................................

4,500 4,500

3-253

Last revised: December 2021.

To correct the original entry.

OR 4,500

Revenue ......................................................................... 4,500

Cash ........................................................................

To reverse the incorrect entry.

4,500

Cash ...............................................................................

3-254

Last revised: December 2021.

4,500

Accounts Receivable ...............................................

To journalize the correct entry. c)

Withdrawals .................................................................. Salaries Expense ...................................................

1,500 1,500

3-255

Last revised: December 2021.

To correct the original entry.

Cash ...............................................................................

1,500

Salaries Expense .................................................

1,500

To reverse the incorrect entry.

Withdrawals ..................................................................

1,500

3-256

Last revised: December 2021.

Cash.......................................................................

1,500

To journalize the correct entry.

3-257

Last revised: December 2021.

Exercise 3-20* (concluded) d)

Accounts Receivable...................................................................... Revenue ................................................................................ To correct the original entry. OR Accounts Receivable...................................................................... Cash ...................................................................................... To reverse the incorrect entry.

750

Cash ................................................................................................ Revenue ................................................................................ To journalize the correct entry.

750

750 750

750

Analysis component: If the error in (b) is not corrected, revenue and profit on the income statement will be overstated each by $4,500. On the balance sheet, assets (accounts receivable) and equity will be overstated each by $4,500. Exercise 3-21 (30 minutes) a)

2023 Dec.

Supplies Expense ......................................................... Cash ........................................................................ Purchased supplies.

8,000

Insurance Expense ....................................................... Cash ........................................................................ Paid insurance premiums.

3,200

Cash ............................................................................... Remodelling Revenue ............................................ Received cash for work to be done.

16,100

Supplies ......................................................................... Supplies Expense .................................................. Adjusted expense for unused supplies on hand.

1,450

Prepaid Insurance ......................................................... Insurance Expense ................................................ Adjusted expense for unexpired coverage; $3,200 – $800.

2,400

Remodelling Revenue ................................................... Unearned Remodelling Revenue .......................... Adjusted revenues for unfinished projects; $16,100 – $8,500.

7,600

8,000

3,200

16,100

Adjusting entries: d)

2023 Dec.

1,450

2,400

7,600

3-258

Last revised: December 2021.

Exercise 3-22 (25 minutes) a)

Initial credit recorded in Unearned Revenue account:

July

31 b)

Cash ....................................................................... Unearned Revenue ........................................ Received cash for work to be done.

4,000

Cash ....................................................................... Unearned Revenue ........................................ Received cash for work to be done.

16,800

Unearned Revenue ............................................... Revenue ......................................................... Completed work for customer.

4,000

Cash ....................................................................... Unearned Revenue ........................................ Received cash for work to be done.

15,000

Unearned Revenue ............................................... Revenue ......................................................... Completed work for customer.

16,800

4,000

16,800

4,000

15,000

16,800

No entry.

Initial credit recorded in Revenue account:

July

Cash ....................................................................... Revenue ......................................................... Received cash for work to be done.

4,000

Cash ....................................................................... Revenue ......................................................... Received cash for work to be done.

16,800

No entry.

Cash ....................................................................... Revenue ......................................................... Received cash for work to be done.

4,000

16,800

15,000

No entry.

Revenue ................................................................. 15,000 Unearned Revenue ........................................ Adjusting entry to reflect unearned revenue for unfinished job.

15,000

3-259

Last revised: December 2021.

Exercise 3-22 (concluded) c)

Under the first method: Unearned revenue = $4,000 + $16,800 – $4,000 + $15,000 – $16,800 = $15,000 Revenue = $4,000 + $16,800 = $20,800 Under the second method: Unearned revenue = $15,000 Revenue = $4,000 + $16,800 + $15,000 – $15,000 = $20,800

PROBLEMS Problem 3-1A (15 minutes) a) (a)

(b)

(c)

(d)

2023 Dec. 31 Insurance Expense .................................................... Prepaid Insurance ................................................ To record expired insurance; 7,440/6 months = 1,240/month.

1,240 1,240

31 Office Rent Expense ................................................. Prepaid Office Rent .............................................. To record expired rent; 23,000 – 5,200 = 17,800 used.

17,800

31 Subscription Expense ............................................... Prepaid Subscriptions ......................................... Used $1,140 of prepaid subscriptions.

1,140

31 Equipment Rent Expense ......................................... Prepaid Equipment Rental ................................... To record rent expense; 33,840/3 years = 11,280/year × 1/12 = 940.

940

17,800

1,140

940

Analysis component: If the adjustments in (a) through (d) were not recorded, assets and equity would be overstated on the balance sheet, and on the income statement, expenses would be understated causing profit to be overstated.

3-260

Last revised: December 2021.

Problem 3-2A (15 minutes)

2023 Dec. 31 Depreciation Expense, Machine A ........................... Accumulated Depreciation, Machine A ............... To record depreciation on Machine A; 102,000/5 years = 20,400/year.

20,400 20,400

Dec. 31 Depreciation Expense, Machine B ........................... Accumulated Depreciation, Machine B ............... To record depreciation on Machine B; 61,000 – 3,400 = 57,600/4 years = 14,400/year; 14,400/year × 9/12 = 10,800.

10,800

Dec. 31 Depreciation Expense, Machine C ........................... Accumulated Depreciation, Machine C ............... To record depreciation on Machine C; 30,500 – 2,900 = 27,600/2 years = 13,800/year; 13,800/year × 2/12 = 2,300.

2,300

10,800

2,300

Analysis component: The recording of depreciation achieves the GAAP of matching. When an asset such as a machine is purchased, it will help generate revenues for more than the current accounting period. Therefore, to properly match the expense of the machine, we allocate a portion of the total cost to each accounting period in which revenue will be generated by the machine; this process is called depreciation. If we expensed the total cost of the machine in the period in which it was purchased, expenses would be overstated in the period the machine was purchased and understated in future periods in which the machine was used in the operations of the business. On the income statement, if depreciation is not recorded at all, expenses will be understated causing profit to be overstated.

3-261

Last revised: December 2021.

Problem 3-3A (15 minutes) a)

2023 Nov. 30 Unearned Lawn Services .......................................... Lawn Services Earned ......................................... To record lawn services earned; 102,000 – 86,000 = 16,000 earned.

16,000 16,000

30 Unearned Garden Services ....................................... Garden Services Earned ...................................... Garden services earned.

31,950

30 Unearned Snow Removal Services .......................... Snow Removal Services Earned ......................... To record lawn services earned; 11,800 – 9,200 = 2600 earned.

2,600

31,950

2,600

No entry required on November 30, 2023.

Analysis component: If the Unearned Lawn Services of $102,000 had been recorded as a revenue when received instead of as a liability with no adjustments being recorded at year end, revenues for the 2023 accounting period would have been overstated by $86,000 (because this amount represents services to be performed during 2024). On the November 30, 2023 balance sheet, this error would have resulted in liabilities being understated by $86,000 and equity overstated by $86,000.

3-262

Last update: 2012-12-05

Problem 3-4A (30 minutes) Adjusting Entries a. Interest Expense .................................................... 1,080

Subsequent Entries a. Apr. 2

Interest Payable ..........................

1,080

Mar. 31 Interest Payable ................................................ 1,080 To record accrued interest. b. Mar. 31

b. Salaries Expense ................................................... 33,150 Salaries Payable ............................................... 33,150 To record accrued salaries expense.

c. Mar. 31

d. Mar. 31

e. Mar. 31

Cash ....................................... To record payment of accrued interest.

1,080

Apr. 4 Salaries Payable ............................

33,150

Salaries Expense ........................... Cash ....................................... To record payment of salaries.

22,200

c. Telephone Expense ....................................................... 470 Apr. Accounts Payable .......................... 15 Accounts Payable ................................................... 470 Cash ....................................... To record telephone bill. To record payment of telephone bill. d. Rent Expense ................................................................. 4,500 Apr. Rent Payable .................................. 26 Rent Payable ........................................................... 4,500 Rent Expense ................................. To record accrued rent for Prepaid Rent .................................. March. Cash .................................... To record payment of rent for 6 e. months. Commissions Expense ................................................. 17,600 Apr. Commissions Payable ................... 15 Commissions Payable ........................................... 17,600 Cash ....................................... To record accrued commissions; To record payment of accrued 440,000 × .04 = 17,600. commissions.

55,350

470 470

9,000 4,500 13,500 27,000

17,600

3-263

Last update: 2012-12-05

3-264

Last update: 2012-12-05

Problem 3-5A (30 minutes)

Adjusting Entries a. Rent Receivable ..................................................... 4,150

Subsequent Entries a. Apr. 3

Cash ............................................

Rent Receivable ..................... To record collection of accrued revenue.

4,150

Mar. 31 Rent Revenue ................................................. 4,150 To record accrued revenue. b. Mar. 31

c. Mar .31

Accounts Receivable ............................................. 8,400

Apr. 7 Cash ................................................

Service Revenue ............................................ 8,400 To record accrued revenue.

Accounts Receivable ............. To record collection of accrued revenue.

c. Interest Receivable ....................................................... 640 Apr. 1 Cash ................................................ Interest Income ..................................................... 640 To record accrued revenue.

d. Mar. 31

4,150

8,400 8,400

640

Interest Receivable ................ To record collection of accrued revenue.

d. Accounts Receivable .................................................... 11,50 Apr. 2 Cash ................................................ 0 Service Revenue ................................................... 11,50 Accounts Receivable ............. 0 To record accrued service To record collection of accrued revenue for February and revenue. March; 34,500/6 = 5,750 x 2 = 11,500.

640

11,50 0

3-265

Last update: 2012-12-05

Problem 3-6A (30 minutes) Part 1 a)

2023 Dec.

Dec.

Insurance Expense ................................................ Prepaid Insurance .......................................... To record the cost of insurance expired during the year.

1,250

Teaching Supplies Expense ................................. Teaching Supplies .......................................... To record the cost of supplies used during the year; 6,500 – 450.

6,050

Depreciation Expense, Equipment ....................... Accumulated Depreciation, Equipment ........ To record equipment depreciation expense.

8,000

Depreciation Expense, Prof. Library .................... Accumulated Depreciation, Professional Library ................................... To record professional library depreciation expense.

4,500

Unearned Extension Revenue .............................. Extension Revenue ........................................ To record extension revenue that were collected in advance; $950 x 2 = $1,900.

1,900

Accounts Receivable............................................. Tuition Revenue ............................................. To record the amount of tuition revenue earned; $1,200 x 2.5 = $3,000.

3,000

Salaries Expense ................................................... Salaries Payable ............................................. To record accrued salaries expense; 2 employees x 3 days x $120/day = $720.

720

Rent Expense......................................................... Prepaid Rent ................................................... To record the expiration of prepaid rent; $7,200/3 months = $2,400.

2,400

1,250

6,050

8,000

4,500

1,900

3,000

720

2,400

3-266

Last update: 2012-12-05

Problem 3-6A Analysis Component – Part 2 PACRIM CAREERS Trial Balances December 31, 2023 Unadjusted Trial Balance Adjustments Account Debit Credit Debit Credit Cash ........................................................ $ 18,000 Accounts receivable .............................. -0f) $3,000 Teaching supplies .................................. 6,500 b) $ 6,050 Prepaid insurance .................................. 1,400 a) 1,250 Prepaid rent ............................................ 7,200 h) 2,400 Professional library ............................... 60,000 Accum. deprec., professional library................................ $ 18,000 d) 4,500 Equipment .............................................. 96,000 Accum. deprec., equipment .................. 32,000 c) 8,000 Accounts payable .................................. 2,500 Salaries payable ..................................... -0g) 720 Unearned extension 6,300 e) 1,900 revenue ................................................... Karoo Ashevak, capital .......................... 229,000 Karoo Ashevak, 92,000 withdrawals ............................................ Tuition revenue ...................................... 196,000 f) 3,000 Extension revenue ................................. 72,500 e) 1,900 Deprec. expense, equipment............................................... -0c) 8,000 Deprec. expense, professional library................................ -0d) 4,500 Salaries expense .................................... 206,000 g) 720 Insurance expense ................................. -0a) 1,250 Rent expense ......................................... 44,000 h) 2,400 Teaching supplies expense................... -0b) 6,050 Advertising expense .............................. 14,000 Utilities expense .................................... 11,200 Totals ...................................................... $556,300 $556,300 $27,820 $27,820

Adjusted Trial Balance Debit Credit $18,000 3,000 450 150 4,800 60,000 $22,500 96,000 40,000 2,500 720 4,400 229,000 92,000 199,000 74,400 8,000 4,500 206,720 1,250 46,400 6,050 14,000 11,200 $572,520

$572,520

3. Assuming the adjustments were not recorded, profit would have been overstated by $18,020 (8,000 + 4,500 + 720 + 1,250 + 2,400 + 6,050 – 3,000 – 1,900). 4. It is unethical to ignore adjusting entries because it misrepresents assets, liabilities, and equity.

3267

Last update: 2012-12-05

Problem 3-7A (35 minutes) Date 2023 Jan.

Account Titles and Explanation

Debits

Depreciation Expense, Equipment ............................... Accumulated Depreciation, Equipment ................ To record depreciation; 21,600/3 yrs = 7,200/yr × 1/12 = 600.

600

Unearned Consulting Revenue..................................... Consulting Revenue ............................................... To record revenue.

8,700

Rent Expense................................................................. Prepaid Rent ........................................................... To record expired rent; 13,500/6 = 2,250.

2,250

Wages Expense ............................................................. Wages Payable ....................................................... To record accrued wages.

18,500

Interest Expense ............................................................ Interest Payable ...................................................... To record accrued interest; 42,000 × 4% = 1,680 × 1/12 = 140.

140

Accounts Receivable..................................................... Consulting Revenue ............................................... To record accrued revenue.

6,150

Insurance Expense ........................................................ Prepaid Insurance .................................................. To record expired insurance; 3,510/18 months = 195/month.

195

Depreciation Expense, Office Furniture ...................... Accumulated Depreciation, Office Furniture ........ To record depreciation of office furniture.

625

Accounts Receivable..................................................... Repair Revenues Earned ....................................... To record accrued repair revenues.

3,400

Store Supplies Expense ................................................ Store Supplies ........................................................ To record store supplies used; 800 + 1,780 – 650 = 1,930.

1,930

Credits

600

8,700

2,250

18,500

140

6,150

195

625

3,400

1,930

3268

Last update: 2012-12-05

2023 a. Nov. 30

Office Supplies Expense ...................................... Office Supplies .............................................. To record the cost of supplies used during the year; $4,800 + $24,800 – $6,300.

23,300

Insurance Expense ............................................... 10,035 Prepaid Insurance ......................................... 10,035 To record the cost of insurance coverage that expired during the year. Policy 1 2 3 Total

23,300

Cost per Month $240 620 315

No. of Months 12 9 5

2023 Cost $ 2,880 5,580 1,575 $10,035

Salaries Expense .................................................. 24,000 Salaries Payable ............................................ To record accrued but unpaid wages; 5 days × 4,800.

24,000

Depreciation Expense, Building .......................... 3,903 Accumulated Depreciation, Building ........... 3,903 To record depreciation expense. Annual depreciation = ($306,000 – $25,000)/30 = $9,367; depreciation for five months = $9,367 × 5/12. NOTE: The actual calculation is 3,902.78 but it is rounded to the nearest whole dollar because depreciation is based on estimates.

Rent Receivable .................................................... Rent Revenue ................................................ To record earned but unpaid rent.

3,100

Unearned Rent ...................................................... Rent Revenue ................................................ To record the amount of rent revenue; 2 × $3,650.

7,300

3,100

7,300

Part 2 2023 c. Dec. 2

Salaries Payable........................................... Cash ...................................................... To record payment of accrued salaries.

24,000

Cash .............................................................. Rent Receivable ................................... Rent Revenue ....................................... To record past due rent for two months.

6,200

24,000

3,100 3,100

3269

Last update: 2012-12-05

Problem 3-9A (30 minutes) Date 2023 a) Oct.

General Journal Account Titles and Explanation

Debit

31 Unearned Consulting Revenue .................................... Consulting Revenue............................................... To record unearned consulting revenue; 26,000 – 12,000 = 14,000 earned.

14,000

31 Consulting Revenue...................................................... Unearned Consulting Revenue ............................. To record as unearned an amount incorrectly recorded as earned.

14,000

31 Rent Expense ................................................................ Prepaid Rent ........................................................... To record expired prepaid rent; 27,000/3 = 9,000/month × 2 months = 18,000 used.

18,000

31 Wages Expense ............................................................. Wages Payable ....................................................... To record accrued wages.

6,800

31 Depreciation Expense, Office Furniture ...................... Accumulated Depreciation, Office Furniture........ To record depreciation expense; 84,000/2 years = 42,000/year.

42,000

31 Accounts Receivable .................................................... Consulting Revenue............................................... To record accrued revenue.

4,200

31 Interest Receivable ....................................................... Interest Income ...................................................... To record accrued interest income.

31 Insurance Expense........................................................ Prepaid Insurance .................................................. To record expired prepaid insurance; 3,400  17 months = 200/month × 12 months = 2,400.

2,400

31 Supplies Expense ......................................................... Supplies .................................................................. To record the use of supplies; 5,300 – 620 = 4,680 used.

4,680

Page G9 Credit

14,000

18,000

6,800

42,000

4,200

2,400

4,680

Problem 3-10A (60 minutes)

3270

Last update: 2012-12-05

Parts 1 and 2 (Note: The solution to Parts 1 and 2 is also done using T-accounts and can be found immediately following the balance column format.)

Date 2023 Oct. 31

Cash Explanation

Date 2023 Oct. 31 Unadjusted balance 31

Date 2023 Oct. 31

Debit

Account No. 101 Credit Balance

Unadjusted balance Accounts Receivable Explanation

Date 2023 Oct. 31

Interest Receivable Explanation

26,000

PR G9

Notes Receivable Explanation

Debit

Account No. 106 Credit Balance 61,000 65,200

4,200

Debit

Account No. 109 Credit Balance

Debit

85 Account No. 111 Credit Balance

Unadjusted balance Supplies Explanation

Date 2023 Oct. 31 Unadjusted balance 31

Prepaid Insurance Explanation

Date 2023 Oct. 31 Unadjusted balance 31

Prepaid Rent Explanation

Date 2023 Oct. 31 Unadjusted balance 31 Problem 3-10A (continued)

Office Furniture

50,000

Debit

5,300 620

4,680

Debit

Account No. 126 Credit Balance

Account No. 128 Credit Balance 3,400 1,000

2,400

Debit

Account No. 131 Credit Balance

18,000

27,000 9,000

Account No. 161

3271

Last update: 2012-12-05

Date 2023 Oct. 31

Explanation

Date 2023 Oct. 31

Accounts Payable Explanation

Wages Payable Explanation

Date 2023 Oct. 31

Debit

Account No. 162 Credit Balance

42,000

Debit

Jeff Moore, Capital Explanation

Debit

Account No. 201 Credit Balance

G9 G9

Unadjusted balance

Account No. 210 Credit Balance 6,800

Debit

14,000

Debit

6,800

Account No. 233 Credit Balance

14,000

Unadjusted balance Jeff Moore, Withdrawals Explanation

28,000 70,000

18,000

Date 2023 Oct. 31 Unadjusted balance 31 31

Balance 84,000

Unadjusted balance

Unearned Consulting Revenue Explanation

Date 2023 Oct. 31

Credit

Unadjusted balance

Accumulated Depreciation, Office Furniture Date Explanation PR 2023 Oct. 31 Unadjusted balance 31 G9

Date 2023 Oct. 31

Debit

26,000 12,000 26,000

Account No. 301 Credit Balance 223,000

Debit

Account No. 302 Credit Balance 28,000

3272

Last update: 2012-12-05

Problem 3-10A (continued) Consulting Revenue Date Explanation 2023 Oct. 31 Unadjusted balance 31 31 31 Interest Income Explanation

Date 2023 Oct. 31 Unadjusted balance 31

Date 2023 Oct. 31

Date 2023 Oct.

Insurance Expense Explanation 31

14,000 4,200

Debit

232,020 246,020 232,020 236,220

Account No. 409 Credit Balance 480 565

Debit 42,000

Debit

6,800

Debit

Account No. 601 Credit Balance 42,000 Account No. 622 Credit Balance 192,000 198,800 Account No. 637 Credit Balance

2,400

Debit

18,000

Debit

Unadjusted balance G9

Account No. 401 Credit Balance

14,000

Unadjusted balance

Supplies Expense Explanation 31 31

Debit

G9 Rent Expense Explanation

31 31

Date 2023 Oct. 31 Unadjusted balance 31

Date 2023 Oct.

G9 G9 G9

Depreciation Expense, Office Furniture Explanation PR

Wages Expense Explanation

Date 2023 Oct.

4,680

2,400 Account No. 640 Credit Balance 44,000 62,000 Account No. 650 Credit Balance 6,800 11,480

3273

Last update: 2012-12-05

Problem 3-10A (continued) Parts 1 and 2 (in T-account format) NOTE: AJE = Adjusting Journal Entry Cash 101 Unadj Bal Oct 31 26,000

Accounts Receivable Unadj Bal Oct 31 61,000 AJE Oct 31 Adj Bal Oct 31

Notes Receivable Unadj Bal Oct 31

27,000 18,000

131 AJE Oct 31

109

Prepaid Insurance

128

65,200 126

5,300 4,680 AJE Oct 31 620 Office Furniture

Unadj Bal Oct 31

Interest Receivable AJE Oct 31 85

4,200

Supplies Unadj Bal Oct 31 Adj Bal Oct 31

50,000

Prepaid Rent Unadj Bal Oct 31 Adj Bal Oct 31

111

106

161

84,000

Unadj Bal Oct 31 Adj Bal Oct 31

3,400 2,400 1,000

Accum. Deprec., Office Furniture 162 Unadj Bal 28,000 Oct 31

9,000

42,000 70,000

Accounts Payable

201

18,000

Unadj Bal Oct 31

Wages Payable

210

AJE Oct 31

AJE Oct 31 Adj Bal Oct 31

Unearned Consulting Revenue

6,800 AJE Oct 31 AJE Oct 31 14,000

26,000 14,000 26,000

233 Unadj Bal Oct 31 AJE Oct 31 Adj Bal Oct 31

3-274

Last update: 2012-12-05

Jeff Moore, Capital 301 Unadj Bal 223,000 Oct 31

Jeff Moore, Withdrawals Unadj Bal Oct 31 28,000

302

Consulting Revenue AJE Oct 31

14,000

232,020 14,000 4,200 236,220

Interest Income 480 85 565 Insurance Expense AJE Oct 31 2,400

409 Unadj Bal Oct 31 AJE Oct 31 Adj Bal Oct 31 637

Deprec. Expense, Office Furniture AJE Oct 31 42,000

Rent Expense Unadj Bal Oct 31 44,000 AJE Oct 31 18,000 Adj Bal Oct 31 62,000

401 Unadj Bal Oct 31 AJE Oct 31 AJE Oct 31 Adj Bal Oct 31

601

Wages Expense Unadj Bal Oct 31 192,000 AJE Oct 31 6,800 Adj Bal Oct 31 198,800

622

640

Supplies Expense Unadj Bal Oct 31 6,800 AJE Oct 31 4,680 Adj Bal Oct 31 11,480

650

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Problem 3-10A (continued) NOTE: After posting the October 31, 2023 adjusting entries, the general journal PR column would appear as follows to show that the posting has been done. General Journal Date Account Titles and Explanation 2023 Adjusting Entries: a) Oct. 31 Unearned Consulting Revenue ........................................ Consulting Revenue .................................................... To record unearned consulting revenue; 26,000 – 12,000 = 14,000 earned. b)

Page G9 Credit

Debit

233 401

14,000

31 Consulting Revenue ......................................................... Unearned Consulting Revenue ................................... To record as unearned an amount incorrectly recorded as earned.

401 233

14,000

31 Rent Expense .................................................................... Prepaid Rent ................................................................. To record expired prepaid rent; 27,000/3 = 9,000/month × 2 months = 18,000 used.

640 131

18,000

31 Wages Expense ................................................................. Wages Payable ............................................................. To record accrued wages.

622 210

6,800

31 Depreciation Expense, Office Furniture .......................... Accumulated Depreciation, Office Furniture ............. To record depreciation expense; 84,000/2 years = 42,000/year.

601 162

42,000

31 Accounts Receivable ........................................................ Consulting Revenue .................................................... To record accrued revenue.

106 401

4,200

31 Interest Receivable ........................................................... Interest Income ............................................................ To record accrued interest income.

109 409

31 Insurance Expense ........................................................... Prepaid Insurance ........................................................ To record expired prepaid insurance; 3,400  17 months = 200/month × 12 months= 2,400.

637 128

2,400

31 Supplies Expense ............................................................. Supplies ........................................................................ To record the use of supplies; 5,300 – 620 = 4,680 used.

650 126

4,680

14,000

18,000

6,800

42,000

4,200

2,400

4,680

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Problem 3-10A (continued) Part 3 Rainmaker Environmental Consultants Adjusted Trial Balance October 31, 2023 Acct. No. 101 106 109 111 126 128 131 161 162 201 210 233 301 302 401 409 601 622 637 640 650

Account Cash ................................................................................... Accounts receivable .......................................................... Interest receivable ............................................................. Notes receivable ................................................................ Supplies ............................................................................ Prepaid insurance ............................................................. Prepaid rent ....................................................................... Office furniture .................................................................. Accumulated depreciation, office furniture ..................... Accounts payable .............................................................. Wages payable................................................................... Unearned consulting revenue .......................................... Jeff Moore, capital .............................................................. Jeff Moore, withdrawals .................................................... Consulting revenue ........................................................... Interest income .................................................................. Depreciation expense, office furniture ............................ Wages expense.................................................................. Insurance expense ............................................................ Rent expense ..................................................................... Supplies expense .............................................................. Totals ..................................................................................

Debit $ 26,000 65,200 85 50,000 620 1,000 9,000 84,000

Credit

$ 70,000 18,000 6,800 26,000 223,000 28,000 236,220 565 42,000 198,800 2,400 62,000 11,480 $580,585

$580,585

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Problem 3-10A (continued) Part 4 Rainmaker Environmental Consultants Income Statement For Year Ended October 31, 2023 Revenues: Consulting revenue ........................................................................ Interest income ............................................................................... Total revenues.............................................................................. Operating expenses: Wages expense ............................................................................... Rent expense .................................................................................. Depreciation expense, office furniture .......................................... Supplies expense............................................................................ Insurance expense .......................................................................... Total operating expenses ........................................................... Loss ...................................................................................................... Rainmaker Environmental Consultants Statement of Changes in Equity For Year Ended October 31, 2023 Jeff Moore, capital, November 1, 2022 ................................................... Investment by owner ............................................................................... Total .................................................................................................... Less: Withdrawal by owner .................................................................... Loss .................................................................................................... Jeff Moore, capital, October 31, 2023 .....................................................

$236,220 565 $236,785 $198,800 62,000 42,000 11,480 2,400 316,680 $ 79,895

$223,000 0 $223,000 $ 28,000 79,895

107,895 $115,105

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Problem 3-10A (concluded) Rainmaker Environmental Consultants Balance Sheet October 31, 2023 Assets Cash .............................................................................................. Accounts receivable .................................................................... Interest receivable ........................................................................ Notes receivable ........................................................................... Supplies ........................................................................................ Prepaid insurance ........................................................................ Prepaid rent .................................................................................. Office furniture ............................................................................. Less: Accumulated depreciation ............................................. Total assets ..................................................................................

$ 26,000 65,200 85 50,000 620 1,000 9,000 $84,000 70,000

14,000 $165,905

Liabilities Accounts payable ......................................................................... Wages payable ............................................................................. Unearned consulting revenue ..................................................... Total liabilities...........................................................................

$ 18,000 6,800 26,000 $ 50,800

Equity Jeff Moore, capital........................................................................ Total liabilities and equity ...........................................................

115,105 $165,905

Analysis component: The business‘s financial performance, or profit, decreased from a profit of $31,400 ($189,000 - $157,600 = $31,400) for the year ended October 31, 2022 to a loss of $79,895 for the year ended October 31, 2023. This is an unfavourable change.

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Problem 3-11A (25 minutes) a)

2023 Sept.

30 Interest Expense............................................................ Interest Payable ........................................................ To record accrued interest.

162

30 Depreciation Expense, Office Furniture ...................... Accumulated Depreciation, Office Furniture .......... To record depreciation on the office furniture; 26,000 – 2,000 = 24,000/4 yrs = 6,000/yr ÷ 12 = 500/month.

500

162

500

30 Repair Supplies Expense .............................................. Repair Supplies ........................................................ To record repair supplies used; 2,200 – 700 = 1,500 used.

1,500

30 Rent Expense................................................................. Prepaid Rent ............................................................. To record expired rent.

10,000

30 Wages Expense ............................................................. Wages Payable ......................................................... To record accrued wages.

2,800

30 Internet Expenses ......................................................... Accounts Payable ..................................................... To record accrued expenses.

100

30 Accounts Receivable .................................................... Hospitality Revenues ............................................... To record accrued hospitality revenues.

6,200

1,500

10,000

2,800

100

6,200

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Problem 3-12A (45 minutes) Part 1

Account Cash .................................................................. Accounts receivable ........................................ Repair supplies ................................................ Prepaid rent ...................................................... Office furniture ................................................. Accounts payable............................................. Notes payable ................................................... Eli Arrow, capital .............................................. Eli Arrow, withdrawals..................................... Hospitality revenues ........................................ Salaries expense .............................................. Wages expense ................................................ Totals ........................................................... Interest expense ............................................... Interest payable ................................................ Depreciation expense, office furniture ........... Accumulated depreciation, office furniture ... Repair supplies expense ................................. Rent expense.................................................... Wages payable ................................................. Internet expense .............................................. Totals ...........................................................

Arrow Hospitality Trial Balances September 30, 2023 Unadjusted Trial Balance Debit Credit 6,000 11,200 2,200 14,000 26,000 8,000 21,600 67,758 5,000 128,000 144,000 16,958 225,358 225,358

Adjustments Debit Credit g) 6,200 c) 1,500 d) 10,000 f)

100

6,200

162

e) 2,800 a) b)

162

500 b)

500

500 1,500 10,000

2,800

100 21,262

162 500

c) 1,500 d) 10,000 f)

Adjusted Trial Balance Debit Credit 6,000 17,400 700 4,000 26,000 8,100 21,600 67,758 5,000 134,200 144,000 19,758

2,800 100

21,262

235,120

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Problem 3-12A (continued) Part 2 Arrow Hospitality Income Statement For Month Ended September 30, 2023 Revenues: Hospitality revenues ........................................................................... Operating expenses: Salaries expense ................................................................................. Wages expense ................................................................................... Rent expense ...................................................................................... Repair supplies expense .................................................................... Depreciation expense, office furniture .............................................. Interest expense.................................................................................. Internet expenses ............................................................................... Total operating expenses ............................................................... Loss .......................................................................................................... Arrow Hospitality Statement of Changes in Equity For Month Ended September 30, 2023 Eli Arrow, capital, September 1 .............................................................. Investment by owner ............................................................................... Total ..................................................................................................... Less: Withdrawal by owner .................................................................... Loss ............................................................................................... Eli Arrow, capital, September 30 ............................................................

$134,200 $144,000 19,758 10,000 1,500 500 162 100 176,020 $ 41,820

$64,158* 3,600 $67,758 $ 5,000 41,820

46,820 $20,938

*Calculation: The adjusted balance of $67,758 is after the owner invested $3,600 during September. Therefore, the balance at the beginning of September was $64,158 ($67,758 $3,600).

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Problem 3-12A (concluded) Arrow Hospitality Balance Sheet September 30, 2023 Assets Cash ...................................................................................................... Accounts receivable ............................................................................ Prepaid rent .......................................................................................... Repair supplies .................................................................................... Office furniture ..................................................................................... Less: accumulated depreciation, office furniture............................. Total assets ..........................................................................................

$ 6,000 17,400 4,000 700 $26,000 500

25,500 $53,600

Liabilities Accounts payable ............................................................................... Interest payable................................................................................... Wages payable .................................................................................... Notes payable...................................................................................... Total liabilities ...............................................................................

$ 8,100 162 2,800 21,600 $32,662

Equity Eli Arrow, capital .................................................................................. Total liabilities and equity ...................................................................

20,938 $53,600

Analysis component: If assets were $76,900 at August 31, 2023 and equity was $64,158* on the same date, liabilities would have been the difference: $12,742. Arrow had a much stronger balance sheet at August 31, 2023 (the lower the total liabilities as a percentage of assets, the stronger the balance sheet - - liabilities were 16.57% of total assets at August 31, 2023 calculated as 12,742/76,900 and liabilities were 60.94% of total assets at September 30, 2023 calculated as 32,662/53,600). Equity decreased substantially because of the loss realized during September, 2023.

*From the statement of changes in equity prepared for the month ended September 30, 2023.

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Problem 3-13A (50 minutes) Part a. GALAVU ENTERTAINMENT Income Statement For Year Ended December 31, 2023 Revenues: Revenue Interest income Total revenues Operating Expenses: Salaries expense Wages expense Depreciation expense, automobiles Office supplies expense Advertising expense Repairs expense, automobiles Depreciation expense, equipment Interest expense Total operating expenses Profit

$240,000 . 150 . $240,150 $76,225 27,800 13,200 13,000 9,000 8,400 4,100 3,500 . 155,225 $ 84,925

Part b. GALAVU ENTERTAINMENT Statement of Changes in Equity For Year Ended December 31, 2023 John Conroe, capital, January 1 ......................................................... Investment by owner ........................................................................... Profit ..................................................................................................... Total ................................................................................................. Less: Withdrawal by owner ................................................................ John Conroe, capital, December 31 ...................................................

$ 8,000 $15,000 84,925

99,925 $107,925 19,000 $ 88,925

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Problem 3-13A (concluded) Part c. GALAVU ENTERTAINMENT Balance Sheet December 31, 2023 Assets Cash Accounts receivable Interest receivable Notes receivable (due in 90 days) Office supplies Automobiles Less: Accumulated depreciation Equipment Less: Accumulated depreciation Land Total assets

$ 11,000 . 18,700 . 300 . 80,000 . 4,000 $140,000 69,000 71,000 $65,000 20,50044,500 35,000 $264,500 Liabilities

Accounts payable Interest payable Salaries payable Unearned revenue Long-term notes payable Total liabilities

. $ 44,000 . 75 . 5,500 . 11,000 . 115,000 . $175,575 Equity

John Conroe, capital Total liabilities and equity

. 88,925 . $264,500

Analysis component: The equity did increase from $8,000 to $88,925 during the year ended December 31, 2023. This was due to the profit the business experienced during the year which increases equity. A slight decrease in equity was caused by the owner‘s net withdrawal of $4,000 ($15,000 investment less owner withdrawals of $19,000). This overall increase is seen as desirable as increases in equity should be driven by income, not owner investment.

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Problem 3-14A (60 minutes) Part 1 Date 2023 Aug.

GENERAL JOURNAL* Account Titles and Explanation PR 1

Page 1 Credit

Debit

Office Furniture ...................................... Accounts Payable ........................... Purchased on account.

161 201

4,700

Cash ...................................................... Mark Diamond, Capital................... Owner investment.

101 301

6,100

Cash ...................................................... Unearned Revenue ........................ Collected cash in advance.

101 233

2,550

Prepaid Rent .......................................... Cash ............................................... Paid for 6 months rent.

131 101

4,650

Cash ...................................................... Revenue ......................................... Collected cash for work done.

101 401

2,100

Hotel Expenses ...................................... Cash ............................................... Paid for hotel expenses.

696 101

1,050

Mark Diamond, Withdrawals .................. Cash ............................................... Owner withdrawals.

302 101

600

623 101

1,210

No entry

Wages Expense..................................... Cash .............................................. Paid wages.

4,700

6,100

2,550

4,650

2,100

1,050

600

1,210

*Note: The PR column in the General Journal would appear as shown above, with the PR column completed, after posting the adjusting entries.

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Problem 3-14A (continued) Part 2 and 3 Cash Aug. 1 6,100 2 2,550 4 2,100 Bal.

4,650 1,050 600 1,210

101 Aug. 3 7 15 31

Prepaid Rent Aug. 3 4,650

131

Office Furniture Aug. 1 4,700

161

Accum. Deprec., Office Furniture

162

3,240

Accounts Payable 201 4,700 Aug. 1

Revenue 2,100

Telephone Expense

401 Aug. 4

688

Unearned Revenue 233 2,550 Aug. 2

Deprec. Exp., Office Furniture

Hotel Expenses Aug. 7 1,050

602

Mark Diamond, Capital 301 6,100 Aug. 1

Mark Diamond, Withdrawals Aug. 15 600

Wages Expense Aug. 31 1,210

Rent Expense

623

302

640

696

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Problem 3-14A (continued) Part 4 Millennium Artic Tours Unadjusted Trial Balance August 31, 2023

Acct. No. 101 131 161 201 233 301 302 401 623 696

Account Title Cash .................................................................. Prepaid rent ....................................................... Office furniture ................................................... Accounts payable............................................... Unearned revenue ............................................. Mark Diamond, capital ....................................... Mark Diamond, withdrawals ............................... Revenue ............................................................ Wages expense ................................................. Hotel expenses .................................................. Totals .................................................................

Debit $ 3,240 4,650 4,700

Credit

$ 4,700 2,550 6,100 600 2,100 1,210 1,050 $15,450

$15,450

Part 5 – Prepare and post adjusting entries. Date 2023 Aug 31

GENERAL JOURNAL* Account Titles and Explanation PR

Page 1 Credit

Debit

Deprec. Exp., Office Furniture................ Accum. Deprec., Office Furniture (4,700 – 272)/3 = 1,476 × 1/12 = 123.

602 162

123

Unearned Revenue ................................ Revenue ......................................... 2,550 × 2/3 = 1,700.

233 401

1,700

Rent Expense ........................................ Prepaid Rent ................................... 4,650/6 = 775.

640 131

775

Telephone Expense ............................... Accounts Payable ........................... Accrued August phone expense.

688 201

230

123

1,700

775

230

*Note: The PR column in the General Journal would appear as shown above, with the PR column completed, after posting the adjusting entries.

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Problem 3-14A (continued) Part 5*

Cash Aug. 1 2 4

6,10 0 2,55 0 2,10 0

Bal.

3,24 0

101 4,65 0 1,05 0 600 1,21 0

Aug. 3 7 15 31

Prepaid Rent Aug. 4,65 3 0

Bal.

Accounts Payable 4,700

201 Aug. 1

230

Aug. 31 Bal.

4,930

Revenue 2,100 1,700 3,800

401 Aug. 4

131 775

Office Furniture Aug. 31

Aug. 1

Accum. Deprec., Office Furniture

161

4,700

123

162 Aug. 31

3,87 5

Unearned Revenue Aug. 1,700 2,550 31 850

Deprec. Exp., Office Furniture Aug. 123 31

233 Aug. 2

Mark Diamond, Capital 301 6,100 Aug. 1

Mark Diamond, Withdrawals Aug. 15 600

302

Bal.

602

Wages Expense Aug. 31 1,210

623

Rent Expense Aug. 775 31

640

Aug. 31 Bal.

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Telephone Expense Aug. 31 230

688

Hotel Expenses Aug. 7

696

1,050

*Note: The T-accounts would appear as shown above after posting the adjusting entries.

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Problem 3-14A (continued) Part 6 – Adjusted Trial Balance Millennium Artic Tours Adjusted Trial Balance August 31, 2023

Acct. No. 101 131 161 162 201 233 301 302 401 602 623 640 688 696

Account Title Cash .................................................................. Prepaid rent ....................................................... Office furniture ................................................... Accum. Deprec., office furniture ......................... Accounts payable............................................... Unearned revenue ............................................. Mark Diamond, Capital ...................................... Mark Diamond, withdrawals ............................... Revenue ............................................................ Deprec. exp., office furniture .............................. Wages expense ................................................. Rent expense ..................................................... Telephone expense ........................................... Hotel expenses .................................................. Totals .................................................................

Debit $ 3,240 3,875 4,700

Credit

123 4,930 850 6,100

600 3,800 123 1,210 775 230 1,050 $15,803

$15,803

Part 7 Millennium Artic Tours Income Statement For Month Ended August 31, 2023 Revenue.............................................................. Operating expenses: Wages expense ............................................. Hotel expenses .............................................. Rent expense ................................................. Telephone expense ........................................ Depreciation expense, office furniture ............ Total operating expenses .......................... Profit ...................................................................

$3,800 $1,210 1,050 775 230 123 3,388 $412

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Problem 3-14A (concluded) Millennium Arctic Tours Statement of Changes in Equity For Month Ended August 31, 2023 Mark Diamond, capital, August 1......................... Investments by owner ......................................... $6,100 Profit ................................................................... 412 Total ................................................................ Less: Withdrawals by owner ................................ Mark Diamond, capital, August 31.......................

6,512 $6,512 600 $5,912

Millennium Arctic Tours Balance Sheet August 31, 2023 Assets Cash Prepaid rent Office furniture Less: Accumulated depreciation Total assets

$ 3,240 3,875 $4,700 123 4,577 $11,692 Liabilities

Accounts payable Unearned revenue Total liabilities

$4,930 850 . $ 5,780 Equity

Mark Diamond, capital Total liabilities and equity

. 5,912 . $11,692

Analysis Component: When a company shows revenue on its income statement, it does not necessarily mean that cash equal to revenues was received during the period in which the revenues were reported. For Millennium Arctic Tours, all of the revenues reported on the income statement were received in cash. Millennium actually received more cash from customers than the revenue reported because of cash received in advance from customers. It is possible that services in the future will be provided on account so that the future revenues, although included as part of profit on the income statement, may not be collected during the period in which the revenue was recorded. So, the total revenues earned and reported on an income statement will not necessarily equal the actual cash collected during the period because of uncollected receivables and unearned revenues. *Problem 3-15A (20 minutes)

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a. Sept. 30

Accounts Receivable ................................... Cash ...................................................... To correct an incorrect entry.

7,000 7,000

OR 30

Counselling Revenue .................................. Cash ...................................................... To reverse incorrect entry.

7,000 7,000

AND 30

Accounts Receivable ................................... Counselling Revenue ........................... To record revenue performed on account.

7,000

Telephone Expense ..................................... Utilities Expense .................................. To correct an incorrect entry.

1,680

Office Supplies............................................. Cleaning Supplies ................................ To correct an incorrect entry.

2,800

Unearned Service Revenue ......................... Accounts Payable ................................ To reverse an incorrect entry.

19,600

7,000

1,680

2,800

19,600

AND 30

Accounts Receivable ................................... Service Revenue .................................. To record services performed on account.

19,600

Accounts Payable ........................................ Office Equipment ................................. To reverse an incorrect entry.

1,200

19,600

1,200

AND 30

Accounts Receivable ................................... Office Supplies ..................................... To record the sale of office supplies on credit.

1,200 1,200

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*Problem 3-15A (concluded) Analysis component: The correcting entry regarding (b) simply transfers the $1,680 from one expense account into another so the net effect on the financial statements is nil. However, it is necessary to prepare a correcting entry despite a nil net effect because decision making based on account balances could be adversely affected if based on incorrect information. *Problem 3-16A (20 minutes) WILLIS CONSULTING Trial Balances March 31, 2023 Unadjusted Trial Account Balance Adjustments Debit Credit Debit Credit $ 32,000 Cash ................................................ Accounts receivable ...................... 63,000 Prepaid rent .................................... -0b) $27,850 Prepaid insurance .......................... -0c) 510 Accounts payable .......................... $ 16,000 Unearned consulting -0a) $6,400 revenue ........................................... Bruce Willis, capital ....................... 38,400 Consulting revenue........................ 82,000 a) 6,400 Rent expense.................................. 38,990 b) 27,850 Insurance expense ......................... 2,410 c) 510 Totals .............................................. $136,400 $136,400 $34,760 $34,760

Adjusted Trial Balance Debit Credit $ 32,000 63,000 27,850 510 $ 16,000 6,400 38,400 75,600 11,140 1,900 $136,400

$136,400

Calculations: b) 38,990/7 = 5,570/month; 5,570 X 5 months = 27,850 not yet used

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*Problem 3-17A (40 minutes) Part 1 Entries that initially recognize assets and liabilities: 2023 Nov. 1

Dec.

Prepaid Advertising............................................... Cash ............................................................ Paid for future advertising.

4,500

Prepaid Insurance ................................................ Cash ............................................................ Paid insurance for one year.

7,800

Cash ..................................................................... Unearned Service Revenue ......................... Received cash in advance.

6,600

Prepaid Consulting Fees ...................................... Cash ............................................................ Paid for future consulting.

5,850

Cash ..................................................................... Unearned Service Revenue ......................... Received cash in advance.

12,100

Advertising Expense ............................................. Prepaid Advertising ...................................... 4,500 – 1,780 = 2,720.

2,720

Insurance Expense ............................................... Prepaid Insurance ........................................ To adjust prepaid insurance; 7,800 x 2/12 = 1,300 used.

1,300

Unearned Service Revenue .................................. Service Revenue .......................................... To adjust unearned service revenue; 6,600 – 1,650 = 4,950 earned.

4,950

Consulting Fees Expense ..................................... Prepaid Consulting Fees .............................. To adjust prepaid consulting fees; 5,850 x 1/3 = 1,950.

1,950

4,500

7,800

6,600

5,850

12,100

2,720

1,300

4,950

1,950

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*Problem 3-17A (continued) Part 1 Dec. 31

Unearned Service Revenue .................................. Service Revenue .......................................... To adjust unearned service revenue.

2,750 2,750

Note: The entries for Part 1 have been posted to T-accounts to help the student see the effects more clearly. The entries for Part 2 have also been posted to T-accounts in Part 2 of this question to help the student see that the results are the same regardless of which approach is used. Prepaid Advertising Nov. 1 4,500 2,720 Dec. 31 Bal. 1,780

Unearned Service Revenue Dec. 31 4,950 6,600 Nov. 30 31 2,750 12,100 Dec. 15 11,000 Bal.

Insurance Expense Dec. 31 1,300 Bal. 1,300

Prepaid Insurance Nov. 1 7,800 1,300 Dec. 31 Bal. 6,500

Service Revenue 4,950 Dec. 31 2,750 31 7,700 Bal.

Prepaid Consulting Fees Dec. 1 5,850 1,950 Dec. 31 Bal. 3,900

Advertising Expense Dec. 31 2,720 Bal. 2,720

Consulting Fees Expense Dec. 31 1,950 Bal. 1,950

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*Problem 3-17A (continued) Part 2 Entries that initially recognize expenses and revenues: 2023 Nov. 1

Dec.

Advertising Expense ............................................. Cash ............................................................ Paid for future advertising.

4,500

Insurance Expense ............................................... Cash ............................................................ Paid insurance for one year.

7,800

Cash ..................................................................... Service Revenue .......................................... Received revenue in advance.

6,600

Consulting Fees Expense ..................................... Cash ............................................................ Paid for future consulting.

5,850

Cash ..................................................................... Service Revenue .......................................... Received cash in advance.

12,100

Prepaid Advertising............................................... Advertising Expense .................................... To adjust for prepaid advertising.

1,780

Prepaid Insurance ................................................ Insurance Expense ...................................... To adjust for prepaid insurance; 7,800/12 × 10.

6,500

4,500

7,800

6,600

5,850

12,100

1,780

6,500

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*Problem 3-17A (continued) Part 2 2023 Dec. 31

Service Revenue .................................................. Unearned Service Revenue ......................... To adjust for unearned service revenue.

1,650

Prepaid Consulting Fees ...................................... Consulting Fees Expense ............................ To adjust for prepaid consulting fees; 5,850 × 2/3.

3,900

Service Revenue .................................................. Unearned Service Revenue ......................... To adjust for unearned service revenue; 12,100 – 2,750 = 9,350 unearned.

9,350

1,650

3,900

9,350

Note: The entries for Part 2 have been posted to T-accounts to help the student see the effects more clearly. The entries for Part 1 have also been posted to T-accounts in Part 1 of this question to help the student see that the results are the same regardless of which approach is used. Prepaid Advertising Dec. 31 1,780 Bal. 1,780

Unearned Service Revenue 1,650 Dec. 31 9,350 31 11,000 Bal. Insurance Expense Nov. 1 7,800 6,500 Dec. 31 Bal. 1,300

Prepaid Insurance Dec. 31 6,500 Bal. 6,500

Service Revenue Dec. 31 1,650 6,600 Nov. 30 31 9,350 12,100 Dec. 15 7,700 Bal.

Prepaid Consulting Fees Dec. 31 3,900 Bal. 3,900

Nov. 1 Bal.

Advertising Expense 4,500 1,780 Dec. 31 2,720

Consulting Fees Expense Dec. 1 5,850 3,900 Dec. 31 Bal. 1,950

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*Problem 3-17A (concluded)

Analysis component: There are no differences between the two methods in terms of the amounts that appear on the financial statements. In both cases, the financial statements reflect the following: Advertising expense for two months ................................... $ 2,720 Prepaid advertising as of December 31 .............................. 1,780 Insurance expense for two months ..................................... 1,300 Prepaid insurance as of December 31 ............................... 6,500 Consulting fees expense (1/3 of total paid)......................... 1,950 Prepaid consulting fees ...................................................... 3,900 Service revenue for two months ........................................ 7,700 Unearned service revenue as of December 31 ........................................................ 11,000 When prepaid expenses and unearned revenues are recorded in balance sheet accounts, the related adjusting entries are designed to generate the correct asset, expense, liability, and revenue account balances. When prepaid expenses and unearned revenues are recorded in income statement accounts, the related adjusting entries are designed to accomplish exactly the same result.

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ALTERNATE PROBLEMS Problem 3-1B (15 minutes) a)

2023 Apr.

30 Equipment Rental Expense ................................................ Prepaid Equipment Rental ............................................. To record expired prepaid equipment rental; 24,750/18 months = 1,375/month × 5 months = 6,875.

6,875

30 Warehouse Rental Expense ............................................... Prepaid Warehouse Rental ............................................ To record expired rent.

6,000

30 Insurance Expense.............................................................. Prepaid Insurance .......................................................... To record the use of insurance; $9,160 × 3/6.

4,580

30 Cleaning Supplies Expense ................................................ Cleaning Supplies .......................................................... To record the use of cleaning supplies.

2,850

6,875

6,000

4,580

2,850

Analysis component: The matching and revenue recognition principle requires that adjusting entries be recorded at the end of each accounting period to allocate revenues and expenses to the period in which they belong. Revenues should be recorded in the accounting period they were realized and expenses should be allocated to the period in which they were used.

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Problem 3-2B (15 minutes) 2023 a) Nov.

30 Depreciation Expense, Furniture ....................................... Accumulated Depreciation, Furniture ........................... To record depreciation on the furniture; 36,000/3 years = 12,000/year; 12,000/12 = 1,000/month.

1,000

30 Depreciation Expense, Equipment ..................................... Accumulated Depreciation, Equipment ........................ To record depreciation on the equipment; 187,000 – 25,000 = 162,000/10 years = 16,200/year; 16,200/12 = 1,350/month.

1,350

30 Depreciation Expense, Building ......................................... Accumulated Depreciation, Building ............................ To record depreciation on the building; 491,000 – 131,000 = 360,000/15 years = 24,000/year; 24,000/12 = 2,000/month.

2,000

1,000

1,350

2,000

Analysis component: The recording of depreciation achieves the GAAP of matching. When an asset such as a machine is purchased, it will help generate revenues for more than the current accounting period. Therefore, to properly match the expense of the machine, we allocate a portion of the total cost to each accounting period in which revenue will be generated by the machine; this process is called depreciation. If we expensed the total cost of the machine in the period in which it was purchased, expenses would be overstated in the period the machine was purchased and understated in future periods in which the machine was used in the operations of the business. If depreciation is not recorded, assets and equity will be overstated.

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Problem 3-3B (15 minutes) a) b)

2023 Jan.

No entry required on January 31, 2023.

31 Unearned Tour Package Revenue ........................ Tour Package Revenue .................................... To record tour revenue earned; 3/4 x 652,000 = 489,000.

489,000

31 Unearned Scuba Diving Revenue.......................... Scuba Diving Revenue ..................................... To record scuba diving revenue; 290,000 – 72,000 = 218,000.

218,000

31 Unearned Kayaking Tour Revenue ..............

100,500

489,000

218,000

Kayaking Tour Revenue ........................... To record kayaking tour revenue earned;

100,500

116,000 – 15,500 = 100,500 earned. Analysis component: Unearned revenues is a type of liability account. It arises when the business collects cash from a customer who is paying for a product/service in advance of receiving the product/service. Because the business now owes the customer a product/service, it is recorded as a liability in accordance with the revenue recognition principle. When the product/service has been provided to the customer, the earned portion of the liability (unearned revenues) is transferred to a revenue account by recording an adjusting entry. This adjustment is in accordance with the revenue recognition principle. The business wants to record or recognize the revenue in the period in which it was actually earned.

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Problem 3-4B (30 minutes) Adjusting Entries a. Sept. 30

b. Sept. 30

c. Sept. 30

a. Cell Phone Expense ...................................................... 465 Oct. 5 Accounts Payable ................................................... 465 To record accrued cell phone expense. b. Wages Expense ..................................................... 82,500 Oct. 9 Wages Payable ................................................. 82,500 To record accrued wages expense. c. Cable Expense ............................................................... 1,650 Oct. 2 Accounts Payable ................................................... 1,650 To record accrued expense. d. Interest Expense .................................................... 1,220 Oct. 2

Subsequent Entries Accounts Payable .......................... Cash ........................................ To record payment of accrual.

465

Wages Payable ............................... Wages Expense .............................. Cash ........................................ To record payment of wages.

82,500 32,500

Accounts Payable .......................... Cash ........................................ To record payment of accrual.

1,650

Interest Payable ..........................

1,220

465

115,000

1,650

Sept. 30 Interest Payable ................................................ 1,220 To record accrued interest. e. Sept. 30

Cash ........................................ To record payment of accrued interest.

e. Property Tax Expense ................................................... 1,675 Oct. 15 Property Tax Payable ..................... Property Tax Payable ............................................ 1,675 Cash ........................................ To record accrued expense. To record payment of accrual.

1,220

1,675

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Problem 3-5B (30 minutes)

Adjusting Entries a.

Subsequent Entries a.

Interest Receivable ................................................ 450

Apr 5

Cash ...........................................

540

Mar 31 Interest Income ..............................................450 To record accrued interest income. b. Mar 31

c. Mar 31

d. Mar 31

Interest Receivable ................ Interest Income ...................... To record collection of interest; 450/25 = 18/day x 5 days = 90.

450 90

b. Accounts Receivable ............................................. 5,600 Consulting Revenue ...................................... 5,600 To record accrued revenue.

Apr 6 Cash ................................................ Accounts Receivable ............. To record collection of accrued revenue.

c. Accounts Receivable .................................................... 8,750 Apr 13 Cash ................................................ Web Design Revenue............................................ 8,750 Accounts Receivable ............. To record accrued revenue. To record collection of accrued revenue. d. Rent Receivable ............................................................ 950 Apr 27 Cash ................................................ Rent Revenue ........................................................ 950 Rent Receivable ..................... To record accrued rent for Rent Revenue ......................... March. To record collection of March and April rent.

5,600 5,600

8,750 8,750

1,900

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Problem 3-6B (30 minutes)

1. a)

2023 Dec. 31

Insurance Expense................................................ Prepaid Insurance .......................................... To record the cost of insurance expired during the month.

31,000

Teaching Supplies Expense ................................. Teaching Supplies.......................................... To record the cost of supplies used during the month; 107,200 – 13,400 = 93,800.

93,800

Depreciation Expense, Equipment ....................... Accumulated Depreciation, Equipment ........ To record equipment depreciation expense.

650

Depreciation Expense, Prof. Library .................... Accumulated Depreciation, Professional Library....................................... To record professional library depreciation expense.

320

Unearned Extension Revenue .............................. Extension Revenue ........................................ To record extension revenue that was collected in advance.

5,400

Accounts Receivable ............................................ Tuition Revenue ............................................. To record the amount of tuition revenue; $1,600 x 1/2 month = 800.

800

Salaries Expense ................................................... Salaries Payable ............................................. To accrue salaries expense.

1,200

Rent Expense ........................................................ Prepaid Rent To record the expiration of prepaid rent; 11,600/4 = 2,900/month.

2,900

31,000

93,800

650

320

5,400

800

1,200

2,900

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Problem 3-6B (cont‘d) 2. Analysis Component FAWCETT INSTITUTE Trial Balances December 31, 2023 Unadjusted Trial Adjusted Trial Balance Adjustments Balance Account Debit Credit Debit Credit Debit Credit Cash ........................................................ $ 25,000 $ 25,000 Accounts receivable .............................. -0f) $ 800 800 Teaching supplies.................................. 107,200 b) $93,800 13,400 Prepaid insurance .................................. 36,000 a) 31,000 5,000 Prepaid rent ............................................ 11,600 h) 2,900 8,700 Professional library ............................... 20,000 20,000 Accum. Deprec., professional $ 3,000 d) 320 $ 3,320 library...................................................... Equipment .............................................. 141,400 141,400 Accum. Deprec., equipment .................. 32,000 c) 650 32,650 Accounts payable .................................. 24,400 24,400 Salaries payable ..................................... -0g) 1,200 1,200 Unearned extension revenue ................ 55,200 e) 5,400 49,800 Jay Fawcett, capital ............................... 62,000 62,000 Jay Fawcett, withdrawals ...................... 40,000 40,000 Tuition revenue ...................................... 285,000 f) 800 285,800 Extension revenue ................................. 124,000 e) 5,400 129,400 Deprec. expense, equipment ................ -0c) 650 650 Deprec. expense, -0d) 320 320 professional library................................ Salaries expense .................................... 143,600 g) 1,200 144,800 Insurance expense................................. -0a) 31,000 31,000 Rent expense ......................................... -0h) 2,900 2,900 Teaching supplies expense .................. -0b) 93,800 93,800 Advertising expense .............................. 36,000 36,000 Utilities expense .................................... 24,800 24,800 Totals ...................................................... $585,600 $585,600 $136,070 $136,070 $588,570 $588,570 3. If the adjusting entries were not recorded, profit would be overstated by $123,670 (650 + 320 + 1,200 + 31,000 + 2,900 + 93,800 – 5,400 – 800). 4. It is unethical to ignore adjusting entries because it misrepresents assets, liabilities, and equity.

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Problem 3-7B (35 minutes) a)

2023 May 31

Depreciation Expense, Machinery ............................. Accumulated Depreciation, Machinery ................. To record depreciation on the machinery; 77,500 – 5,500/6 yrs = 12,000/yr × 9/12 = 9,000. Accounts Receivable .................................................. Revenue .................................................................. To record accrued revenues. Insurance Expense...................................................... Prepaid Insurance .................................................. To record expired insurance; 23,040/2 yrs = 11,520/yr × 3/12 = 2,880 or 23,040 x 3/24 = 2,880. Salaries Expense ......................................................... Salaries Payable ..................................................... To record accrued salaries. Interest Expense ......................................................... Interest Payable ...................................................... To record accrued interest. 144,000 * .035 = 5,040/12 = 420 Depreciation Expense, Office Equipment.................. Accumulated Depreciation, Office Equipment To record depreciation on the office equipment. Advertising Expense ................................................... Prepaid Advertising................................................ To record the use of prepaid advertising. Unearned Revenue ...................................................... Revenue .................................................................. To record revenue earned. Interest Receivable...................................................... Interest income....................................................... To record accrued interest income. Office Supplies Expense ............................................ Office Supplies ....................................................... To record the use of office supplies.

9,000 9,000

24,300 24,300 2,880 2,880

21,500 21,500 420 420

8,100 8,100 6,480 6,480 4,500 4,500 570 570 28,400

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Problem 3-8B (30 minutes) Part 1 2023 a) Oct.

Office Supplies Expense.................................................. Office Supplies .......................................................... To record the cost of supplies used during the month; $1,000 + $9,100 – $600.

9,500

Insurance Expense ........................................................... Prepaid Insurance ..................................................... To record the cost of insurance coverage that expired during the month; Policy #1: 8,400/24 = $350; Policy #2: 6,660/36 = 185; Policy #3: 1,500/12 = 125; $350 + $185 + $125 = $660.

660

Salaries Expense ................................................. Salaries Payable .......................................... To record accrued but unpaid wages; 5 days × $3,250/day. Depreciation Expense, Building ............................ Accumulated Depreciation, Building ............ To record depreciation expense. Annual depreciation = (250,000 – 40,000)/25 = 8,400/year; 8,400/12 = 700/month.

9,500

660

16,250 16,250

700 700

Rent Receivable ................................................... Rent Revenue.............................................. To record earned but unpaid rent.

2,600

Unearned Rent .................................................... Rent Revenue ......................................... To record the amount of rent revenue.

2,350

2,600

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Problem 3-8B Part 2 2023 Nov.

2 Salaries Payable ................................................... Cash................................................................ To record payment of accrued and current salaries.

16,250

15 Cash....................................................................... Rent Receivable ............................................. Rent Revenue ................................................. To record collection of rent.

5,200

16,250

2,600 2,600

Problem 3-9B (30 minutes) General Journal Date Account Titles and Explanation PR 2023 a) Dec. 31 Depreciation Expense, Surveying Equipment .................. Accumulated Depreciation, Surveying Equipment ........ To record depreciation for December. b)

Debit

Page G7 Credit

430 430

31 Unearned Surveying Revenue ............................................ Surveying Revenue ........................................................ To record earned surveying revenue; 14,800 – 9,600 = 5,200 earned.

5,200

31 Rent Expense ...................................................................... Prepaid Rent ................................................................... To record expired rent; 17,880  6 months = 2,980.

2,980

31 Wages Expense ................................................................... Wages Payable ............................................................... To record accrued wages.

12,400

5,200

2,980

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Problem 3-9B (concluded) e)

31 Interest Expense ................................................................. Interest Payable.............................................................. To record accrued interest. 31 Accounts Receivable .......................................................... Surveying Revenue ........................................................ To record accrued revenue. 31 Advertising Expense ........................................................... Prepaid Advertising ....................................................... To record used advertising; 1,280  4 months = 320/month  2 = 160 for half of December. 31 Supplies Expense ............................................................... Supplies .......................................................................... To record supplies used. 31 Utilities Expense ................................................................. Accounts Payable .......................................................... To record accrued utilities.

120 120 21,800 21,800 160 160

1,320 1,320 2,340 2,340

Analysis component: Accumulated Depreciation is a contra asset account and is reported on the balance sheet. Because Accumulated Depreciation is an asset account, its ending balance for one period becomes the beginning balance for the next accounting period.

Depreciation Expense is an expense account and is reported on the income statement. Because Depreciation Expense is an expense account, the balance in Depreciation Expense is the amount of depreciation for one accounting period while Accumulated Depreciation represents total depreciation recorded to date for a particular plant and equipment asset.

NOTE TO INSTRUCTOR: Students who are ahead and have completed Chapter 5 might also add ―Also, the ending balance for depreciation expense for one period does not become the beginning balance for the next accounting period because it is closed; depreciation expense is a temporary account. Accumulated depreciation is not closed because it is a permanent account‖.

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Problem 3-10B (60 minutes) Parts 1 and 2 Note: The solution to Parts 1 and 2 is also done using T-accounts and can be found immediately following the balance column format.

Date 2023 Dec.

Cash Explanation 31

Date 2023 Dec. 31 31

Date 2023 Dec.

Accounts Receivable Explanation

Debit

Account No. 106 Credit Balance

21,800

29,200 51,000

Debit

Account No. 126 Credit Balance

1,320

Debit

160

Debit

2,980

Debit

1,280 1,120

Account No. 131 Credit Balance

Unadjusted balance G7

1,640 320

Account No. 128 Credit Balance

Unadjusted balance

Surveying Equipment Explanation 31

Unadjusted balance

Prepaid Rent Explanation 31 31

15,600

Unadjusted balance

Prepaid Advertising Explanation 31 31

Debit

Unadjusted balance

Supplies Explanation 31 31

Account No. 101 Credit Balance

17,880 14,900

Account No. 167 Credit Balance

Unadjusted balance

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Problem 3-10B (continued) Date 2023 Dec.

Date 2023 Dec.

Accumulated Depreciation - Surveying Equipment Explanation PR 31 31

Debit

31 Unearned Surveying Revenue Explanation

120

Debit

120

Account No. 210 Credit Balance

12,400

Debit

Account No. 233 Credit Balance

5,200

14,800 9,600

Debit

Account No. 251 Credit Balance

Unadjusted balance Ben Hallmark, Capital Explanation

13,800 16,140

Account No. 203 Credit Balance

Unadjusted balance

Notes Payable Explanation

7,348 7,778

Account No. 201 Credit Balance

2,340

G7 Wages Payable Explanation

Debit

430

Unadjusted balance

Interest Payable Explanation

31 31

Account No. 168 Credit Balance

Unadjusted balance

Accounts Payable Explanation 31 31

Debit

12,400

36,000

Debit

Account No. 301 Credit Balance

Unadjusted balance

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Problem 3-10B (continued) Date 2023 Dec.

Date 2023 Dec.

Ben Hallmark, Withdrawals Explanation 31

G7 G7

5,200 21,800

G7 Salaries Expense Explanation

430

Debit

430 Account No. 622 Credit Balance 56,000

Debit

Account No. 623 Credit Balance

12,400

39,726 52,126

Debit

Account No. 633 Credit Balance

120

Debit

Account No. 637 Credit Balance

31 Insurance Expense Explanation

Unadjusted balance

Rent Expense Explanation

170,948 176,148 197,948

Account No. 601 Credit Balance

Unadjusted balance

Interest Expense Explanation

Debit

Unadjusted balance Wages Expense Explanation

Debit

Account No. 401 Credit Balance

Unadjusted balance

31 31

Account No. 302 Credit Balance 24,300

Depreciation Expense, Surveying Equipment Explanation PR

Debit

Unadjusted balance Surveying Revenue Explanation

31 31 31

6,000

Debit

Account No. 640 Credit Balance

2,980

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Supplies Expense Date 2023 Dec.

Date 2023 Dec.

Explanation 31 31

31 Gas and Oil Expense Explanation

Date 2023 Dec. 31

1,320

2,958 4,278

Debit

Account No. 655 Credit Balance

160

Debit

Account No. 671 Credit Balance

Unadjusted balance Repairs Expense Explanation

Debit

Unadjusted balance

Advertising Expense Explanation

Account No. 650 Credit Balance

6,564

Debit

Account No. 684 Credit Balance

Unadjusted balance Utilities Expense Explanation

12,400

Debit

Account No. 690 Credit Balance

2,340

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Problem 3-10B (continued) Parts 1 and 2 (in T-account format) NOTE: AJE = Adjusting Journal Entry Cash Unadj Bal Dec 31

101

15,600

Accounts Receivable Unadj Bal Dec 31 29,200 AJE Adj Bal Dec 31

Prepaid Advertising 128 Unadj Bal Dec 31 1,280 160 AJE Dec 31 Adj Bal Dec 31 1,120 Accum. Deprec., Surveying Equipment 168 Unadj Bal 7,348 Dec 31 430 AJE Dec 31 Adj Bal 7,778 Dec 31 Wages Payable 210 12,400 AJE Dec 31

106

Supplies Unadj Bal Dec 31

21,800

Adj Bal Dec 31

126

1,640 1,320

AJE Dec 31

320

51,000

Prepaid Rent 131 Unadj Bal Dec 31 17,880 2,980 AJE Dec 31 Adj Bal Dec 31 14,900

Accounts Payable

201 Unadj Bal 13,800 Dec 31 2,340 AJE Dec 31 Adj Bal 16,140 Dec 31

Unearned Surveying Revenue 233 AJE Dec Unadj Bal 31 5,200 14,800 Dec 31

Surveying Equipment Unadj Bal Dec 31 58,000

Interest Payable 120

Notes Payable

167

203 AJE Dec 31

36,000

251 Unadj Bal Dec 31

Surveying Revenue

401

9,600 Adj Bal Problem 3-10B (continued) Ben Hallmark, Capital

301

Ben Hallmark, Withdrawals

302

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28,652

Unadj Bal Dec 31

Deprec. Expense, Surveying Equipment AJE Dec 31 430

Unadj Bal Dec 31

601

Salaries Expense Unadj Bal Dec 31

Unadj Bal 170,948 Dec 31 5,200 AJE Dec 31 21,800 AJE Dec 31 Adj Bal 197,948 Dec 31

24,300

622

Wages Expense Unadj Bal Dec 31

56,000

AJE Dec 31 Adj Bal Dec 31 Interest Expense AJE Dec 31 120

633

Supplies Expense Unadj Bal Dec 31 2,958 AJE Dec 31 1,320 Adj Bal Dec 31 4,278

Repairs Expense Unadj Bal Dec 31

Insurance Expense Unadj Bal Dec 31 6,000

637

650

Advertising Expense AJE Dec 31 160

655

684

Utilities Expense AJE Dec 31 2,340

690

AJE Dec 31

623

39,726 12,400 52,126 Rent Expense 2,980

640

Gas and Oil Expense Unadj Bal 6,564 Dec 31

671

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Problem 3-10B (continued) NOTE: After posting the December 31, 2023 adjusting entries, the general journal PR column would appear as follows to show that the posting has been done.

Date 2023 a) Dec. 31

General Journal Account Titles and Explanation Adjusting entries: Depreciation Expense, Surveying Equipment ................ Accumulated Depreciation, Surveying Equipment ...... To record depreciation for December.

Debit

601 168

430

Unearned Surveying Revenue .......................................... Surveying Revenue ...................................................... To record earned surveying revenue; 14,800 – 9,600 = 5,200 earned.

233 401

5,200

Rent Expense .................................................................... Prepaid Rent ................................................................. To record expired rent; 17,880  6 months = 2,980.

640 131

2,980

Wages Expense ................................................................. Wages Payable ............................................................. To record accrued wages.

622 210

12,400

Interest Expense ............................................................... Interest Payable............................................................ To record accrued interest.

633 203

120

Accounts Receivable ........................................................ Surveying Revenue ...................................................... To record accrued revenue.

106 401

21,800

Advertising Expense ......................................................... Prepaid Advertising ..................................................... To record used advertising; 1,280  4 months = 320/month  2 = 160 for half of December.

655 128

160

Supplies Expense ............................................................. Supplies ........................................................................ To record supplies used.

650 126

1,320

Utilities Expense ............................................................... Accounts Payable ........................................................ To record accrued utilities.

690 201

2,340

Page G7 Credit

430

5,200

2,980

12,400

120

21,800

160

1,320

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Problem 3-10B (continued) Part 3 Hallmark Surveying Services Adjusted Trial Balance December 31, 2023 Acct. No. 101 106 126 128 131 167 168 201 203 210 233 251 301 302 401 601 622 623 633 637 640 650 655 671 684 690

Account Cash ................................................................................ Accounts receivable ...................................................... Supplies ......................................................................... Prepaid advertising ....................................................... Prepaid rent .................................................................... Surveying equipment .................................................... Accumulated depreciation, surveying equipment ....... Accounts payable .......................................................... Interest payable ............................................................. Wages payable ............................................................... Unearned surveying revenue ........................................ Notes payable ................................................................ Ben Hallmark, capital .................................................... Ben Hallmark, withdrawals ........................................... Surveying revenue ......................................................... Depreciation expense, surveying equipment .............. Salaries expense............................................................ Wages expense .............................................................. Interest expense ............................................................ Insurance expense ........................................................ Rent expense ................................................................. Supplies expense .......................................................... Advertising expense ...................................................... Gas and oil expense ...................................................... Repairs expense ............................................................ Utilities expense ............................................................ Totals ..............................................................................

Debit $ 15,600 51,000 320 1,120 14,900 58,000

Credit

$ 7,778 16,140 120 12,400 9,600 36,000 28,652 24,300 197,948 430 56,000 52,126 120 6,000 2,980 4,278 160 6,564 12,400 2,340 $308,638

$308,638

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Problem 3-10B (continued) Part 4 Hallmark Surveying Services Income Statement For Month Ended December 31, 2023 Revenues: Surveying revenue ............................................................................ Operating expenses: Wages expense ................................................................................. Salaries expense ............................................................................... Repairs expense ............................................................................... Gas and oil expense ......................................................................... Insurance expense ............................................................................ Rent expense .................................................................................... Supplies expense.............................................................................. Utilities expense ............................................................................... Advertising expense ......................................................................... Depreciation expense, surveying equipment ................................. Interest expense................................................................................ Total operating expenses ............................................................. Profit ....................................................................................................... Hallmark Surveying Services Statement of Changes in Equity For Month Ended December 31, 2023 Ben Hallmark, capital, December 1....................................................... Investment by owner ............................................................................. Profit ....................................................................................................... Total ................................................................................................... Less: Withdrawal by owner .................................................................. Ben Hallmark, capital, December 31.....................................................

$197,948 $52,126 56,000 12,400 6,564 6,000 2,980 4,278 2,340 160 430 120 143,398 $ 54,550

$24,652* $ 4,000 54,550

58,550 $83,202 24,300 $58,902

*Calculation: The adjusted balance of $28,652 is after the owner invested $4,000 during the month. Therefore, the balance at the beginning of the month was $24,652 ($28,652 $4,000).

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Problem 3-10B (concluded) Part 4 Hallmark Surveying Services Balance Sheet December 31, 2023 Assets Cash .................................................................................................... Accounts receivable .......................................................................... Supplies .............................................................................................. Prepaid advertising ............................................................................ Prepaid rent ........................................................................................ Surveying equipment......................................................................... Less: Accumulated depreciation.................................................. Total assets ........................................................................................

$ 15,600 51,000 320 1,120 14,900 $58,000 7,778

50,222 $133,162

Liabilities Accounts payable .............................................................................. Interest payable.................................................................................. Wages payable ................................................................................... Unearned surveying revenue ............................................................ Notes payable..................................................................................... Total liabilities ................................................................................

$ 16,140 120 12,400 9,600 36,000 $ 74,260

Equity Ben Hallmark, capital......................................................................... Total liabilities and equity .................................................................

58,902 $133,162

Analysis component: At December 31, 2023, $58,902 or 44% ($58,902/$133,162 x 100) of the business‘s assets are financed by the owner and $74,260 or 56% ($74,260/$133,162 x 100) are financed by debt. Assuming total assets at the end of the previous month totalled $84,200, equity financing increased from 29% ($24,652/$84,200 x 100 = 29%) at the beginning of the month to 44%. Generally speaking, an increase in equity financing is a favourable change since there is greater risk with debt financing (the risk associated with being able to make payments on outstanding loans).

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Problem 3-11B (25 minutes) a)

2023 June

Arena Rental Expense ...................................................... 130,000 Prepaid Arena Rental ................................................... To record rent; 182,000/7 months = 26,000/month × 5 months = 130,000. Repair Supplies Expense .................................................. Repair Supplies ............................................................ To record the use of repair supplies.

1,900

Depreciation Expense, Skate Equipment .......................... Accumulated Depreciation, Skate Equipment............... To record depreciation of skate equipment.

82,000

Unearned Training Revenue ............................................. Training Revenue ......................................................... To record revenues earned; 19,600 – 12,600 = 7,000.

7,000

Salaries Expense .............................................................. Salaries Payable .......................................................... To record accrued salaries.

58,000

30 Interest Expense ............................................................... Interest Payable ........................................................... To record accrued interest.

1,800

30 Training Revenue .............................................................. Unearned Training Revenue ........................................ To record training revenue not yet earned.

92,000

130,000

1,900

82,000

7,000

58,000

1,800

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Problem 3-12B (45 minutes) Part 1 B52 Skate Training Trial Balances June 30, 2023 Unadjusted Trial Balance Account Debit Cash ........................................................... $ 112,000 Accounts receivable ................................. 28,000 Repair supplies ................................................ 2,800 Prepaid arena rental .................................. 182,000 Skate equipment ....................................... 428,000 Accumulated deprec., skate equip........... Accounts payable ...................................... Unearned training revenue ....................... Notes payable ............................................ Ben Gibson, capital ................................... Ben Gibson, withdrawals .............................. 72,000 Training revenue ....................................... Salaries expense ....................................... 350,000 Arena rental expense ................................ 168,000 Other expenses ......................................... 7,600 Totals .................................................... $1,350,400 Repair supplies expense............................. Depreciation expense, skate equip. ......... Salaries payable ........................................ Interest expense.......................................... Interest payable ......................................... Totals ....................................................

Adjusted Trial Balance Adjustments Debit Credit

Credit

b) $ 1,900 a) 130,000

Debit $ 112,000 28,000 900 52,000 428,000

$ 164,000 c) 82,000 5,400 19,600 d) $ 7,000 g) 92,000 160,000 451,400

Credit

$ 246,000 5,400 104,600 160,000 451,400 72,000

550,000 g) 92,000 d) e) 58,000 a) 130,000

7,000

465,000 408,000 298,000 7,600

$1,350,400 b) c)

1,900 82,000

1,800

1,900 82,000 e) 58,000 f)

$372,700

58,000 1,800

1,800 $372,700

$1,492,200

1,800 $1,492,200

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Problem 3-12B (continued) Part 2 B52 Skate Training Income Statement For Year Ended June 30, 2023 Revenues: Training revenue ......................................................................... Operating expenses: Salaries expense ......................................................................... Arena rental expense .................................................................. Depreciation expense, skate equipment ................................... Other expenses ........................................................................... Repair supplies expense ............................................................ Interest expense.......................................................................... Total operating expenses ....................................................... Loss ..................................................................................................

$465,000 $408,000 298,000 82,000 7,600 1,900 1,800 799,300 $334,300

B52 Skate Training Statement of Changes in Equity For Year Ended June 30, 2023 Ben Gibson, capital, June 30, 2022 ................................................ Investment by owner ....................................................................... Total ............................................................................................. Less: Withdrawal by owner ............................................................ Loss ....................................................................................... Ben Gibson, capital, June 30, 2023 ................................................

$431,400* 20,000 $451,400 $ 72,000 334,300

406,300 $ 45,100

*Calculation: The adjusted balance of $451,400 is after the owner invested $20,000 during the year. Therefore, the balance at the beginning of the year was $431,400 ($451,400 - $20,000).

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Problem 3-12B (concluded) B52 Skate Training Balance Sheet June 30, 2023 Assets Cash .................................................................................................. Accounts receivable ........................................................................ Prepaid arena rental ........................................................................ Repair supplies ................................................................................ Skate equipment .............................................................................. Less: Accumulated depreciation................................................ Total assets ......................................................................................

$112,000 28,000 52,000 900 $428,000 246,000

Liabilities Accounts payable ............................................................................ Interest payable................................................................................ Salaries payable ............................................................................... Unearned training revenue .............................................................. Notes payable................................................................................... Total liabilities ........................................................................... Equity Ben Gibson, capital ......................................................................... Total liabilities and equity ...............................................................

182,000 $374,900

5,400 1,800 58,000 104,600 160,000 $329,800

45,100 $374,900

Analysis component: If liabilities at June 30, 2022 were $90,000 and equity was $431,400* on the same date, then total assets were $521,400 ($90,000 + $431,400 = $521,400). B52 Skate Training had a much stronger balance sheet at June 30, 2022 (the lower the total liabilities as a percentage of total assets, the stronger the balance sheet; at June 30, 2022 liabilities were 17.26% of total assets calculated as 90,000/521,400 and liabilities were 87.97% of total assets at June 30, 2023 calculated as 329,800/374,900). Equity decreased substantially during the year ended June 30, 2023 because of the $334,300 loss and, to a lesser degree, the owner withdrawals of $72,000. *From the statement of changes in equity prepared for the year ended June 30, 2023.

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Problem 3-13B (50 minutes) Part 1 MAD CATZ COURIER Income Statement For Month Ended December 31, 2023 Revenues: Delivery revenue ............................................................... Interest income ................................................................. Total revenues .............................................................. Operating Expenses: Wages expense................................................................ Salaries expense .............................................................. Depreciation expense, equipment .................................... Repairs expense............................................................... Depreciation expense, trucks ........................................... Advertising expense ......................................................... Office supplies expense ................................................... Interest expense ............................................................... Total operating expenses .............................................. Loss .....................................................................................

$190,000 250 $190,250 $162,000 41,000 23,000 17,300 12,000 9,800 5,400 650 271,150 $ 80,900

Part 2 MAD CATZ COURIER Statement of Changes in Equity For Month Ended December 31, 2023 Madison Catz, capital, December 1 ........................................................ $25,500* Investment by owner ............................................................................... 127,000 Total ..................................................................................................... $152,500 Less: Withdrawal by owner .................................................................... $ 5,000 Loss ............................................................................................... 80,900 85,900 Madison Catz, capital, December 31 ...................................................... $ 66,600 *Calculation: The adjusted balance of $152,500 is after the owner invested $127,000 during the month. Therefore, the balance at the beginning of the month was $25,500 ($152,500 - $127,000).

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Problem 3-13B (concluded) Part 3 MAD CATZ COURIER Balance Sheet December 31, 2023 Assets Cash ..................................................................................... Accounts receivable ............................................................. Interest receivable ................................................................ Notes receivable (due in 90 days) ........................................ Office supplies ...................................................................... Trucks .................................................................................. Less: Accumulated depreciation ....................................... Equipment ............................................................................ Less: Accumulated depreciation ....................................... Land ..................................................................................... Total assets ..........................................................................

$ 14,000 25,000 125 100,000 1,800 $62,000 24,000 $130,000 95,000

38,000 35,000 60,000 $273,925

Liabilities Accounts payable ................................................................. Interest payable .................................................................... Salaries payable ................................................................... Unearned delivery revenue................................................... Long-term notes payable ...................................................... Total liabilities ................................................................

$ 37,000 325 15,000 55,000 100,000 $207,325

Equity Madison Catz, capital ........................................................... Total liabilities and equity .....................................................

66,600 $273,925

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Problem 3-14B (60 minutes) Part 1 Date 2023 July

GENERAL JOURNAL* Account Titles and Explanation PR 1

Debit

Cash ...................................................... Unearned Revenue ......................... Collected an advance.

101 233

3,600

Melanie Thornhill, Withdrawals .............. Cash ............................................... Owner withdrawal.

302 101

4,000

Accounts Payable .................................. Cash .............................................. Paid for supplies purchased on account.

201 101

2,200

Cash ...................................................... Revenue ......................................... Did work and collected cash.

101 401

1,400

Cash ...................................................... Revenue ......................................... Collected cash for work done.

101 401

3,600

4,000

2,200

1,400

3,600

No entry

Melanie Thornhill, Withdrawals .............. Cash ............................................... Owner withdrawals.

302 101

1,000

Repair Supplies...................................... Cash ............................................... Purchased supplies.

131 101

1,600

Wages Expense..................................... Cash .............................................. Paid wages.

623 101

2,800

Page 1 Credit

1,000

1,600

2,800

*Note: The PR column in the General Journal would appear as shown above, with the PR column completed, after posting the adjusting entries.

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Problem 3-14B (continued) Part 2 and 3

Bal. July 1 3 4

Cash 6,400 3,600 1,400 3,600

Bal.

3,400

4,000 2,200 1,000 1,600 2,800

101 July 1 2 15 22 31

Repair Supplies Bal. 3,000 July 22 1,600

Bal.

131

201 Bal.

Unearned Revenue 700 3,600

233 Bal. July 1

1,000

Bal.

4,300

Bal.

401 25,800 1,400 3,600 30,800

Repair Sup. Exp. Bal. 2,700

Bal. July 3 4 Bal.

161

Accum. Deprec., 162 Tools 560 Bal.

4,600

Accounts Payable July 2 2,200 3,200

Revenue

Tools Bal. 16,800

Deprec. Expense, Tools Bal. 560

602

Melanie Thornhill, Capital 301 1 9,160 Bal.

Melanie Thornhill, Withdrawals -0Bal. 4,000 July 1 15 1,000 Bal. 5,000

Wages Expense Bal. 1,960 July 31 2,800

Rent Expense Bal. 8,000

Bal.

623

4,760

696

1. Calculated as: 6,400 + 3,000 + 16,800 – 560 – 3,200 – 700 – x + 0 – 25,800 + 560 + 1,960 + 8,000 + 2,700; x = 9,160.

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Problem 3-14B (continued) Part 4 MT Repairs Unadjusted Trial Balance July 31, 2023

Acct. No. 101 131 161 162 201 233 301 302 401 602 623 640 696

Account Title Cash .................................................................. Repair supplies .................................................. Tools .................................................................. Accumulated depreciation, tools ........................ Accounts payable............................................... Unearned revenue ............................................. Melanie Thornhill, capital ................................... Melanie Thornhill, withdrawals ........................... Revenue ............................................................ Depreciation expense, tools ............................... Wages expense ................................................. Rent expense ..................................................... Repair supplies expense .................................... Totals .................................................................

Debit $ 3,400 4,600 16,800

Credit

560 1,000 4,300 9,160

5,000 30,800 560 4,760 8,000 2,700 $45,820

$45,820

Part 5 – Prepare and post adjusting entries. Date 2023 July 31

GENERAL JOURNAL* Account Titles and Explanation PR

Page 1 Credit

Debit

Depreciation expense, tools ................... Accumulated deprec., tools ............. 16,800/5 = 3,360 × 1/12 = 280.

602 162

280

Repair Supplies Expense ....................... Repair Supplies............................... 4,600 × 3/4 = 3,450 used.

696 131

3,450

Rent Expense ........................................ Accounts Payable ........................... Accrued July’s rent.

640 201

4,000

Unearned Revenue ................................ Revenue ......................................... 4,300 – 3,800 = 500 earned.

233 401

500

280

3,450

4,000

500

*Note: The PR column in the General Journal would appear as shown above, with the PR column completed, after posting the adjusting entries.

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Problem 3-14B (continued) Part 5*

Cash Bal. 6,400 July 1 3,600 3 1,400 4 3,600

4,000 2,200 1,000 1,600 2,800

101 July 1 2 15 22 31

Bal. 3,400

Repair Supplies Bal. 3,000 3,450 July 22 1,600

Bal.

131 July 31

161

Accum. Deprec., Tools 162 560 Bal. 280 July 31

1,150

840

Accounts Payable July 2 2,200 3,200 4,000

201 Bal. July 31

Unearned Revenue July 31 500 700 3,600

233 Bal. July 1

5,000

Bal.

3,800

Bal.

Revenue 401 25,800 Bal. 1,400 July 3 3,600 4 500 31 31,300 Bal.

Deprec. Expense, Tools Bal. 560 July 31 280

Repair Sup. Exp. Bal. 2,700 July 31 3,450 Bal. 6,150

Tools Bal. 16,800

Bal. 840

602

Melanie Thornhill, Capital 301 9,160 Bal.

Wages Expense Bal. 1,960 July 31 2,800

Bal. 4,760

Melanie Thornhill, Withdrawals Bal. -0July 1 4,000 15 1,000 Bal. 5,000

623 Bal. July 31

Bal.

Rent Expense 8,000 4,000

Bal.

302

640

12,000

696

*Note: The T-accounts would appear as shown above after posting the adjusting entries.

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Problem 3-14B (continued) Part 6 – Adjusted Trial Balance MT Repairs Adjusted Trial Balance July 31, 2023

Acct. No. 101 131 161 162 201 233 301 302 401 602 623 640 696

Debit $ 3,400 1,150 16,800

Credit

840 5,000 3,800 9,160

5,000 31,300 840 4,760 12,000 6,150 $50,100

$50,100

Part 7 MT Repairs Income Statement For Three Months Ended July 31, 2023 Revenue.............................................................. Operating expenses: Rent expense ................................................. Repair supplies expense ................................ Wages expense ............................................. Depreciation expense, tools ........................... Total operating expenses .......................... Profit ...................................................................

$31,300 $12,000 6,150 4,760 840 23,750 $ 7,550

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Problem 3-14B (concluded) MT Repairs Statement of Changes in Equity For Three Months Ended July 31, 2023 Melanie Thornhill, capital, May 1 ......................... Investments by owner ......................................... $9,160 Profit ................................................................... 7,550 Total ................................................................ Less: Withdrawals by owner ................................ Melanie Thornhill, capital, July 31........................

16,710 $16,710 5,000 $11,710

MT Repairs Balance Sheet July 31, 2023 Assets Cash Repair supplies Tools Less: Accumulated depreciation Total assets

$ 3,400 . 1,150 $16,800 840 15,960 $20,510 Liabilities

Accounts payable Unearned revenue Total liabilities

. $ 5,000 . 3,800 . $ 8,800 Equity

Melanie Thornhill, capital Total liabilities and equity

. 11,710 . $20,510

Analysis Component: When a company shows expenses on its income statement, it does not necessarily mean that cash equal to the expenses was paid during the period in which the expenses were reported. For example, expenses can be unpaid because they were incurred on account. In addition, prepaid expenses represent cash that was paid during the period but likely only partially expensed. Therefore, cash paid can be greater than or less than the expenses reported on the income statement because of expenses incurred on account and prepaids.

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Problem 3-15B* (25 minutes) a.

May

31 Accounts Receivable.............................................16,200 Advertising Expense ..................................... To reverse incorrect entry.

16,200

AND

31 Repairs Expense ...................................................16,200 Cash ............................................................... To record repairs paid in cash.

16,200

31 Accounts Payable .................................................... 8,100 Computer Equipment ...................................... To reverse incorrect entry.

8,100

AND 31 Office Furniture ....................................................... 8,100 Note Payable ................................................... To record the purchase of office furniture by issuing a note payable. c.

31 Telemarketing Revenue ..........................................15,000 Unearned Revenue ......................................... To correct an incorrect entry.

8,100

15,000

OR 31 Telemarketing Revenue ..........................................15,000 Cash ................................................................ To reverse incorrect entry.

15,000

AND

31 Cash ........................................................................15,000 Unearned Revenue ......................................... To record cash collected in advance.

15,000

31 Delivery Expense..................................................... 6,300 Telephone Expense......................................... To correct an incorrect entry.

6,300

31 Telemarketing Revenue .......................................... 1,200 Interest income ................................................ To correct an incorrect entry.

1,200

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Problem 3-15B* (concluded) Analysis component: The correcting entry regarding (e) simply transfers the $1,200 from one revenue account into another so the net effect on the financial statements is nil. However, it is necessary to prepare a correcting entry despite a nil net effect because decision making based on account balances could be adversely affected if based on incorrect information. Problem 3-16B RAINBOW JANITORIAL SERVICES Trial Balances October 31, 2023 Unadjusted Trial Balance Adjustments Account Debit Credit Debit Credit $ 3,500 Cash .............................................................. Accounts receivable .................................... 7,200 Prepaid advertising ...................................... -0e) $1,500 Cleaning supplies ........................................ -0a) 6,150 Equipment .................................................... 29,000 Accumulated depreciation, equipment ....... $ 3,200 b) $3,200 Unearned window washing revenue........... -0d) 2,400 Unearned office cleaning revenue .............. -0c) 6,900 William Nahanee, capital ............................. 9,150 Window washing revenue ........................... 23,800 d) 2,400 Office cleaning revenue ............................... 71,500 c) 6,900 Advertising expense .................................... 2,900 e) 1,500 Salaries expense .......................................... 56,900 Depreciation expense, equipment .............. -0b) 3,200 Cleaning supplies expense ......................... 8,150 a) 6,150 Totals ............................................................ $107,650 $107,650 $20,150 $20,150

Adjusted Trial Balance Debit Credit $ 3,500 7,200 1,500 6,150 29,000 $ 6,400 2,400 6,900 9,150 21,400 64,600 1,400 56,900 3,200 2,000 $110,850 $110,850

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Problem 3-17B (40 minutes) Part 1 Entries that initially recognize assets and liabilities: 2023 Apr. 1 Prepaid Consulting Fees ....................................... Cash ................................................................. Paid for future consulting services.

May

7,200 7,200

1 Prepaid Insurance .................................................. Cash ................................................................. Paid insurance for one year.

1,920

30 Cash ........................................................................ Unearned Service Revenue ............................ Received cash in advance.

7,500

1 Prepaid Advertising ............................................... Cash ................................................................ Paid for future advertising.

1,200

9,200

Cash ....................................................................... Unearned Service Revenue ........................... Received cash in advance.

Year-end adjusting entries: 2023 May 31 Consulting Services Expense ............................... Prepaid Consulting Fees ................................ To adjust prepaid consulting fees.

1,920

7,500

1,200

9,200

5,000 5,000

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Problem 3-17B (continued) Part 1 May 31

Insurance Expense ............................................... Prepaid Insurance ........................................ To adjust prepaid insurance; 1,920 x 2/12 = 320 used.

320

Unearned Service Revenue .................................. Service Revenue .......................................... To adjust unearned service revenue; 7,500 – 7,200 = 300 earned.

300

Advertising Expense ............................................. Prepaid Advertising ...................................... To adjust prepaid advertising; 1,200 – 340 = 860 used.

860

Unearned Service Revenue .................................. Service Revenue .......................................... To adjust unearned service revenue.

9,000

320

300

860

9,000

Prepaid Advertising 1,200 860 May 31 340

Apr. 1 Bal.

Unearned Service Revenue May 31 300 7,500 Apr. 30 31 9,000 9,200 May 23 7,400 Bal.

Insurance Expense May 31 320 Bal. 320

Prepaid Insurance 1,920 320 May 31 1,600

Prepaid Consulting Fees Apr. 1 7,200 5,000 May 31 Bal. 2,200

Service Revenue 300 May 31 9,000 31 9,300 Bal.

Advertising Expense May 31 860 Bal. 860

Consulting Services Expense May 31 5,000 Bal. 5,000

Problem 3-17B (continued)

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Entries that initially recognize expenses and revenues: 2023 Apr. 1

May

Consulting Services Expense ............................... Cash ............................................................ Paid for future consulting services.

7,200

Insurance Expense ............................................... Cash ............................................................ Paid insurance for one year.

1,920

Cash ..................................................................... Service Revenue .......................................... Received cash in advance.

7,500

Advertising Expense ............................................. Cash ............................................................ Paid for future advertising.

1,200

Cash ..................................................................... Service Revenue .......................................... Received cash in advance.

9,200

7,200

1,920

7,500

1,200

9,200

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Problem 3-17B (continued) Part 2 Year-end adjusting entries: 2023 May 31

Prepaid Consulting Fees ...................................... Consulting Services Expense....................... To adjust for prepaid consulting fees; 7,200 – 5,000 = 2,200 prepaid.

2,200

Prepaid Insurance ................................................ Insurance Expense ...................................... To adjust for prepaid insurance; 1,920 – 320 = 1,600 prepaid.

1,600

Service Revenue .................................................. Unearned Service Revenue ......................... To adjust for unearned service revenue.

7,200

Prepaid Advertising............................................... Advertising Expense .................................... To adjust for prepaid advertising.

340

Service Revenue .................................................. Unearned Service Revenue ......................... To adjust for unearned service revenue; 9,200 – 9,000 earned = 200 unearned.

200

2,200

1,600

7,200

340

200

Unearned Service Revenue 7,200 May 31 200 31 7,400 Bal.

Prepaid Insurance May 31 1,600 Bal. 1,600

Prepaid Consulting Fees May 31 2,200 Bal. 2,200

Service Revenue

Advertising Expense

May 31 7,200 7,500 31 200 9,200 9,300

Apr. 30 May 23 Bal.

May 1 Bal.

1,200 340 860

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Problem 3-17B (concluded) Part 2

Insurance Expense Apr. 1 1,920 1,600 May 31 Bal. 320

Consulting Services Expense Apr. 1 7,200 2,200 May 31 Bal. 5,000

Analysis Component There are no differences between the two methods in terms of the amounts that appear on the financial statements. In both cases, the financial statements reflect the following: Prepaid consulting fees as of May 31.................................................. Consulting fees expense for two months ................................................ Insurance expense for two months ......................................................... Prepaid insurance as of May 31 .............................................................. Unearned service revenue as of May 31 ................................................ Service revenue for two months ............................................................. Prepaid advertising as of May 31 ............................................................ Advertising expense for two months .......................................................

$2,200 5,000 320 1,600 7,400 9,300 340 860

When prepaid expenses and unearned revenues are recorded in balance sheet accounts, the related adjusting entries are designed to generate the correct asset, expense, liability, and revenue account balances. When prepaid expenses and unearned revenues are recorded in income statement accounts, the related adjusting entries are designed to accomplish exactly the same result. ANALYTICAL AND REVIEW PROBLEMS A&R Problem 3-1 1.

$388,400

$22,520

$398,120 – $22,520 = $375,600

($388,400 + $22,520) – $398,120 = $12,800 OR 388,400 – 375,600 = 12,800.

ETHICS CHALLENGE 1. GAAP requires that annual depreciation accumulate in the contra-asset account, Accumulated Depreciation. While plant and equipment assets are often shown at their net value on the balance sheet (as in Recipe‘s and Spin Master‘s balance Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 6McGraw-Hill Education Ltd.

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sheets in Appendix I) the cost of the equipment along with its related accumulated depreciation can be ascertained from the notes. Jackie is correct with her journal entry recommendation. 2. One strength of Bob‘s method would be the ease of preparing the balance sheet. The equipment balance in the adjusted trial balance would be directly transferable to the balance sheet if the preparer desired to show the amount at net, which it would be. Bob‘s approach carries considerable weaknesses since financial statement users would not be able to ascertain the original cost of the equipment or be able to know how much of the original cost had been allocated to date to depreciation. 3. While both approaches would lead to the same total for assets on the balance sheet, GAAP requires Jackie‘s approach. As a professional accountant Jackie is required to uphold the standards of her profession and thus the decision is an ethical one for her.

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FFS 3-1 Part 1 RPE CONSULTING Income Statement For Year Ended July 31, 2023 Revenues: Consulting revenue ............................................................................ Operating expenses: Salaries expense ................................................................................. Office supplies expense ..................................................................... Advertising expense ........................................................................... Rent expense ...................................................................................... Depreciation expense, office equipment........................................... Insurance expense .............................................................................. Interest expense.................................................................................. Total operating expenses ............................................................. Profit ....................................................................................................... RPE CONSULTING Statement of Changes in Equity For Year Ended July 31, 2023 Ray Edds, capital, August 1 .................................................................. Investment by owner ............................................................................. Profit ....................................................................................................... Total ................................................................................................... Less: Withdrawal by owner .................................................................. Ray Edds, capital, July 31 .....................................................................

$168,160 $77,600 15,000 14,700 13,200 6,000 2,440 2,200 131,140 $ 37,020

$ 8,420* $20,000 37,020

57,020 $65,440 10,000 $55,440

*Calculation: The adjusted balance of $28,420 is after the owner invested $20,000 during the year. Therefore, the balance at the beginning of the year was $8,420 ($28,420 $20,000).

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FFS 3-1 Part 1 (continued) RPE CONSULTING Balance Sheet July 31, 2023 Assets Cash .................................................................................................... Accounts receivable .......................................................................... Prepaid insurance .............................................................................. Office supplies ................................................................................... Office equipment ............................................................................... Less: Accumulated depreciation.................................................. Total assets ........................................................................................

$ 27,000 22,460 4,880 3,000 $92,000 18,000

74,000 $131,340

Liabilities Accounts payable .............................................................................. Unearned consulting revenue ........................................................... Salaries payable ................................................................................. Interest payable.................................................................................. Notes payable..................................................................................... Total liabilities ................................................................................

$ 10,200 14,300 6,600 800 44,000 $ 75,900

Equity Ray Edds, capital ............................................................................... Total liabilities and equity .................................................................

55,440 $131,340

Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 6McGraw-Hill Education Ltd.

3342

Last update: 2012-12-05

Analysis component – Part 2 RPE Consulting Trial Balances July 31, 2023 Unadjusted Trial Balance Adjustments Account Debit Credit Debit Credit Accounts payable ......................................... $ 9,300 a)$ 900 Accounts receivable ..................................... $ 12,000 b) $10,460 Accum. deprec., office equipment ................ 12,000 d) 6,000 Advertising expense ..................................... 13,800 a) 900

FFS3-1 (continued)

Cash ............................................................ Consulting revenue ......................................

27,000

Deprec. expense, office equipment .............. Insurance expense ....................................... Interest expense........................................... Interest payable............................................ Long-term notes payable.............................. Office equipment .......................................... Office supplies ............................................. Office supplies expense ............................... Prepaid insurance ........................................ Ray Edds, capital ......................................... Ray Edds, withdrawals ................................. Rent expense ............................................... Salaries expense .......................................... Salaries payable ........................................... Unearned consulting revenue....................... Totals ...........................................................

-0-01,400

Adjusted Trial Balance Debit $ 22,460 18,000 14,700 27,000

156,000

b) 10,460 c) 1,700 d) e) f)

6,000 2,440 800

-044,000 92,000 18,000 -07,320

168,160 6,000 2,440 2,200

800

g) 15,000 g) 15,000 e)

2,440

800 44,000 92,000 3,000 15,000 4,880

28,420 10,000 13,200 71,000

$265,720

Credit $ 10,200

h) 6,600 -0h) 6,600 16,000 c) 1,700 $265,720 $ 43,900 $ 43,900

28,420 10,000 13,200 77,600

$290,480

6,600 14,300 $290,480

Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 6McGraw-Hill Education Ltd.

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Last revised: September 2021.

FFS 3-1 (concluded) Analysis component - Part 3 If the adjustments would not have been recorded, assets would have been overstated by $12,980 (10,460 – 6,000 – 15,000 – 2,440), liabilities would have been understated by $6,600 (900 + 800 + 6,600 – 1,700), and equity would have been overstated by $19,580 (10,460 + 1,700 – 900 – 6,000 – 2,440 – 800 – 15,000 – 6,600). FFS 3-2 a. Accounts Receivable .................................................................................................................. XX Franchise Revenues ............................................................................................................ XX To record the accrual of franchise revenues. and Gift Card Liability (or Advance Ticket Sales) ............................................................................ XX Franchise Revenues ............................................................................................................ XX To record the earning of unearned amounts. b. Cost of Inventory Sold ................................................................................................................ XX Accounts Payable ................................................................................................................ XX To record the accrual of inventory expenses. Cost of Inventory Sold ................................................................................................................ XX Prepaid Expenses ................................................................................................................ XX To record the expiration (or use) of a prepaid. c. Expense (any reasonable expense) ........................................................................................... XX Prepaid Expenses and Other Assets ........................................................................... XX Ass To record the expiration (or use) of a prepaid. d. Expense (any reasonable expense) ........................................................................................... XX Accounts Payable and Accrued Liabilities ......................................................................... XX To record the accrual of an expense.

Critical Thinking Question CT 3-1 Note to instructor: Student responses will vary therefore the answer here is only suggested and not inclusive of all possibilities; it is presented in point form for brevity. Part 1: Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw-Hill Education Ltd.

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Facts:  March 1, 2023 office furniture was purchased for $700,000 ($300,000 was paid in cash and the balance was financed over four years at 4% annual interest with annual principal payments of $100,000). 

Furniture has a useful life of five years and residual value of $20,000.



Insurance over furniture costs $8,000 annually, payable each March 1.



Problem: Adjusting entries are required at Frogbox‘s December 31, 2023 year end to comply with the matching principle

Part 2 Assumption(s)/Principle(s): 

The furniture was recorded as an asset when purchased on March 1, 2023 and that depreciation has been recorded correctly to date using the straight-line method.



The insurance is recorded as a prepaid when purchased each March 1.



Interest on the furniture loan is paid annually with each $100,000 payment.



Adjustments are recorded at year end only.



The matching principle requires that expenses be allocated to the appropriate accounting period. Also, the prudence principle prohibits the overstatement of income and assets. If adjusting entries are not recorded, income and assets could be overstated.

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CT 3-1 (continued)

Part 3 Goal(s)*:  To correctly record adjusting entries based on the information available to ensure financial statements comply with GAAP (assuming that the personnel director wants to comply with GAAP). *The goal is highly dependent on ―perspective.‖ Part 4 Conclusion(s)/Consequence(s):  As a minimum, the following adjusting entries will have to be recorded based on the information provided (calculations rounded to the nearest whole dollar for simplicity): 2023 Oct 31

Insurance Expense ............................................... Prepaid Insurance ........................................ To adjust prepaid insurance; 2,667 used for first 4 months; 8,000 x 8/12 = 5,333 used for remaining 8 months

5,333

Interest Expense................................................... Interest Payable ........................................... To record accrued interest; (400,000 – 100,000 – 100,000) x 4% x 8/12 = 5,333.

5,333

Depreciation Expense, Furniture .......................... Accumulated Depreciation, Furniture ........... To record depreciation on furniture; (700,000 – 20,000)/5 = 136,000.

136,000

5,333

136,000

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Cumulative Problem, Echo Systems (120 minutes) Part 1 Journal entries: Date 2023 Dec.

General Journal Account Titles and Explanation

Debit

3 Advertising Expense ............................................. Cash ................................................................ Paid share of mall advertising costs.

655 101

2,100

3 Repairs Expense, Computer ................................. Cash ................................................................ Repaired the computer.

684 101

1,200

4 Cash ....................................................................... Accounts Receivable ........................................ Collected accounts receivable.

101 106

7,500

10 Wages Expense ..................................................... Cash ................................................................ Paid employee for part-time work.

623 101

1,200

14 Cash ....................................................................... Unearned Computer Services Revenue........ Received advance on work to be performed.

101 236

3,000

17 Computer Supplies ............................................... Accounts Payable .......................................... Purchased supplies on credit.

126 201

2,310

101 403

11,250

31 Cash ....................................................................... Accounts Receivable ..................................... Collected accounts receivable.

101 106

5,700

31 Mileage Expense ................................................... Cash ................................................................ Reimbursed Mary Graham for business usage.

676 101

600

31 Mary Graham, Withdrawals .................................. Cash ................................................................ Owner withdrew cash.

302 101

3,600

Page G4 Credit

2,100

1,200

7,500

1,200

3,000

2,310

18 No entry recorded in the journal. 20 Cash ....................................................................... Computer Services Revenue ......................... Collected cash revenue from customer.

11,250

24–28 No entry required. 5,700

600

3,600

Cumulative Problem (continued) Part 2

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Last revised: September 2021.

Adjusting entries: Date 2023 Dec.

General Journal Account Titles and Explanation 31

Debit

Computer Supplies Expense ................................ 652 Computer Supplies ........................................ 126 Adjustment for supplies used; supplies account balance less cost of supplies on hand; 4,560 + 2,310 = 6,870; 6,870 – 1,440 = 5,430.

5,430

Insurance Expense................................................ Prepaid Insurance ............................................ Adjustment for expired insurance; 1/4 of original prepaid amount; 4,320 x 3/12 = 1,080.

637 128

1,080

Wages Expense ..................................................... Wages Payable ................................................ Adjustment for accrued wages.

623 210

800

5,430

1,080

800

Depreciation Expense, Computer Equipment ........... 613 2,250 Accumulated Depreciation, Computer Equipment ................................. 168 Adjustment for depreciation expense on computer equipment. $36,000 Cost ............................................................ Predicted life ............................................. 4 years Annual depreciation (cost/life) ................ $ 9,000 Expense for three months........................ $ 2,250 Depreciation Expense, Office Equipment............ 612 Accumulated Depreciation, Office Equipment ............................................... 164 Adjustment for depreciation expense on office equipment. $18,000 Cost ............................................................ Predicted life ............................................. 3 years Annual depreciation (cost/life) ................ $ 6,000 Expense for three months........................ $ 1,500

1,500

Rent Expense ........................................................ Prepaid Rent ................................................... Adjustment for expired rent; 3/4 of original prepaid amount; 9,000 x ¾ = 6,750.

6,750

640 131

Page G5 Credit

2,250

1,500

6,750

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Cumulative Problem (continued) Posting to the accounts: Date 2023 Oct.

Nov.

Dec.

Cash Explanation 1 2 5 8 15 17 20 22 31 31 1 2 5 18 22 28 30 30 3 3 4 10 14 20 31 31 31

Debit

G1 G1 G1 G1 G1 G1 G1 G1 G2 G2 G2 G2 G2 G2 G2 G2 G2 G3 G4 G4 G4 G4 G4 G4 G4 G4 G4

90,000

Acct. No. 101 Credit Balance

9,000 4,320 2,640 6,600 1,410 3,720 2,400 1,400 7,200 1,000 9,300 1,920 3,750 1,500 1,200 2,800 3,600 2,100 1,200 7,500 1,200 3,000 11,250 5,700 600 3,600

90,000 81,000 76,680 74,040 80,640 79,230 75,510 77,910 76,510 69,310 68,310 77,610 75,690 79,440 77,940 76,740 73,940 70,340 68,240 67,040 74,540 73,340 76,340 87,590 93,290 92,690 89,090

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Cumulative Problem (continued) Date 2023 Oct.

Nov.

Dec.

Date 2023 Oct. Nov. Dec.

Date 2023 Oct. Dec.

Date 2023 Oct.

Date 2023 Dec.

Accounts Receivable Explanation 6 12 15 22 28 8 18 24 4 31

PR G1 G1 G1 G1 G2 G2 G2 G2 G4 G4

Computer Supplies Explanation 3 5 17 31

PR G1 G2 G4 G5

Prepaid Insurance Explanation 5 31

PR G1 G5

Prepaid Rent Explanation 2 31

PR G1 G5

Office Equipment Explanation 1

6,600 2,400 6,450 8,700 3,750 7,500 7,500 5,700

Debit

5,430

Debit

1,080

6,750

18,000

Debit

4,320 3,240

Acct. No. 131 Credit Balance

9,000

2,640 4,560 6,870 1,440

Acct. No. 128 Credit Balance

4,320

Debit

6,600 9,000 2,400 0 6,450 15,150 11,400 18,900 11,400 5,700

Acct. No. 126 Credit Balance

2,640 1,920 2,310

Debit

Acct. No. 106 Credit Balance

6,600 2,400

Accumulated Depreciation, Office Equipment Explanation PR 31

Debit

9,000 2,250

Acct. No. 163 Credit Balance 18,000 Acct. No. 164 Credit Balance 1,500

1,500

Cumulative Problem (continued) Computer Equipment

Acct. No. 167

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Date 2023 Oct.

Date 2023 Dec.

Date 2023 Oct. Dec.

Date 2023 Dec.

Date 2023 Oct.

Date 2023 Oct. Nov. Dec.

Explanation 1

Debit

36,000

Accumulated Depreciation, Computer Equipment Explanation PR Debit 31

G5 Accounts Payable Explanation

3 8 17

PR G1 G1 G4

Wages Payable Explanation 31

2,310

Debit

PR G2 G3 G4

2,250

Acct. No. 201 Credit Balance

2,640

2,640 0 2,310

Acct. No. 210 Credit Balance 800

Debit

7,200 3,600 3,600

3,000

Acct. No. 301 Credit Balance 144,000

Debit

800

Acct. No. 236 Credit Balance 3,000

G1 Mary Graham, Withdrawals Explanation

Acct. No. 168 Credit Balance

2,640

G4 Mary Graham, Capital Explanation

31 30 31

Debit

Balance 36,000

2,250

G5 Unearned Computer Services Revenue Explanation PR

Credit

144,000

Acct. No. 302 Credit Balance 7,200 10,800 14,400

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Last revised: September 2021.

Cumulative Problem (continued) Date 2023 Oct.

Nov.

Dec.

Date 2023 Dec.

Date 2023 Oct. Nov. Dec.

Date 2023 Dec.

Computer Services Revenue Explanation 6 12 28 2 8 24 20

Debit

G1 G1 G2 G2 G2 G2 G4

6,600 2,400 6,450 9,300 8,700 7,500 11,250

Depreciation Expense, Office Equipment Explanation PR Debit 31

Acct. No. 403 Credit Balance 6,600 9,000 15,450 24,750 33,450 40,950 52,200

Acct. No. 612 Credit Balance

1,500

Depreciation Expense, Computer Equipment Explanation PR Debit

Acct. No. 613 Credit Balance

G5 Wages Expense Explanation

31 30 10 31

PR G2 G2 G4 G5

Insurance Expense Explanation 31

PR G5

Rent Expense Explanation 31

PR G5

Computer Supplies Expense Explanation 31

PR G5

2,250

Debit 1,400 2,800 1,200 800

Debit 1080

Debit 6,750

Debit 5,430

2,250 Acct. No. 623 Credit Balance 1,400 4,200 5,400 6,200 Acct. No. 637 Credit Balance 1,080 Acct. No. 640 Credit Balance 6,750 Acct. No. 652 Credit Balance 5,430

Cumulative Problem (continued) Advertising Expense

Acct. No. 655

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Last revised: September 2021.

Date 2023 Oct. Dec.

Date 2023 Nov. Dec.

Date 2023 Oct. Dec.

Date 2023 Nov.

Explanation 20 3 Mileage Expense Explanation 1 28 31 Repairs Expense, Computer Explanation 17 3 Charitable Donations Expense Explanation 22

Debit

G1 G4

3,720 2,100

3,720 5,820

Debit

Acct. No. 676 Credit Balance

G2 G2 G4

1,000 1,200 600

1,000 2,200 2,800

Debit

Acct. No. 684 Credit Balance

G1 G4

1,410 1,200

1,410 2,610

PR G2

Debit 1,500

Credit

Balance

Acct. No. 699 Credit Balance 1,500

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Last revised: September 2021.

Cumulative Problem (continued)

Part 3 ECHO SYSTEMS Adjusted Trial Balance December 31, 2023 Acct. No. 101 106 126 128 131 163 164 167 168 201 210 236 301 302 403 612 613 623 637 640 652 655 676 684 699

Account Cash ......................................................................................... Accounts receivable ................................................................. Computer supplies ................................................................... Prepaid insurance .................................................................... Prepaid rent .............................................................................. Office equipment ...................................................................... Accumulated depreciation, office equipment ............................ Computer equipment ................................................................ Accumulated depreciation, computer equipment. ..................... Accounts payable ..................................................................... Wages payable ........................................................................ Unearned computer services revenue ...................................... Mary Graham, capital ............................................................... Mary Graham, withdrawals ....................................................... Computer services revenue ...................................................... Depreciation expense, office equipment ................................... Depreciation expense, computer equipment ............................ Wages expense ....................................................................... Insurance expense ................................................................... Rent expense ........................................................................... Computer supplies expense ..................................................... Advertising expense ................................................................. Mileage expense ...................................................................... Repairs expense, computer ...................................................... Charitable donations expense .................................................. Totals .......................................................................................

Debit $ 89,090 5,700 1,440 3,240 2,250 18,000

Credit

1,500

36,000 2,250 2,310 800 3,000 144,000 14,400 52,200 1,500 2,250 6,200 1,080 6,750 5,430 5,820 2,800 2,610 1,500 $206,060

_______ $206,060

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Last revised: September 2021.

Cumulative Problem (continued) Part 4 ECHO SYSTEMS Income Statement For Three Months Ended December 31, 2023 Revenue: Computer services revenue .............................................. Operating Expenses: Rent expense ................................................................... Wages expense................................................................ Advertising expense ......................................................... Computer supplies expense ............................................. Mileage expense .............................................................. Repairs expense, computer .............................................. Depreciation expense, computer equipment ..................... Charitable donations expense .......................................... Depreciation expense, office equipment ........................... Insurance expense ........................................................... Total operating expenses .............................................. Profit.....................................................................................

$52,200 $6,750 6,200 5,820 5,430 2,800 2,610 2,250 1,500 1,500 1,080 35,940 $16,260

ECHO SYSTEMS Statement of Changes in Equity For Three Months Ended December 31, 2023 Mary Graham, capital, October 1.......................................... Investments by owner........................................................... Profit ................................................................................... Total .............................................................................. Less: Withdrawals by owner ................................................. Mary Graham, capital, December 31 ....................................

$ $144,000 16,260

160,260 $160,260 14,400 $145,860

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Last revised: September 2021.

Cumulative Problem (concluded) Part 5 ECHO SYSTEMS Balance Sheet December 31, 2023 Assets Cash ..................................................................................... Accounts receivable ............................................................. Computer supplies ............................................................... Prepaid insurance ................................................................ Prepaid rent .......................................................................... Office equipment .................................................................. Less: Accumulated depreciation ....................................... Computer equipment ............................................................ Less: Accumulated depreciation ....................................... Total assets ..........................................................................

$ 89,090 5,700 1,440 3,240 2,250 $18,000 1,500 $36,000 2,250

16,500 33,750 $151,970

Liabilities Accounts payable ................................................................. Wages payable .................................................................... Unearned computer services revenue .................................. Total liabilities ................................................................

2,310 800 3,000 6,110

Equity Mary Graham, capital ........................................................... Total liabilities and equity .....................................................

145,860 $151,970

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Last revised: September 2021.

SOLUTIONS MANUAL to accompany

Fundamental Accounting Principles th

17 Canadian Edition by Larson/Dieckmann/Harris

Revised for the 17th Edition by: John Harris, Seneca College

Technical checks by: Rhonda Heninger, SAIT

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Last revised: September 2021.

Chapter 4

Completing the Accounting Cycle and Classifying Accounts

Chapter Opening Critical Thinking Challenge Questions* Pela‘s external users include Kensington Capital, all investors that have provided funds to Pela through its venture capitalist group, as well as their bank if they have any outstanding loans. The Canadian Government is also a user, as Pela will pay taxes annually as a corporation based on their earnings. The company also likely has external financial statement auditors, as the venture capitalist group likely requires an independent review of their financial statements. *The Chapter 4 Critical Thinking Challenge questions are asked at the beginning of this chapter. Students are reminded at the conclusion of the chapter to refer to the Critical Thinking Challenge questions at the beginning of the chapter. The solutions to the Critical Thinking Challenge questions are available here in the Solutions Manual and accessible to students in the print and ebooks.

Knowledge Check-Up Questions 1. d) 2. b) 7. a)

3. a) 8. a)

4. c) 9. c)

5. d) 10. d)

6. c) 11. b)

Concept Review Questions 1. The four-step closing entry process is: (i) close the revenue (and gain) accounts to the Income Summary account, (ii) close the expense (and loss) accounts to the Income Summary account, (iii) close the Income Summary account to the owner‘s capital account, and (iv) close the withdrawals account to the owner‘s capital account. 2. Closing entries prepare the revenue, expense, and withdrawal accounts for the upcoming year by giving them zero balances. Closing entries also update the owner‘s capital account for the transactions of the year just finished. 3. Closing entries include: (1) closing the revenue accounts, (2) closing the expense accounts, (3) closing the Income Summary account, and (4) closing the withdrawals account. 4. Temporary accounts accumulate data related to one account period. They include all income statement accounts, withdrawals accounts and the Income Summary. The accounts are opened at the beginning of a period, used to record transactions that period, and then closed at the end of the period by transferring their balances to the owner‘s capital account. Temporary accounts are closed at the end of the period. Permanent accounts report on transactions related to one or more future accounting periods. They carry their ending balances into the next period and include all balance sheet accounts. Permanent accounts are not closed at the end of the period. The accounts are classified as follows: Temporary Accounts

Permanent Accounts

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Last revised: September 2021.

Withdrawals Interest income

Prepaid insurance Owner‘s capital

5. I disagree with Alexis. The information in temporary accounts are not deleted but are closed and transferred to the owner‘s capital account. Closing entries zero out the temporary accounts (revenues, expenses, Income Summary, and withdrawals) and transfer these balances to a permanent account (capital). 6. Both adjusting and closing entries are recorded at the end of the accounting period. Adjusting entries update the accounts for economic transactions that have taken place but not in the form of external transactions. Closing entries update the owner‘s capital account and prepare the temporary accounts for use in the next accounting period. 7. The purpose of the Income Summary account is to help in the closing process at the end of an accounting period. The Income Summary is a temporary account that contains a credit for the sum of all revenues and a debit for the sum of all expenses. Before the account is closed, the account balance equals the profit or loss reported on the Income Statement. The Income Summary account will be closed to the owner‘s capital account and the ending balance will be equal to zero. An income statement is not an account but one of the financial statements used to communicate to financial statement users. The Income Statement summarizes each category of revenues and expenses for the period and is not closed at the end of the period. 8. Yes, an error has occurred because Depreciation Expense is a temporary account that should be closed. If the item appears on the post-closing trial balance, the amounts of profit next period and equity this period are overstated. 9. This closing entry would have been recorded on December 31, 2020 to close the revenue balance to the Income Summary. Revenue ................................................ 1,570,600,000 Income Summary........................... 1,570,600,000 10. A company‘s operating cycle is the average time between paying cash for salaries or merchandise and receiving cash from customers in exchange for services or goods. 11. A classified balance sheet is more useful because it groups common accounts together. This grouping allows financial statement users to determine how much of a certain type of an account a company has and compare it to other groupings. For example, comparing the current assets to current liabilities shows whether a company has enough current assets to meet their current liabilities. The groupings also help users make decisions based on time. For example, current liabilities need to be paid within the longer of one year or the company‘s operating cycle. 12. Assets on a typical balance sheet include current assets; non-current investments; property, plant and equipment; and intangible assets. Liabilities are classified as current and non-current. 13. Property, plant and equipment are tangible long-lived assets used to produce or sell goods and services. 14. The very end of Note 18 shows that there is no debt retirement in 2021. In 2022, there is $120,325,000 in long-term debt to be repaid. *15. A work sheet is used to collect and organize the data for preparing adjusting entries, closing entries, and financial statements.

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Last revised: September 2021.

QUICK STUDY Quick Study 4-1 1.

―b‖; Permanent accounts generally consist of all balance sheet accounts, and these accounts are not closed.

―c‖; Permanent accounts report on activities related to one or more future accounting periods, and they carry their ending balances into the next period.

―d‖; Temporary accounts accumulate data related to one accounting period.

―a‖; Temporary accounts include all income statement accounts, the withdrawals account, and the Income Summary account.

Quick Study 4-2

Account a. b. c. d. e. f.

Accounts Payable Insurance Expense Delivery Vehicle Interest Income Unearned Revenue Accumulated Depreciation g. Stephos Petridis, Capital h. Depreciation Expense i. Stephos Petridis, Withdrawals j. Wages Payable k. Prepaid Insurance l. Utility Expense m. Building n. Supplies Expense

(1) Temporary?

(1) Permanent?

(2) Financial Statement? Balance Sheet Income Statement Balance Sheet Income Statement Balance Sheet Balance Sheet Balance Sheet and Statement of Changes in Equity Income Statement Statement of Changes in Equity Balance Sheet Balance Sheet Income Statement Balance Sheet Income Statement

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Last revised: September 2021.

Quick Study 4-3 a. Income Summary balance after closing revenues and expenses: Revenues: $35,000 + $3,500 Expenses: $19,000 + $4,000 + $2,300 Credit balance

= = =

$38,500 –25,300 $13,200

b. Peter Jontil, Capital balance after all closing entries: Beginning balance ........ Profit ............................ Total ............................. Less: Withdrawals ...... Ending balance ...........

$14,000 13,200 $27,200 OR 6,000 $21,200

(Withdrawals)

Peter Jontil, Capital 14,000 6,000 13,200 21,200

(Beg. Bal.) (Profit) (End. Bal.)

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Last revised: September 2021.

Quick Study 4–4 2023 Apr 30 Revenue .......................................................... Income Summary ...................................... To close the revenue account. 30 Income Summary ........................................... Expenses ................................................... To close the expenses account. 30 Income Summary ........................................... Capital ........................................................ To close the income summary to capital. 30 Capital ............................................................. Withdrawals ............................................... To close withdrawals to capital.

(1)

(2)

(3)

(4)

Apr. 30

Assets 250

Liabilities 30

100 100 60 60 40 40 20 20

Apr. 30 (4) 20

Apr. 30 Balance

Withdrawals 20 20 (4) -0-

Income Summary (2) 60 100 (1) (3) 40 40 Balance -0Balance

(1)

Revenue 100 100 -0-

Apr. 30 Balance

Income Summary (2) 60 100 (1) 40 Balance

Capital 200 Apr. 30 40 (3) 220 Balance

Expenses 60 60 (2) -0-

Income Summary (2) 60 100 (1) (3) 40 40 Balance -0Balance

Note that the $40 debit balance results after The third entry then debits the income posting the first and second closing entries. summary for the $40 balance which results in a final balance of ‗0‘.

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Last revised: September 2021.

Quick Study 4-5 (1)

2023 Oct. 31 Revenue .......................................................... Income Summary ...................................... To close the revenue account.

(2)

(3)

(4)

Oct. 31

Oct. 31 Balance

100 100

31 Income Summary ........................................... Expenses ................................................... To close the expenses account.

140

31 Capital............................................................. Income Summary ...................................... To close the income summary to capital.

31 Capital............................................................. Withdrawals .............................................. To close withdrawals to capital.

Assets 250

Withdrawals 20 20 (4) -0-

(1)

Liabilities 110

Oct. 31

Revenue 100 100 -0-

Oct. 31 Balance

140

Capital (4) 20 200 Oct. 31 (3) 40 140 Balance

Oct. 31 Balance

Expenses 140 140 (2) -0-

Income Summary (2) 140 100 (1) Balance 40 40 (3) Balance -0-

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Last revised: September 2021.

Quick Study 4-6 Silver Star Automotive Post-Closing Trial Balance October 31, 2023 Account Cash ........................................................................... Accounts receivable ................................................. Unearned revenue ..................................................... Capital ........................................................................ Totals .........................................................................

Debit $40 20

$60

Credit

$10 50 $60

Quick Study 4-7 1.

(f)

Journalizing transactions.

(g)

Posting the transaction entries.

(a)

Preparing the unadjusted trial balance.

(h)

Completing the work sheet (optional).

(c)

Journalizing and posting adjusting entries.

(e)

Preparing the financial statements.

(d)

Journalizing and posting closing entries.

(b)

Preparing the post-closing trial balance.

Quick Study 4-8 1. 2. 3. 4.

c e a f

5. 6. 7.

b a d

Quick Study 4-9

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1. 2. 3. 4. 5.

h. g. a. h. c.

6. 7. 8. 9. 10.

f. e. a. b. e.

11. 12. 13. 14. 15.

c. a. c. d. c.

16. 17. 18. 19. 20.

c. h. a. e. b.

Quick Study 4-10 Jardine Servicing Partial Balance Sheet March 31, 2023 Liabilities Current liabilities Accounts payable..................................................... Unearned revenue .................................................... Notes payable, due February 1, 2024 ...................... Current portion of mortgage payable ..................... Total current liabilities ............................................. Non-current liabilities Mortgage payable (less $56,000 current portion) ............................. Total liabilities ...............................................................

$14,000 26,000 45,000 56,000 $141,000

59,000 $200,000

Quick Study 4-11 Current assets: Accounts receivable .................................

$15,000

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Last revised: September 2021.

Cash ........................................ 6,000 Office supplies .......................................... Prepaid insurance ..................................... Total .................................... $25,300

1,800 2,500

Current liabilities: Accounts payable ...................................... $10,000 Unearned services revenue ...................... 4,000 Total ............................................................ $14,000 1.81 is less than the industry average of 2.2 so $25,300 Current ratio = = 1.81 compares unfavourably. However, a current ratio $14,000 of 1.81 is generally considered to be favourable. Quick Study 4-12 Quick ratio = (Cash + Accounts Receivable) (Accounts payable + Unearned service revenue) Quick Ratio

=($6,000 + $15,000) / ($10,000 + $4,000) =$21,000 / $14,000 =1.50

Quick Study 4-13

(Numbers in thousands) Debt to equity ratio

2020

2019

= ($427,927 + $1,397,608) / ($283,536)

= ($1,488,322+$430,758) / ($344,986)

=$1,825,535 / $283,536

=$1,919,080/ $344,986

4-366

Last revised: September 2021.

=6.44

=5.56

Comment: There has been a significant change in Recipe‘s debt to equity ratio from 2019 to 2020. About 87% of assets were funded by debt in 2020 compared to about 85% in 2019. It is unfavourable that the debt to equity ratio has increased. *Quick Study 4-14 1. 2. 3.

BS BS IS

4. 5. 6.

BS BS IS

*Quick Study 4-15

4-367

Last revised: September 2021.

Account Cash Accounts receivable Supplies Ed Wolt, capital Ed Wolt, withdrawals Revenue Supplies expense Totals Profit

Unadjusted Trial Balance Adjustments Dr Cr Dr Cr 15 22 25 8 40 12 48 14 8 88 88 8 8

Adjusted Trial Balance Dr Cr 15 22 17 40 12 48 22 88 88

Balance Sheet & Statement of Income Statement Changes in Equity Dr Cr Dr Cr 15 22 17 40 12 48 22 22 48 66 40 26 26 48 48 66 66

4-368

Last revised: September 2021.

*Quick Study 4-16 Alice Pursley, Capital for the December 31, 2023 balance sheet: Beginning capital .......................................................... Profit ($184,000 – $125,000).......................................... Less: Withdrawals ........................................................ Ending capital ...............................................................

$50,000 59,000 32,000 $77,000

*Quick Study 4-17 Sam Hascal, Capital for the December 31, 2023, balance sheet: Beginning capital .......................................... Less: Loss ($74,000 – $115,000) .................. Less: Withdrawals ........................................ Ending capital ...............................................

$165,000 41,000 32,000 $ 92,000

EXERCISES Exercise 4-1 (20 minutes) 2023 Apr. 30

Acct.

Closing entries: Plumbing Revenue ............................................... Income Summary ............................................ To close revenue to the income summary.

41,050 41,050

Income Summary ................................................. Depreciation Expense, Trucks ....................... Salaries Expense ............................................ Rent Expense .................................................. Advertising Expense ....................................... To close expense accounts to income summary.

31,800

Income Summary ................................................. Angel Zhang, Capital ...................................... To close income summary to capital.

9,250

Angel Zhang, Capital ........................................... Angel Zhang, Withdrawals ............................. To close withdrawals to capital.

9,400

Zhang Co. Post-Closing Trial Balance April 30, 2023 Account

4,700 17,600 2,800 6,700

9,250

9,400

Debit

Credit

4-369

Last revised: September 2021.

No. 101 106 153 154 193 201 209 233 301

Cash Accounts receivable .................................................. Trucks ......................................................................... Accumulated depreciation, trucks............................ Franchise.................................................................... Accounts payable ...................................................... Salaries payable......................................................... Unearned revenue ..................................................... Angel Zhang, capital .................................................. Totals ..........................................................................

*Calculated as: 28,100 + 9,250 – 9,400 = 27,950

$ 3,400 8,300 25,000 $ 8,050 13,000

$49,700

9,400 3,000 1,300 27,950* $49,700

Angel Zhang, Capital 28,100 (Adj. Bal, Apr. 30) 9,400 9,250 (Profit) (Withdrawals) 27,950 (Post-closing Bal., Apr. 30)

4-370

Last revised: September 2021.

Exercise 4-2 (20 minutes) 2023 Closing entries: January 31 Subscription Revenues ......................................... Interest Income ...................................................... Income Summary .............................................. To close revenues to the income summary.

71,400 490 71,890

31 Income Summary ................................................... Depreciation Expense, Equipment .................. Rent Expense .................................................... Salaries Expense............................................... To close expense accounts to income summary.

81,000

31 Trish Norris, Capital ............................................... Income Summary .............................................. To close income summary to capital.

9,110

31 Trish Norris, Capital ............................................... Trish Norris, Withdrawals ................................. To close withdrawals to capital.

19,800

1,700 17,900 61,400

9,110

19,800

4-371

Last revised: September 2021.

Exercise 4-3 (30 minutes) Part 1

Title

Debit

Credit

Cash ............................................................................................. $ 40,000 Supplies........................................................................................ 4,000 Prepaid insurance ......................................................................... 6,500 Equipment .................................................................................... 46,000 Accumulated depreciation, equipment ..........................................

$ 13,000

Unearned revenue ........................................................................

4,000

Nick Stilz, capital ..........................................................................

110,100

Nick Stilz, withdrawals .................................................................. 43,000 Ticket revenue ..............................................................................

131,000

Depreciation expense, equipment ................................................ 4,000 Insurance expense ....................................................................... 3,000 Rent expense ............................................................................... 61,000 Salaries expense .......................................................................... 42,000 Supplies expense ......................................................................... 8,600 Totals ........................................................................................... $258,100

$258,100

No, Nick Stilz‘s capital account of $110,100 will not show up on the balance sheet as at December 31, 2023. The capital amount reported on the adjusted trial balance represents the beginning balance of Nick Stilz‘s capital account. After the closing entries are prepared and posted, the ending capital balance will be reported on the balance sheet as at December 31, 2023.

4-372

Last revised: September 2021.

Exercise 4-3 (Continued) Part 2 2023 Dec. 31

Closing entries: Ticket Revenue ...................................................... Income Summary ........................................... To close the revenue account to the income summary.

131,000 131,000

Income Summary ................................................... Depreciation Expense, Equipment .................. Insurance Expense ........................................ Rent Expense ................................................. Salaries Expense ........................................... Supplies Expense .......................................... To close the expense accounts to the income summary.

118,600

Income Summary.................................................... Nick Stilz, Capital ........................................... To close the income summary to capital.

12,400

Nick Stilz, Capital ................................................... Nick Stilz, Withdrawals ................................... To close withdrawals to capital.

43,000

4,000 3,000 61,000 42,000 8,600

12,400

43,000

Part 3 Dec 31

Nick Stilz, Capital 43,000 110,100 12,400 79,500

Jan 1 Dec 31 Bal.

4-373

Last revised: September 2021.

Exercise 4-4 (30 minutes) 1.

Dec. 31Services Revenue ...................................................... 403 Income Summary ...................................................... 901 Close revenue account.

44,000 44,000

31Income Summary ....................................................... 901 Depreciation Expense—Equipment ........................... 612 Salaries Expense ...................................................... 622 Insurance Expense ................................................... 637 Rent Expense ........................................................... 640 Supplies Expense ..................................................... 653 Close expense accounts.

33,100 3,000 22,000 2,500 3,400 2,200

31Income Summary ....................................................... 901 A. Cruz, Capital ......................................................... 301 Close income summary.

10,900 10,900

31A. Cruz, Capital .......................................................... 301 A. Cruz, Withdrawals................................................. 302 Close withdrawals account.

7,000 7,000

2. CRUZ COMPANY Post-Closing Trial Balance December 31 Debit Cash

Credit

....................................................... $19,000 ..

Supplies .................................................................. 13,000 Prepaid insurance ................................................... 3,000 Equipment ............................................................... 24,000 Accumulated depreciation–Equipment .................... ...

$ 7,500

A. Cruz, Capital* ......................................................

51,500

Totals ....................................................... $59,000 .. $59,000 *$47,600 + $10,900 - $7,000 = $51,500

4-374

Last revised: September 2021.

WILSON TRUCKING COMPANY Income Statement For Year Ended December 31 Trucking revenue .......................................................... .......... $130,000 Expenses Depreciation expense—Trucks................................ $23,500 Salaries expense ..................................................... 61,000 Office supplies expense .......................................... ..8,000 Repairs expense ..................................................... 12,000 Total expenses ........................................................ .......... 104,500 Net income .................................................................... .......... $ 25,500

WILSON TRUCKING COMPANY Statement of Owner‘s Equity For Year Ended December 31 K. Wilson, Capital, December 31 prior year .................. $170,000 Add:

Net income .......................................................

25,500

Less:

195,500 Withdrawals ..................................................... (20,000)

K. Wilson, Capital, December 31 current year............... $175,500

4-375

Last revised: September 2021.

Exercise 4-6 (20 minutes)

WILSON TRUCKING COMPANY Balance Sheet December 31 Assets Current assets Cash .................................................................... $ 8,000 Accounts receivable .................................................... 17,500 Office supplies ............................................................ 3,000 Total current assets..................................................... 28,500 Plant assets Trucks ..................................................... $172,000 Accumulated depreciation-Trucks ............................... (36,000) 136,000 Land .................................................................... 85,000 Total plant assets ........................................................ 221,000 Total assets................................................................... $249,500 Liabilities Current liabilities Accounts payable ........................................................ Interest payable........................................................... Total current liabilities ................................................. Long-term notes payable............................................... Total liabilities................................................................

$ 12,000 4,000 16,000 58,000 74,000

Equity * K. Wilson, Capital ......................................................... Total liabilities and equity ..............................................

175,500 $249,500

K. Wilson Capital is computed as follows.

Beginning balance .................................................................................... $170,000 Plus: Net income ($130,000 - $23,500 - $61,000 - $8,000 - $12,000) ...... 25,500 Less: Withdrawals (20,000) Ending balance $175,500

Exercise 4-7 (10 minutes)

4-376

Last revised: September 2021.

Date

Dec 31

General Journal Trucking revenue

Debit 130,000

Income summary

Dec 31

Income summary

130,000

104,500

Depreciation expense— Trucks

Dec 31

23,500

Salaries expense

61,000

Office supplies expense

8,000

Interest expense

12,000

Income summary

25,500

K. Wilson, Capital

Dec 31

Credit

K. Wilson, Capital K. Wilson, Withdrawal

25,500

20,000 20,000

4-377

Last revised: September 2021.

Exercise 4-8 (35 minutes) Closing entries: (1)

(2)

(3)

(4)

2023 Dec. 31

Services Revenue .................................................. Income Summary ........................................... To close the revenue account to the Income Summary.

103,000

Income Summary ............................................................ 45,800 Rent Expense ........................................................... Salaries Expense ...................................................... Insurance Expense................................................... Depreciation Expense .............................................. To close the expense accounts to the income summary.

103,000

9,100 27,000 1,500 8,200

Income Summary ............................................................ 57,200 Marcy Jones, Capital ............................................... To close the income summary to capital.

57,200

Marcy Jones, Capital ...................................................... 38,000 Marcy Jones, Withdrawals ...................................... To close withdrawals to capital.

38,000

4-378

Last revised: September 2021.

Exercise 4-8 (concluded) Posted accounts: Dec. 31

Assets 142,000 Liabilities 51,000

Dec. 31 Balance

Rent Expense 9,100 9,100 (2) 0

Dec. 31 Balance

Salaries Expense 27,000 27,000 (2) 0

Dec. 31 Balance

Insurance Expense 1,500 1,500 (2) 0

Dec. 31

Marcy Jones, Capital 38,000 71,800 Dec. 31 57,200 (3) 91,000 Balance

(4)

Dec. 31 Balance

Marcy Jones, Withdrawals 38,000 38,000 (4) 0

(2) (3)

Income Summary 45,800 103,000 (1) 57,200 0 Balance

(1)

Services Revenue 103,000 103,000 Dec. 31 0 Balance

Depreciation Expense Dec. 31 8,200 8,200 (2) Balance 0

Exercise 4-9 (10 minutes) Jones Consulting Post-Closing Trial Balance December 31, 2023 Account Assets ........................................................................ Liabilities ................................................................... Marcy Jones, Capital................................................. Totals .........................................................................

Debit $142,000

$142,000

Credit $ 51,000 91,000 $142,000

4-379

Last revised: September 2021.

Exercise 4-10 (12 minutes) 1.

Jozef Jones, Withdrawals; Interest income, and Other Expenses have not been closed.

2. 2023 June 30

Jozef Jones, Capital .......................................... Interest income.................................................. Jozef Jones, Withdrawals............................ Other Expenses ............................................ To close interest income, withdrawals and other expenses directly to capital.

$216,200 – $58,900 = $157,300

58,900 1,150 59,900 150

Jozef Jones, Capital 216,200 58,900 157,300 (Balance)

4-380

Last revised: September 2021.

Exercise 4-11 (15 minutes) Part A Account Title

X X

X X X

X X

Accounts payable ................................................................. Accounts receivable ............................................................. Accumulated depreciation, equipment .................................. Accumulated depreciation, truck ........................................... Cash ..................................................................................... Depreciation expense ........................................................... Equipment ............................................................................ Franchise.............................................................................. Gas and oil expense ............................................................. Intangible asset .................................................................... Interest expense ................................................................... Interest payable .................................................................... Land not currently used in business operations .................... Long-term notes payable ...................................................... Notes payable, due February 1, 2024 ................................... Notes receivable ...................................................................

Adjusted Trial Balance Credit Debit $ 31,000 $ 48,000 9,000 21,000 14,400 3,800 19,000 21,000 7,500 7,000 450 750 148,000 35,000 7,000 6,000

Prepaid rent .......................................................................... Rent expense ....................................................................... Repair revenue ..................................................................... Repair supplies ..................................................................... Repair supplies expense ...................................................... Truck......................................................................................... Unearned repair revenue ...................................................... Vic Sopik, capital .................................................................. Vic Sopik, withdrawals ..........................................................

14,000 51,000

Totals ...................................................................................

$457,250

266,000 13,100 29,000 26,000 12,600 74,900 49,000

$457,250

$74,900 - $3,800 - $7,500 - $450 - $51,000 + $266,000 - $29,000 - $49,000 = $200,150.

Analysis component: Depreciation expense, gas and oil expense, interest expense, rent expense, repair revenue, repair supplies expense, and withdrawals are all temporary accounts and do not appear on the post-closing trial balance because their balances were transferred to capital during the closing process leaving each with a zero post-closing balance. The adjusted balance of $74,900 in capital is the balance prior to closing all temporary accounts into it. A capital account balance does appear on the post-closing trial balance but it is the post-closing balance of $200,150 as determined in part (b) above. Therefore, the adjusted capital balance of $74,900 will not appear on the post-closing trial balance Note to instructor: Reinforce to the student that the question asks which account balances from the adjusted trial balance will not appear on the post-closing trial balance. Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw-Hill Education Ltd.

4-381

Last revised: September 2021.

Exercise 4-12 (15 minutes) a. b. c. d. e. f. g. h. i.

Current assets = $48,000 + $14,400 + $2,000* + $14,000 + $13,100 = $91,500. Property, plant, and equipment = $19,000 + $26,000 - $9,000 - $21,000 = $15,000. Intangible assets = $21,000 + $7,000 = $28,000. Non-current investments = $4,000* + $148,000 = $152,000. Total assets = $91,500 + $15,000 + $28,000 + $152,000 = $286,500. Current liabilities = $31,000 + $750 + $5,000** + $7,000 + $12,600 = $56,350. Non-current liabilities = $30,000**. Total liabilities = $56,350 + $30,000 = $86,350. Total liabilities and equity = $86,350 + $200,150 = $286,500.

*$2,000 of the $6,000 notes receivable is current while the $4,000 balance is a noncurrent investment. **$5,000 of the $35,000 long-term notes payable is current while the $30,000 balance is a non-current liability.

4-382

Last revised: September 2021.

Exercise 4-13 (20 minutes) Sunshine Sushi Balance Sheet December 31, 2023 Assets Current assets: Cash ................................................................

115,000

Merchandise inventory .....................................

34,250

Notes receivable, current .................................

41,500

Total current assets .........................................

$ 190,750

Non-current investments: Notes receivable, non-current ..........................

$ 74,000

Property, plant and equipment: Equipment ........................................................ $373,875 Less: Accumulated depreciation...................

99,700

$274,175

Furniture .......................................................... $102,000 Less: Accumulated depreciation...................

38,250

63,750

Total property, plant and equipment .................

$ 337,925

Total assets .............................................................

$602,675

Liabilities Current liabilities: Accounts payable ............................................. $ 41,625 Wages payable ................................................ $ 30,250 Bank loan, current ............................................ $ 60,550 Total current liabilities ......................................

$ 132,425

Non-current liabilities: Bank loan, non-current ..................................... Total liabilities ..................................................

440,450 $572,875

Equity Natsuki Miyakawa, capital ...................................

29,800*

Total liabilities and equity .........................................

$602,675

*$28,500+($50,750-$38,150)-11,300 = $29,800 Exercise 4-14 (30 minutes)

4-383

Last revised: September 2021.

DOVER PACIFIC TOURS Balance Sheet November 30, 2023 Assets Current assets: Cash .................................................................................... Accounts receivable .......................................................... Prepaid insurance .............................................................. Prepaid rent ........................................................................ Supplies .............................................................................. Current portion of notes receivable ................................. Total current assets ........................................................... Non-current investments: Notes receivable, less $7,500 current portion ................ Property, plant and equipment: Vehicles .............................................................................. Less: Accumulated depreciation .................................. Office furniture ................................................................... Less: Accumulated depreciation .................................. Total property, plant and equipment ................................ Intangible assets: Copyright ............................................................................ Total assets ............................................................................... Liabilities Current liabilities: Accounts payable .......................................................... Salaries payable ............................................................ Unearned touring revenue ............................................ Notes payable ................................................................ Current portion of long-term notes payable ................ Total current liabilities ................................................... Non-current liabilities: Long-term notes payable, less $10,000 current portion ............................................................................. Total liabilities ....................................................................

$ 7,200 19,000 4,600 9,000 2,250 7,500 $ 49,550 13,000 $64,000 15,800 $ 6,500 4,100

$48,200 2,400 50,600 9,000 $122,150

$ 41,000 12,100 23,000 14,000 10,000 $100,100 11,600

Equity Pat Dover, capital* ............................................................. Total liabilities and equity ........................................................

$111,700

10,450 $122,150

*Calculated as Total assets of $122,150 less Total liabilities of $111,700 = $10,450.

4-384

Last revised: September 2021.

Exercise 4-15 (20 minutes) HANSON TRUCKING COMPANY Balance Sheet December 31, 2023 Assets Current assets: Cash ........................................................................ Accounts receivable .............................................. Office supplies ....................................................... Total current assets ............................................... Property, plant and equipment: Land ........................................................................ Trucks ..................................................................... Less: Accumulated depreciation ...................... Total property, plant and equipment .................... Total assets ................................................................... Liabilities Current liabilities: Accounts payable .................................................. Interest payable ..................................................... Total current liabilities........................................... Long-term notes payable .......................................... Total liabilities ...........................................................

$ 13,000 29,600 3,100 $ 45,700 $275,000 $170,000 46,000

124,000 $399,000 $444,700

$ 31,000 400 $ 31,400 152,000

Equity Stanley Hanson, capital ........................................... Total liabilities and equity ............................................

$183,400

261,300* $444,700

*Calculation:

$206,200 - $19,000 + $168,000 - $22,500 - $58,000 - $6,500 - $6,900 = $261,300

OR Total assets – Total liabilities = $444,700 - $183,400 = $261,300

4-385

Last revised: September 2021.

Exercise 4-16 (60 minutes) 1. Leda Svenson, withdrawals; tutoring revenue; rent expense; depreciation expense; and advertising expense have zero balances because each account was closed at December 31, 2022 resulting in each balance being transferred to capital leaving a zero balance behind. 2. 2023 Jan. 15 Accounts Receivable..................................... Tutoring Revenue .................................. To record revenues earned on account.

8,000 8,000

Feb. 20 Advertising Expense ..................................... Cash ....................................................... To record payment for advertising.

2,000

July 7 Cash ............................................................... Accounts Receivable............................. To record collection from customers.

9,000

Dec. 10 Leda Svenson, Withdrawals ......................... Cash ....................................................... To record cash withdrawals by owner.

3,000

2,000

9,000

3,000

4-386

Last revised: September 2021.

Exercise 4-16 (continued) 2.

Dec 31/22 Jul 07/23 Unadj Bal

Dec 31/22

Cash 2,000 2,000 9,000 3,000 6,000

Feb 20/23 Dec 10/23

Office Equip. 20,000

Accum. Deprec., Office Equipment 10,000 Dec 31/22

Leda Svenson, Capital 17,100

Dec 31/22

Rent Expense -0-

Accounts Receivable Dec 31/22 5,000 9,000 Jul 07/23 Jan. 15/23 8,000 Unadj Bal 4,000

Dec 31/22

Leda Svenson, Withdrawals Dec 31/22 -0Dec 10/23 3,000 Unadj Bal 3,000 Depreciation Expense Dec 31/22 -0-

Dec 31/22

Prepaid Rent 3,000

Unearned Revenue 2,900 Dec 31/22 Tutoring Revenue -0Dec 31/22 8,000 Jan. 15/23 8,000 Unadj Bal Advertising Expense Dec 31/22 -0Feb 20/23 2,000 Unadj Bal 2,000

4-387

Last revised: September 2021.

Exercise 4-16 (continued) 3. Svenson‘s Tutoring Clinic Unadjusted Trial Balance December 31, 2023 Account Cash ..................................................................................... Accounts receivable .............................................................. Prepaid rent .......................................................................... Office equipment ................................................................... Accumulated depreciation, office equipment ............................ Unearned revenue ................................................................ Leda Svenson, capital ........................................................... Leda Svenson, withdrawals ................................................... Tutoring revenue ................................................................... Advertising expense .............................................................. Totals .................................................................................... 4. Journalize adjustments: 2023 Dec. 31 Depreciation Expense ..................................... Accum. Deprec., Office Equipment ........ To record annual depreciation. 31

Debit $ 6,000 4,000 3,000 20,000

Credit

$10,000 2,900 17,100 3,000 8,000 2,000 $38,000

$38,000

2,000 2,000

Unearned Revenue .......................................... Tutoring Revenue .................................... To record earned revenue.

2,400

Rent Expense ................................................... Prepaid Rent............................................. To record expired prepaid rent.

3,000

2,400

3,000

4-388

Last revised: September 2021.

Exercise 4-16 (continued) 4. Post adjustments: Cash Dec 31/22 2,000 2,000 Feb 20/23 Jul 07/23 9,000 3,000 Dec 10/23 Unadj Bal 6,000 Office Equip. Dec 31/22 20,000

Accum. Deprec., Office Equipment 10,000 Dec 31/22 2,000 Dec 31/23 12,000 Adj Bal

Leda Svenson, Capital 17,100 Dec 31/22

Rent Expense Dec 31/22 -0Dec 31/23 3,000 Adj Bal 3,000

Accounts Receivable Dec 31/22 5,000 9,000 Jul 07/23 Jan. 15/23 8,000 Unadj Bal 4,000

Leda Svenson, Withdrawals Dec 31/22 -0Dec 10/23 3,000 Unadj Bal 3,000

Depreciation Expense Dec 31/22 -0Dec 31/23 2,000 Adj Bal 2,000

Prepaid Rent Dec 31/22 3,000 3,000 Adj Bal

Dec 31/23

-0-

Unearned Revenue Dec 31/23 2,400 2,900 Dec 31/22 500

Adj Bal

Tutoring Revenue -0- Dec 31/22 8,000 Jan 15/23 8,000 Unadj Bal 2,400 Dec 31/23 10,400 Adj Bal Advertising Expense Dec 31/22 -0Feb 20/23 2,000 Unadj Bal 2,000

4-389

Last revised: September 2021.

Exercise 4–16 (continued) 5. Svenson‘s Tutoring Clinic Adjusted Trial Balance December 31, 2023 Account Cash ............................................................................ Accounts receivable .................................................... Office equipment ......................................................... Accumulated depreciation, office equipment.................. Unearned revenue ....................................................... Leda Svenson, capital ................................................. Leda Svenson, withdrawals ......................................... Tutoring revenue ......................................................... Rent expense .............................................................. Depreciation expense .................................................. Advertising expense .................................................... Totals ..........................................................................

Debit $ 6,000 4,000 20,000

Credit

$12,000 500 17,100 3,000 10,400 3,000 2,000 2,000 $40,000

$40,000

4-390

Last revised: September 2021.

Exercise 4–16 (continued) 6. Svenson‘s Tutoring Clinic Income Statement For Year Ended December 31, 2023 Revenue: Tutoring revenue .........................................................................

$10,400

Operating expenses: Rent expense ............................................................................... Advertising expense .................................................................... Depreciation expense.................................................................. Total operating expenses ....................................................... Profit .................................................................................................. Svenson‘s Tutoring Clinic Statement of Changes in Equity For Year Ended December 31, 2023 Leda Svenson, capital, January 1.................................................... Investments by owner ...................................................................... Profit .................................................................................................. Total .............................................................................................. Less: Withdrawals by owner .......................................................... Leda Svenson, capital, December 31 ..............................................

$3,000 2,000 2,000 7,000 $ 3,400

$17,100 $

0 3,400

3,400 $20,500 3,000 $17,500

Svenson‘s Tutoring Clinic Balance Sheet December 31, 2023 Assets Current assets: Cash ........................................................................................... Accounts receivable .................................................................. Total current assets .................................................................. Property, plant and equipment: Office equipment ....................................................................... Less: Accumulated depreciation .......................................... Total assets ....................................................................................... Liabilities Current liabilities: Unearned revenue ..................................................................... Equity Leda Svenson, capital .................................................................. Total liabilities and equity ................................................................ Exercise 4–16 (continued)

$ 6,000 4,000 $ 10,000 $20,000 12,000

8,000 $18,000

500

17,500 $18,000

4-391

Last revised: September 2021.

(1)

(2)

(3)

(4)

Dec. 31 Tutoring Revenue .......................................... 10,400 Income Summary ................................... To close the revenue account to the income summary. 31 Income Summary ...........................................7,000 Rent Expense ......................................... Depreciation Expense ........................... Advertising Expense ............................. To close the expense accounts to the income summary. 31 Income Summary ...........................................3,400 Leda Svenson, Capital........................... To close the income summary to capital. 31 Leda Svenson, Capital...................................3,000 Leda Svenson, Withdrawals ................. To close withdrawals to capital.

10,400

3,000 2,000 2,000

3,400

3,000

4-392

Last revised: September 2021.

Exercise 4–16 (continued) 7. Post the closing entries: Cash Dec 31/22 Jul 07/23 Unadj Bal

2,000 9,000 6,000

Dec 31/22

Office Equip. 20,000

2,000 3,000

Feb 20/23 Dec 10/23

Leda Svenson, Capital (4) 3,000

17,100 Dec 31/22 3,400 (3) 17,500 Postclosing balance

Accounts Receivable Dec 31/22 5,000 9,000 Jul 07/23 Jan. 15/23 8,000 Unadj Bal 4,000

Prepaid Rent Dec 31/22 3,000 3,000 Dec 31/23

Accum. Deprec., Office Equip. 10,000 Dec 31/22 2,000 Dec 31/23 12,000 Adj Bal

Unearned Revenue Dec 31/23 2,400 2,900 Dec 31/22

Leda Svenson, Withdrawals Dec 31/22 -0Dec 10/23 3,000 Unadj Bal 3,000 3,000 (4)

-0-

Dec 31/22 Dec 31/23 Adj Bal

(2) (3)

Rent Expense -03,000 3,000 3,000 (2) -0-

Depreciation Expense Dec 31/22 -0Dec 31/23 2,000 Adj Bal 2,000 2,000 (2) -0-

Adj Bal

-0-

500 Adj Bal Tutoring Revenue -0- Dec 31/22 8,000 Jan 15/23 8,000 Unadj Bal 2,400 Dec 31/23 (1) 10,400

10,400 Adj Bal -0-

Advertising Expense Dec 31/22 -0Feb 20/23 2,000 Unadj Bal 2,000 2,000 (2) -0-

Income Summary 7,000 10,400 (1) 3,400 3,400 Bal. -0-

4-393

Last revised: September 2021.

Exercise 4–16 (concluded) 8. Svenson‘s Tutoring Clinic Post-Closing Trial Balance December 31, 2023 Account Cash .......................................................................... Accounts receivable ................................................... Office equipment........................................................ Accumulated depreciation, office equipment ................ Unearned revenue ..................................................... Leda Svenson, capital ................................................ Totals .........................................................................

Debit $ 6,000 4,000 20,000

$30,000

Credit

$12,000 500 17,500 $30,000

Exercise 4-17 (60 minutes) Part 1 General Journal Date Account Titles and Explanation 2023 May 2 Cash ....................................................................... Laptop .................................................................... Emily Lee, Capital .......................................... To record the owner’s initial investment.

Debit

Credit

5,500 900 6,400

3 Supplies ................................................................. Cash ................................................................ To record purchase of supplies.

600

4 Printer .................................................................... Accounts Payable .......................................... To record purchased of printer on account.

360

5 Prepaid Insurance ................................................. Cash ................................................................ Paid one year’s insurance in advance.

2,400

6 Emily Lee, Withdrawal .......................................... Cash ............................................................... To record owner withdrawal.

200

600

360

2,400

200

8 No entry required. 10 Cash ....................................................................... Unearned Revenue ........................................ Collected cash for future tours.

1,920 1,920

4-394

Last revised: September 2021.

Exercise 4-17 (continued) 15 Cash ....................................................................... Tour Revenue ................................................. Received cash for providing tours.

600

25 Unearned Revenue................................................ Tour Revenue ................................................. Earned revenue from providing tours.

1,000

600

1,000

4-395

Last revised: September 2021.

Exercise 4-17 (continued) Parts 2, 3, 5 Ledger as of May 31 (using the T-account format): May 2 10 15 Bal.

May 4

Cash 5,500 1,920 600 4,820

600 2,400 200

May 3 5 6

Printer 360

May 3 Bal.

Supplies 600 200

May 2

Laptop 900

400

Accum. Dep., Printer 10

Unearned Revenue May 25 1,000 1,920 May 10

May 31

Wages Payable 500 May 31

Prepaid Insurance May 5 2,400 200 Bal. 2,200 Accum. Dep., Laptop 25

May 31

Accounts Payable 360

May 4

Emily Lee, Capital 6,400 May 2 May 31

920

Bal.

500 Bal.

May 31

200

465 6,665

31 Bal.

Emily Lee, Withdrawals May 6 200 200 May 31 Bal. -0-

4-396

Last revised: September 2021.

Exercise 4-17 (continued) Parts 2, 3, 5 Tour Revenue

May 31

1,600

600 1,000 1,600

May 15 25 Bal.

Wages Expense May 31 500 500 May 31 Bal. -0-

Deprec. Expense, Laptop May 31 25 25 Bal.

May 31

-0-

Insurance Expense 200 200 May 31 May 31 Bal. -0-

Deprec. Expense, Printer 10 May 31 Bal.

10 May 31

-0-

Supplies Expense 400 400 May 31 May 31 Bal. -0-

Income Summary 1,135 1,600 May 31 May 31 May 31 465 465 Bal. Bal. -0-

4-397

Last revised: September 2021.

Part 3 Date 2023 May

General Journal Account Titles and Explanation Adjusting entries:

Debit

Credit

31 Depreciation Expense........................................... Accumulated Depreciation, Laptop ............. To record depreciation (900/3 x 1/12 months).

31 Depreciation Expense........................................... Accumulated Depreciation, Printer ............. To record depreciation (360/3 x 1/12 months).

31 Supplies Expense ................................................. Supplies .......................................................... To record the cost of consumed supplies

400

31 Insurance Expense ............................................... Prepaid Insurance .......................................... To record expired insurance ($2,400/12 months).

200

31 Wages Expense..................................................... Wages Payable ............................................... To record accrued wages.

500

400

200

500

Part 4 VERY Income For Month Ended May 31, 2023 Revenues: Tour revenue ................................................................................. Operating expenses: Wages expense ............................................................................. Supplies expense.......................................................................... Insurance expense........................................................................ Depreciation expense, laptop ...................................................... Depreciation expense, printer ...................................................... Total operating expenses ...................................................... Profit .....................................................................................................

VANCOUVER Statement

$1,600 $500 400 200 25 10 1,135 $ 465

4-398

Last revised: September 2021.

Exercise 4-17 (continued) VERY Statement of For Month Ended May 31, 2023

Changes

Emily Lee, capital, May 1 ..................................................................... Investment by owner ........................................................................... Profit ..................................................................................................... Total ................................................................................................ Less: Withdrawals by owner ............................................................. Emily Lee, capital, May 31 ...................................................................

Liabilities Current liabilities Accounts payable .................................................................. Wages payable ...................................................................... Unearned revenue................................................................. Total liabilities ........................................................................ Equity Emily Lee, capital ..................................................................... Total liabilities and equity ...........................................................

$ 6,400 465 $6,865 $200 $6,665

VERY Balance May 31, 2023 Assets Current assets: Cash ....................................................................................... Supplies ................................................................................. Prepaid insurance ................................................................. Total current assets .............................................................. Property, plant and equipment: Laptop.................................................................................... Less: Accumulated depreciation ..................................... Printer .................................................................................... Less: Accumulated depreciation ..................................... Total property, plant and equipment .................................... Total assets ..................................................................................

VANCOUVER Equity

VANCOUVER Sheet

$4,820 200 2,200 $ 7,220 $900 25 $ 360 10

$875 350 1,225 $8,445

360 500 920 $ 1,780

6,665 $8,445

4-399

Last revised: September 2021.

Exercise 4-17 (concluded) Part 5

Date 2023 May 31

General Journal Account Titles and Explanation Closing entries: Tour Revenue .............................................................. Income Summary ................................................. To close the revenue account to the Income Summary account.

Debit

Credit

1,600 1,600

Income Summary ........................................................ Wages Expense ................................................... Supplies Expense ................................................ Insurance Expense ............................................. Depreciation Expense, Printer ............................ Depreciation Expense, Laptop ........................... To close the expenses to the income summary.

1,135

Income Summary ........................................................ Emily Lee, Capital ............................................... To close the Income Summary to capital.

465

Emily Lee, Capital ....................................................... Emily Lee, Withdrawals ....................................... To close withdrawals to capital.

200

500 400 200 10 25

465

200

Part 6 VERY Post-Closing May 31, 2023

VANCOUVER Balance

Trial

Account Cash ....................................................................................... Supplies ................................................................................. Prepaid insurance ................................................................. Laptop .................................................................................... Accumulated depreciation, laptop ....................................... Printer .................................................................................... Accumulated depreciation, printer ...................................... Accounts payable ................................................................. Wages payable ...................................................................... Unearned revenue ................................................................. Emily Lee, capital .................................................................. Totals ..................................................................................... Exercise 4-18 (15 minutes)

$ 4,820 200 2,200 900 $

360

$8,480

10 360 500 920 6,665 $8,480

4-400

Last revised: September 2021.

Case 1 Case 2 Case 3 Case 4

Current Current Current Assets Liabilities Ratio $ 78,000 / $31,000 = . 104,000 / 75,000 = ... 44,000 / 48,000 = ... 84,500 / 80,600 =

F/U 2.52 1.39 0.92 1.05

F F U U

Exercise 4-19 (15 minutes) (Numbers in thousands) 2024 Current assets: Cash ...................................... $6,501 Accounts Receivable ................................ 4,368 Notes Receivable (current) ....................... 220 Inventories ................................................. 123 Prepaid expenses and other current assets Total .................................... $11,402

Current Ratio Quick Ratio Comments

2023

190

$3,880 4,616 265 137 695 $9,593

2024 2023 =$11,402 / $11,061 =$9,593 / $10,649 =1.03 =0.90 =($6,501 + $4,368) / $11,061 =($3,880 + $4,616) / $10,649 =0.98 =0.80 In 2023, Organic Catering‘s current ratio was low, indicating that the company did not have sufficient liquid assets to cover their current obligations. In 2024, the current ratio increased slightly to above 1. This increase is favourable as it indicates that for every dollar of current liabilities, Organic Catering has slightly more current assets to pay for these current liabilities. Organic Catering‘s quick ratio is below one for 2023 and 2024, which is unfavourable. The quick ratio did increase from 2023 to 2024, from 0.80 to 0.98 respectively. This increase is favourable as it indicates that Organic Catering has more liquid assets to cover its current laibilties. The increase in current ratio and quick ratio is due primarily to a large increase in cash. Overall, Organic Catering‘s liquidity is satisfactory. However, the company may face challenges in paying their current obligations in the future.

4-401

Last revised: September 2021.

Exercise 4-20 (5 minutes) 2024 2023 =$31,376 / $45,964 =$31,980 / $56,700 =0.68 =0.56 Organic Catering‘s debt to equity ratio increased slightly from 2023 to 2024. An increase in debt to equity is generally unfavourable as it indicates that the company has more debt, which is associated with more risk. However, overall the ratio is significantly below 1, which means that Organic Catering finances its operations more with equity than debt. Overall, the ratio indicates that Organic Catering has a healthy balance of debt and equity.

Debt to equity ratio Comments

Exercise 4-21* (15 minutes) 1. 2. 3. 4.

C B D B

5. 6. 7. 8.

C A A D

9. 10. 11. 12.

C C D D

13. 14. 15. 16.

C A A C

Exercise 4-22* (20 minutes) Balance Sheet Adjusted & Statement of Trial Income Changes in Balance Statement Equity No. Title Debit Credit Debit Credit Debit Credit 101 Cash ....................$ 21,000 $21,000 106 Accounts receivable............. 8,200 8,200 153 Trucks ...................... 48,000 48,000 154 Accum. depreciation, trucks $ 31,250 $31,250 193 Franchise .............................. 6,500 6,500 201 Accounts payable ................. 13,000 13,000 209 Salaries payable ................... 14,600 14,600 233 Unearned revenue ................ 2,450 2,450 301 Bo Webber, capital ............... 37,750 37,750 302 Bo Webber, withdrawals….. 7,200 7,200 401 Plumbing revenue ................ 31,600 $31,600 611 Depreciation expense, trucks 12,100 $12,100 622 Salaries expense .................. 17,800 17,800 640 Rent expense ........................ 6,000 6,000 677 Misc. expenses ..................... 3,850 3,850 Totals ................................. $130,650 $130,650 $39,750$31,600$90,900$99,050 Loss ................................. 8,150 8,150 Totals ................................. $39,750$39,750$99,050 $99,050

4-402

Last revised: September 2021.

Exercise 4-23 (25 minutes) Parts 1, 2, and 3 Musical Sensations Work Sheet For Year Ended December 31, 2023

Unadjusted Trial Balance Debit Credit 7,500 14,200 790 125,000

Adjustments Debit Credit

Account Cash ................................. Accounts receivable ....... Office supplies ................ d) 650 Musical equipment.......... Accum. deprec. musical equip. ........... 21,600 b) 21,600 Accounts payable ........... 4,200 Unearned performance revenue ............................ 12,400 a) 3,175 Jim Daley, capital ............ 154,300 Jim Daley, withdrawals... 52,000 Performance revenue ..... 138,000 a) 3,175 Salaries expense ............. 86,000 c) 6,100 Travelling expense .......... 45,010 Totals............................ 330,500 330,500 Depreciation expense, musical equip. ................. b) 21,600 Salaries payable .............. c) 6,100 Office supplies expense . d) 650 Totals............................ 31,525 31,525 Loss ................................. Totals............................

Adjusted Trial Balance Debit Credit 7,500 14,200 140 125,000

Income Statement Debit Credit

Balance Sheet & Statement of Changes in Equity Debit Credit 7,500 14,200 140 125,000

43,200 4,200

9,225 154,300

52,000

52,000 141,175

92,100 45,010

141,175 92,100 45,010

21,600

21,600 6,100

650 358,200 358,200

6,100 650 159,360 141,175 18,185 159,360 159,360

198,840 217,025 18,185 217,025 217,025

4-403

Last revised: September 2021.

Exercise 4-23 (concluded) Part 4 $154,300 – $52,000 – $18,185 = $84,115 or

(With.) (Loss)

Jim Daley, Capital 154,300 52,000 18,185 84,115

(Beg. bal.)

(End. bal.)

Exercise 4-24 (20 minutes) 1. (a) Income = $36,800 2. (a) Mar. 31 Income Summary ............................................................ Capital ......................................................................... To close the income summary account to capital.

3. (a) $63,000 + $36,800 – $17,000 = $82,800 OR

(With.)

Capital 63,000 17,000 36,800 82,800

36,800 36,800

(Beg. bal.) (Profit) (End. bal.)

1. (b) Loss = $60,000 2. (b) Mar. 31

Capital .............................................................................. Income Summary ....................................................... To close the income summary account to capital.

60,000

Capital 114,000 (Beg. bal.)

3. (b) $114,000 – $60,000 = $54,000 OR

60,000

(Loss)

60,000 54,000 (End. bal.)

4-404

Last revised: September 2021.

Exercise 4-25 (30 minutes) Debit Rent revenue .......................................................................... Salaries expense .................................................................... Insurance expense ................................................................. Dock rental expense .............................................................. Boat supplies expense .......................................................... Depreciation expense, boats ................................................ Totals ....................................................................................... Profit ................................................................................ Totals ......................................................................................

35,000 4,100 11,700 5,920 21,200 77,920 19,080 97,000

Closing entries: 2023 Dec. 31 Rent Revenue ......................................................................... 97,000 Income Summary ............................................................ To close the revenue account.

Credit 97,000

97,000 97,000

97,000

31 Income Summary ................................................................... 77,920 Salaries Expense ............................................................. Insurance Expense.......................................................... Dock Rental Expense ...................................................... Boat Supplies Expense ................................................... Depreciation Expense, Boats ......................................... To close the expense accounts.

35,000 4,100 11,700 5,920 21,200

31 Income Summary ................................................................... 19,080 Carl Winston, Capital ...................................................... To close Income Summary.

19,080

31 Carl Winston, Capital ............................................................. 17,700 Carl Winston, Withdrawals ............................................. To close the withdrawals account.

17,700

4-405

Last revised: September 2021.

Part 1 TYBALT CONSTRUCTION Income Statement For Year Ended December 31 Revenues Services revenue .............................................................. Rent revenue .................................................................... Interest revenue ................................................................ Total revenues .................................................................. Expenses Depreciation expense—Building ....................................... Depreciation expense—Equipment ................................... Wages expense ................................................................ Interest expense ............................................................... Insurance expense............................................................ Rent expense .................................................................... Supplies expense.............................................................. Property taxes expense .................................................... Total expenses ................................................................. Net income .................................................................... $

$97,000 14,000 4,100 $115,100 11,000 6,000 52,900 5,100 10,000 13,400 7,400 5,000 110,800 4,300

TYBALT CONSTRUCTION Statement of Owner's Equity For Year Ended December 31 O. Tybalt, Capital, December 31 previous year ................... Add: Investments by owner ............................................ Net income............................................................. ....................................................... 130,700 Less: Withdrawals by owner ............................................ O. Tybalt, Capital, December 31 current year .....................

$121,400 $5,000 4,300

9,300 (13,000) $117,700

4-406

Last revised: September 2021.

TYBALT CONSTRUCTION Balance Sheet December 31 Assets Current assets Cash ................................................................................. $ 5,000 Supplies ............................................................................ 31,100 Prepaid insurance ............................................................. 7,000 Total current assets .......................................................... .. $ 43,100 Plant assets Equipment......................................................................... 40,000 Accumulated depreciation—Equipment ............................ (20,000)20,000 Building ............................................................................. 150,000 Accumulated depreciation—Building ................................. (50,000)100,000 Land.................................................................................. .. 55,000 Total plant assets .............................................................. .. 175,000 Total assets ........................................................................ .. $218,100 Liabilities Current liabilities Accounts payable.............................................................. $ 16,500 Interest payable ................................................................ 2,500 Rent payable ..................................................................... 3,500 Wages payable ................................................................. 2,500 Property taxes payable ..................................................... 900 Unearned revenue ............................................................ 14,500 Total current liabilities ....................................................... .. $ 40,400 Long-term liabilities Long-term notes payable .................................................. .. 60,000 Total liabilities ..................................................................... .. 100,400 Equity O. Tybalt, Capital ............................................................... .. 117,700 Total liabilities and equity .................................................... .. $218,100

4-407

Last revised: September 2021.

Part 2 Closing entries (all dated December 31) Instructor note: Entries are shown without an account reference column because no posting is required. (1)Services Revenue.............................................................. 97,000 Rent Revenue ........................................................................ 14,000 Interest Revenue.................................................................... 4,100 Income Summary ...................................................... 115,100 Close revenue accounts. (2)Income Summary .............................................................. 110,800 Depreciation Expense—Building ............................... 11,000 Depreciation Expense—Equipment ........................... 6,000 Wages Expense ........................................................ 52,900 Interest Expense ....................................................... 5,100 Insurance Expense ................................................... 10,000 Rent Expense ........................................................... 13,400 Supplies Expense ..................................................... 7,400 Property Taxes Expense ...........................................

5,000

Close expense accounts. (3)Income Summary .............................................................. 4,300 O. Tybalt, Capital ...................................................... Close income summary account.

4,300

(4)O. Tybalt, Capital .............................................................. 13,000 O. Tybalt, Withdrawals .............................................. 13,000 Close the withdrawals account.

4-408

Last revised: September 2021.

Part 1 2023 Dec. 31

Closing entries: Repair Revenue ........................................................... Income Summary ................................................... To close revenue to the income summary.

157,630 157,630

Income Summary ........................................................ Depreciation Expense, Equipment ....................... Wages Expense ..................................................... Insurance Expense ................................................ Rent Expense ......................................................... Office Supplies Expense ....................................... Utilities Expense .................................................... To close expense accounts to income summary.

174,990

Mike Yang, Capital ...................................................... Income Summary ................................................... To close income summary to capital.

17,360

Mike Yang, Capital ...................................................... Mike Yang, Withdrawals ........................................ To close withdrawals to capital.

36,000

8,500 104,500 1,900 52,350 4,800 2,940

17,360

36,000

Part 2 MY Autobody Post-Closing Trial Balance December 31, 2023 Acct. No. Account 101 Cash .............................................................. 124 Shop supplies .............................................. 128 Prepaid insurance ....................................... 167 Equipment .................................................... 168 Accumulated depreciation, equipment ...... 201 Accounts payable ........................................ 210 Wages payable ............................................. 301 Mike Yang, capital ....................................... Totals ............................................................

Debit $ 28,000 1,800 4,200 88,000

$122,000

Credit

$ 7,500 19,000 8,860 86,640 $122,000

4-409

Last revised: September 2021.

Problem 4-3A (30 minutes) MY AUTOBODY Income Statement For Year Ended December 31, 2023 Revenue: Repair revenue Operating expenses: Wages expense Rent expense Depreciation expense, equipment Office supplies expense Utilities expense Insurance expense Total operating expenses................................... Loss ............................................................................

$157,630 $104,500 52,350 8,500 4,800 2,940 1,900 174,990 $ 17,360

MY AUTOBODY Statement of Changes in Equity For Year Ended December 31, 2023 Mike Yang, capital, January 1 Less: Loss Withdrawals Mike Yang, capital, December 31

$140,000 17,360 36,000 $ 86,640

4-410

Last revised: September 2021.

MY AUTOBODY Balance Sheet December 31, 2023 Assets Current assets: Cash ........................................................................... Shop supplies............................................................ Prepaid insurance ..................................................... Total current assets .................................................. Property, plant and equipment: Equipment ................................................................. Less: Accumulated depreciation .......................... Total assets ..................................................................... Liabilities Current liabilities: Accounts payable ...................................................... Wages payable .......................................................... Total current liabilities .............................................. Equity Mike Yang, capital ....................................................... Total liabilities and equity ..............................................

$28,000 1,800 4,200 $ 34,000 $88,000 7,500

80,500 $114,500

$19,000 8,860 $ 27,860

86,640 $114,500

Analysis component: As a creditor, I would review the current assets on the balance sheet to determine MY Autobody‘s ability to pay current obligations in 2024. At December 31, 2023 MY Autobody has $34,000 in current assets of which $28,000 is cash and accounts payable total $19,000. Therefore, as a creditor, although MY Autobody experienced a loss, its $34,000 of current assets appear to be sufficient to meet its current obligations of $27,860.

4-411

Last revised: September 2021.

Problem 4-4A (25 minutes) 2023

Closing entries:

Dec. 31 Professional Revenue .................................................. Rent Revenue................................................................ Income Summary .................................................... To close the revenue accounts. 31

199,480 22,500 221,980

Income Summary.......................................................... Depreciation Expense, Building ............................ Depreciation Expense, Equipment ........................ Wages Expense ...................................................... Interest Expense ..................................................... Insurance Expense ................................................. Supplies Expense ................................................... Telephone Expense ................................................ Utilities Expense ..................................................... To close the expense accounts.

130,040

Income Summary.......................................................... Amar Lloyd, Capital ................................................ To close the Income Summary account.

91,940

Amar Lloyd, Capital ...................................................... Amar Lloyd, Withdrawals ....................................... To close the withdrawals account.

2,300

19,300 7,300 63,300 540 17,300 12,100 3,700 6,500

91,940

2,300

4-412

Last revised: September 2021.

Problem 4-5A (50 minutes) Part 1 LLOYD CONSTRUCTION Income Statement For Year Ended December 31, 2023 Revenues: Professional revenue Rent revenue Total revenues Operating expenses: Wages expense Depreciation expense, building Insurance expense Supplies expense Interest expense Depreciation expense, equipment Utilities expense Telephone expense Total operating expenses Profit............................................................................

$199,480 22,500 $221,980 $ 63,300 19,300 17,300 12,100 540 7,300 6,500 3,700 130,040 $ 91,940

LLOYD CONSTRUCTION Statement of Changes in Equity For Year Ended December 31, 2023 Amar Lloyd, capital, January 1 Investments by owner Profit Total Less: Withdrawals by owner Amar Lloyd, capital, December 31

$ 17,640 $68,000 91,940 $177,580

159,940 2,300 $175,280

4-413

Last revised: September 2021.

LLOYD CONSTRUCTION Balance Sheet December 31, 2023 Assets Current assets: Cash ........................................................................... Current investments................................................. Supplies ..................................................................... Total current assets .................................................. Non-current investments: Notes receivable ..................................................... Property, plant and equipment: Land .......................................................................... Building..................................................................... Less: Accumulated depreciation ......................... Equipment ................................................................ Less: Accumulated depreciation ......................... Total property, plant and equipment ..................... Intangible assets: Franchise ................................................................ Total assets .................................................................. Liabilities Current liabilities: Accounts payable ...................................................... Interest payable ......................................................... Unearned professional revenue ............................... Current portion of long-term notes payable............ Total current liabilities .............................................. Non-current liabilities: Long-term notes payable (less current portion) ..... Total liabilities .............................................................. Equity Amar Lloyd, capital ...................................................... Total liabilities and equity ..............................................

$ 15,300 20,300 6,900 $ 42,500 38,500 $ 82,500 $253,000 137,500 $ 71,000 34,500

115,500 36,500 234,500 27,500 $343,000

$ 16,300 120 26,300 41,500 $ 84,220 83,500 $167,720

175,280 $343,000

4-414

Last revised: September 2021.

Problem 4-5A (concluded) Analysis component: Liabilities must be separated between those that are due within one year of the balance sheet date (current) and those that are due beyond one year of the balance sheet date (non-current) because decision makers must be able to assess whether the business has sufficient current assets to cover its current obligations. If the $41500 current portion of the $125,000 long-term note was not shown as a current liability on the balance sheet, it would have appeared that Lloyd had sufficient current assets to cover its current liabilities when in fact it does not.

Problem 4-6A (30 minutes) Part 1 General Journal Account Titles and Explanation

Date 2023 Mar 31 Telephone Expense ............................................... Accounts Payable and Accrued Liabilities ... To accrue the March telephone expense.

Debit

Credit

365 365

31 Accounts Receivable............................................. Revenue .......................................................... To record accrued revenues.

4,250

31 Unearned Revenue ................................................ Revenue .......................................................... To record amount of advance payment earned.

1,840

31 Depreciation Expense, Equipment ....................... Accumulated Depreciation, Equipment ........ To record depreciation expense.

1,170

4,250

1,840

1,170

4-415

Last revised: September 2021.

Problem 4-6A (Continued) Part 2 Adventure Elements Adjusted Trial Balance March 31, 2023 Acct. No.

Account

Debit

Credit

101

Cash ........................................................................

$10,750

103

Accounts receivable (6,200+4,250) ..........................

10,450

126

Supplies ...................................................................

475

141

Notes receivable, due January 1, 2026 ....................

10,900

167

Equipment................................................................

23,400

168

Accumulated depreciation, equipment (6,250+1,170) ..........................................................

194

201

Accounts payable and accrued liabilities (4,500+365) .............................................................

4,865

203

Unearned revenues (13,800 – 1,840) ......................

11,960

233

Long-term notes payable .........................................

18,500

300

Becky Brenner, capital .............................................

44,300

301

Becky Brenner, withdrawals .....................................

402

Revenues (74,070+4,250+1,840).............................

606

Depreciation expense, equipment (0+1,170)............

1,170

610

Rent expense ...........................................................

9,800

612

Wages expense .......................................................

37,000

623

Interest expense ......................................................

525

633

Insurance expense...................................................

2,660

637

Supplies expense .....................................................

2,580

652

Telephone expense (2,980 + 365) ...........................

3,345

688

Utilities expense .......................................................

2,500

Totals .......................................................................

$167,205

$7,420 11,350

40,300 80,160

$167,205

4-416

Last revised: September 2021.

Problem 4-6A (Concluded) Part 3 2023 March 31

Closing entries: Revenues ................................................. Income Summary................................ To close the revenue account to the income summary.

80,160 80,160

Income Summary..................................... Depreciation Expense, Equipment .... Insurance Expense ............................. Interest Expense ................................. Rent Expense ....................................... Supplies Expense ............................... Telephone Expense ............................ Utilities Expense ................................. Wages Expense .................................. To close expense accounts to the income summary.

59,580

Income Summary..................................... Becky Brenner, Capital ...................... To close the income summary to capital.

20,580

Becky Brenner, Capital ........................... Becky Brenner, Withdrawals ............. To close withdrawals to capital.

40,300

1,170 2,660 525 9,800 2,580 3,345 2,500 37,000

20,580

40,300

4-417

Last revised: September 2021.

Problem 4-7A (40 minutes) Adventure Elements Income Statement For Year Ended March 31, 2023 Revenues ......................................................................... Operating expenses: Wages expense ............................................................ Rent expense ............................................................... Telephone expense ...................................................... Insurance expense ....................................................... Supplies expense......................................................... Utilities expense .......................................................... Depreciation expense, equipment .............................. Interest expense........................................................... Total operating expenses .......................................... Profit ................................................................................ Adventure Elements Statement of Changes in Equity For Year Ended March 31, 2023 Becky Brenner, capital, April 1 ...................................... Profit ................................................................................ Investments by owner ................................................... Total ............................................................................ Less: Withdrawals for the year .................................... Becky Brenner, capital, March 31 ..................................

$80,160 $37,000 9,800 3,345 2,660 2,580 2,500 1,170 525 59,580 $20,580

$32,300 $20,580 12,000

32,580 $64,880 40,300 $24,580

4-418

Last revised: September 2021.

Problem 4-7A (concluded) Adventure Elements Balance Sheet March 31, 2023 Assets Current assets: ........................................................... Cash ....................................................................... Accounts receivable ............................................. Supplies ................................................................. Total current assets .............................................. Non-current investments: Notes receivable...................................................... Property, plant and equipment: Equipment ............................................................... Less: Accumulated depreciation ..................... Intangible assets: Copyright ................................................................ Total assets ..................................................................... Liabilities Current liabilities: Accounts payable.................................................. Unearned revenues ............................................... Current portion of long-term notes payable ....... Total current liabilities .......................................... Non-current liabilities: Long-term notes payable (less current portion) ......... Total liabilities............................................................... Equity Becky Brenner, capital ................................................ Total liabilities and equity ..............................................

$ 10,750 10,450 475 $21,675 10,900 $23,400 7,420

$15,980 11,350 $59,905

$4,865 11,960 3,800 $20,625 14,700 $35,325

24,580 $59,905

Analysis component: Because the current ratio is so low Adventure Elements might be tempted to report the notes receivable as a current asset on the March 31, 2023 balance sheet because total current assets would then be greater than total current liabilities giving the misimpression that Brenner is in a position to cover its current obligations. However, that would be unethical to mis-report current assets.

4-419

Last revised: September 2021.

Problem 4-8A (20 minutes) 1. Apex Architectural Designs Income Statement For Year Ended June 30, 2023 Revenues: Design revenue ......................................................................... Operating expenses: Salaries expense ....................................................................... Supplies expense...................................................................... Depreciation expense, office equipment................................. Telephone expense ................................................................... Depreciation expense, office furniture .................................... Utilities expense ....................................................................... Interest expense........................................................................ Insurance expense .................................................................... Total operating expenses ....................................................... Profit ...............................................................................................

$135,000

$64,400 2,100 1,700 1,550 840 2,650 340 1,190 74,770 $ 60,230

2. $85,500 + $60,230 – $34,500 = $111,230

(With.)

Nolan Apex, Capital 85,500 (Beg. bal.) 34,500 60,230 (Profit) 111,230 (End. bal.)

4-420

Last revised: September 2021.

Problem 4-9A (40 minutes) IMPRESSIONS DANCE SCHOOL Income Statement For Year Ended September 30, 2023 Revenues: Dance lesson revenue .............................................. Rent revenue ............................................................. Total revenues...................................................... Operating expenses: Salaries expense ....................................................... Gas, oil, and repairs expense ................................. Depreciation expense, building ............................... Depreciation expense, automobiles ........................ Total operating expenses ...................................... Loss .................................................................................

IMPRESSIONS DANCE SCHOOL Statement of Changes in Equity For Year Ended September 30, 2023 Alisha Bjorn, capital, October 1 ..................................... Less: Loss ...................................................................... Withdrawals ......................................................... Alisha Bjorn, capital, September 30 ..............................

$153,680 20,800 $174,480 $172,000 29,400 28,200 6,900 236,500 $ 62,020

$164,960 $62,020 10,000

72,020 $ 92,940

4421

Last revised: September 2021.

Problem 4-9A (continued) 2. Impressions Dance Balance September 30, 2023 Assets Current assets: Cash ..................................................................................... Accounts receivable ........................................................... Store supplies ..................................................................... Total current assets ............................................................

School Sheet

$11,400 13,300 4,180 $ 28,880

Non-current investments: Land for future expansion .................................................. Property, plant and equipment: Land ..................................................................................... Building................................................................................ Less: Accumulated depreciation .................................... Automobiles ........................................................................ Less: Accumulated depreciation .................................... Total property, plant and equipment ................................. Intangible assets: Copyright .......................................................................... Brand name ........................................................................ Total assets ............................................................................ Liabilities Current liabilities: Accounts payable ............................................................. Unearned revenue ............................................................ Total current liabilities .................................................. Non-current liabilities: Note payable, due in 18 months ...................................... Total liabilities ..................................................................... Equity Alisha Bjorn, capital ............................................................ Total liabilities and equity.....................................................

48,000

$32,700 $234,000 163,000 $ 70,000 39,160

71,000 30,840 134,540 $ 6,700 8,600

15,300 $226,720

$ 22,480 23,300 $45,780 88,000 $133,780

92,940 $226,720

4422

Last revised: September 2021.

Problem 4-9A (concluded) Analysis component: The business experienced a loss for the year ended September 30, 2023. It has current assets that are less than current liabilities at September 30, 2023 and, in the longer term, there is a note payable that is due 18 months from September 30, 2023. The business does not have the ability to meet current obligations let alone a new one that would be created by the purchase of a new car. However, if Alisha were to sell the Land for future expansion, a non-current investment, she may be able to meet current liabilities and consider buying a new car. But then there is the issue of the loss: will this be ongoing? If so, the sale of the land might provide only temporary relief and the purchase of the car would complicate things for the business in the long-term.

Problem 4-10A (30 minutes) Part 1 Wyett North, capital = $415,780 – $28,000 + $132,995 = $520,775 OR Wyett North, Capital 415,780 (Beg. bal.) (With.) 28,000 132,995* (Profit) 520,775 (End. bal.) *Profit = Revenues – Expenses = 398,400 – (16,200 + 25,000 + 3,500 + 10,260 + 41,000 + 126,625 + 6,100 + 36,720) = 398,400 – 265,405 = 132,995

4423

Last revised: September 2021.

Problem 4-10A (concluded) Part 2 North Country Rentals Balance Sheet March 31, 2023 Assets Current assets: Cash ............................................................................... Rent receivable ............................................................. Office supplies .............................................................. Prepaid advertising ...................................................... Current portion of notes receivable ........................... Total current assets ...................................................... Non-current investments: Notes receivable, less current portion ....................... Property, plant and equipment: Land ............................................................................... Building ......................................................................... Less: Accumulated depreciation .............................. Furniture ........................................................................ Less: Accumulated depreciation .............................. Total property, plant and equipment .......................... Intangible assets: Brand name ................................................................. Total assets ......................................................................... Liabilities Current liabilities: Accounts payable ......................................................... Interest payable ............................................................ Salaries payable ............................................................ Current portion of long-term notes payable ............... Total current liabilities ................................................. Non-current liabilities: Long-term notes payable, less current portion .......... Total liabilities.................................................................. Equity Wyett North, capital ......................................................... Total liabilities and equity ..................................................

$ 17,000 16,000 700 400 55,000 $ 89,100 88,000 $110,000 $591,000 25,000 $ 42,800 3,500

566,000 39,300 715,300 3,000 $895,400

9,100 900 2,625 215,000 $227,625 147,000 $374,625

520,775 $895,400

Problem 4-10A (Continued) Part 3 Current Ratio

=$89,100 / $227,625 =0.39

Analysis component: It is reasonable to assume that the $362,000 in addition to the owner‘s original investment was used to Manual acquire property, plant and equipment Since the purpose of Education property, Solutions to accompany Fundamental Accounting Principles,assets. 17th Canadian Edition. © 2022 McGraw-Hill Ltd. plant 4-424 and equipment assets is to generate revenues, borrowing to purchase them is generally considered a good reason to borrow (provided the debt can be serviced).

Last revised: September 2021.

Debt to Equity Ratio

=$374,625 / $520,775 =0.72

4-425

Last revised: September 2021.

Problem 4-11A (90 minutes) Part 2 NOTE: The general ledger accounts are shown at the end of the solution (in both balance column and T-account format) as they would appear after all entries have been posted. Transactions for June (The account numbers in the PR column below would be included only during the posting of these journal entries into the ledger accounts in Part 2 of Problem 410A): General Journal Date Account Titles and Explanation 2023 June 1 Cash ....................................................................... Furniture................................................................. Computer Equipment ............................................ Sam Near, Capital ............................................ To record the owner’s initial investment.

Debit

101 160 167 301

40,000 5,000 60,000

2 Rent Expense ......................................................... Cash .................................................................. Paid one month of rent.

640 101

3,200

3 Office Supplies ...................................................... Cash .................................................................. Acquired office supplies.

124 101

2,400

10 Prepaid Insurance ................................................. Cash .................................................................. Paid one year’s premium in advance.

128 101

7,200

14 Salaries Expense ................................................... Cash .................................................................. Paid two weeks salary.

622 101

3,600

24 Cash ....................................................................... Commissions Revenue ................................... Collected commissions from airlines.

101 405

13,600

28 Salaries Expense ................................................... Cash .................................................................. Paid two weeks salary.

622 101

3,600

29 Telephone Expense ............................................... Cash .................................................................. Paid the telephone bill.

688 101

3,500

30 Repairs Expense.................................................... Accounts Payable ........................................... Repaired the computer on account.

684 201

700

30 Sam Near, Withdrawals ......................................... Cash .................................................................. Owner’s withdrawal of cash.

302 101

2,850

Page G1 Credit

105,000

3,200

2,400

7,200

3,600

13,600

3,600

3,500

700

2,850

4-426

Last revised: September 2021.

Problem 4-11A (continued) Part 3 Date 2023 a) June 30

General Journal Account Titles and Explanation PR Adjusting entries: Insurance Expense .............................................................. 637 Prepaid Insurance .......................................................... 128 To record expired insurance (2/3 × $600 per month).

Page G2 Debit Credit 400 400

Office Supplies Expense ........................................................ 650 Office Supplies ............................................................... 124 To record the cost of consumed supplies ($2,400 – $1,600).

800

Depreciation Expense, Furniture. ...................................... 610 Accumulated Depreciation, Furniture. ....................... 161 To record depreciation.

400

Depreciation Expense, Computer Equip. .......................... 612 Accumulated Depreciation, Computer Equip. ............. 168 To record depreciation.

1,650

Salaries Expense ................................................................. 622 Salaries Payable ............................................................. 209 To record accrued salaries.

320

Accounts Receivable ........................................................... 106 Commissions Revenue .................................................. 405 To record accrued commissions.

3,500

800

400

1,650

320

3,500

Note: The account numbers in the PR column above would be included only during the posting of these journal entries into the ledger accounts in Part 3 of Problem 4-11A.

4-427

Last revised: September 2021.

Problem 4-11A (continued) Part 4 TOURS-FOR-LESS Income For Month Ended June 30, 2023

Statement

Revenues: Commissions revenue ................................................................... Operating expenses: Salaries expense ............................................................................ Telephone expense ........................................................................ Rent expense .................................................................................. Depreciation expense, computer equipment ............................... Office supplies expense ................................................................ Repairs expense............................................................................. Depreciation expense, furniture ................................................... Insurance expense ......................................................................... Total operating expenses ........................................................ Loss ...................................................................................................... TOURS-FOR-LESS Statement of For Month Ended June 30, 2023

Changes

Sam Near, capital, June 1 .................................................................... Investment by owner ........................................................................... Total ................................................................................................. Less: Withdrawals by owner ............................................................. Loss .......................................................................................... Sam Near, capital, June 30 ..................................................................

$17,100 $7,520 3,500 3,200 1,650 800 700 400 400 18,170 $ 1,070

Equity

0 105,000 $105,000

$2,850 1,070

3,920 $101,080

4-428

Last revised: September 2021.

Problem 4-11A (continued) Part 4 TOURS-FOR-LESS Balance June 30, 2023 Assets Current assets: Cash ........................................................................................ Accounts receivable .............................................................. Office supplies ....................................................................... Prepaid insurance .................................................................. Total current assets ............................................................... Property, plant and equipment: Computer equipment ............................................................. Less: Accumulated depreciation ....................................... Furniture ................................................................................ Less: Accumulated depreciation ....................................... Total property, plant and equipment .................................... Total assets .................................................................................. Liabilities Current liabilities Accounts payable .................................................................. Salaries payable ..................................................................... Total liabilities ........................................................................ Equity Sam Near, capital ...................................................................... Total liabilities and equity ...........................................................

Sheet

$27,250 3,500 1,600 6,800 $ 39,150 $60,000 1,650 $ 5,000 400

$58,350 4,600 62,950 $102,100

700 320 $ 1,020

101,080 $102,100

4-429

Last revised: September 2021.

Problem 4-11A (continued) Part 5

Date 2023 June 30

General Journal Account Titles and Explanation Closing entries: Commissions Revenue .............................................. Income Summary .................................................. To close the revenue account to the Income Summary account.

PR Debit 405 901

17,100

Income Summary ........................................................ Depreciation Expense, Furniture ........................ Depreciation Expense, Computer Equipment..... Salaries Expense .................................................. Insurance Expense ............................................... Rent Expense ........................................................ Office Supplies Expense ...................................... Repairs Expense ................................................... Telephone Expense .............................................. To close the expenses to the income summary.

901 610 612 622 637 640 650 684 688

18,170

Sam Near, Capital ....................................................... Income Summary .................................................. To close the Income Summary to capital.

301 901

1,070

Sam Near, Capital ....................................................... Sam Near, Withdrawals ........................................ To close withdrawals to capital.

301 302

2,850

Page G3 Credit

17,100

400 1,650 7,520 400 3,200 800 700 3,500

1,070

2,850

Note: The account numbers in the PR column above would be included only during the posting of these journal entries into the ledger accounts in Part 5 of Problem 4-13A.

4-430

Last revised: September 2021.

Problem 4-11A (continued) Part 6 TOURS-FOR-LESS Post-Closing Trial June 30, 2023 Acct. No. Account 101 Cash ...................................................................................... 106 Accounts receivable ............................................................. 124 Office supplies...................................................................... 128 Prepaid insurance ................................................................ 160 Furniture ............................................................................... 161 Accumulated depreciation, furniture .................................. 167 Computer equipment ........................................................... 168 Accumulated depreciation, computer equipment .............. 201 Accounts payable ................................................................. 209 Salaries payable ................................................................... 301 Sam Near, capital ................................................................. Totals.....................................................................................

Balance

$ 27,250 3,500 1,600 6,800 5,000 $

400

60,000

$104,150

1,650 700 320 101,080 $104,150

Parts 1, 2, 3, 5 Ledger as of June 30 (using the balance column format):

Date 2023 June 1 2 3 10 14 24 28 29 30

Date 2023 June 30

Cash Explanation

Accounts Receivable Explanation

Debit

G1 G1 G1 G1 G1 G1 G1 G1 G1

40,000

Acct. No. 101 Credit Balance

3,200 2,400 7,200 3,600 13,600 3,600 3,500 2,850

40,000 36,800 34,400 27,200 23,600 37,200 33,600 30,100 27,250

Debit

Acct. No. 106 Credit Balance

3,500

4-431

Last revised: September 2021.

Problem 4-11A (continued) Parts 1, 2, 3, 5

Date 2023 June 3 30

Date 2023 June 10 30

Date 2023 June 1

Date 2023 June 30

Office Supplies Explanation

Acct. No. 124 Credit Balance

Debit

G1 G2

2,400

Debit

G1 G2

7,200

Debit

Acct. No. 160 Credit Balance

5,000

Accumulated Depreciation, Furniture Explanation PR

Debit

Acct. No. 161 Credit Balance

Prepaid Insurance Explanation

Furniture Explanation

800

7,200 6,800

400

Debit

Acct. No. 167 Credit Balance

60,000

Accumulated Depreciation, Computer Equipment Date Explanation PR Debit 2023 June 30 G2

Acct. No. 168 Credit Balance

Accounts Payable Explanation

Acct. No. 201 Credit Balance

Date 2023 June 1

Date 2023 June 30

Computer Equipment Explanation

Acct. No. 128 Credit Balance

400

2,400 1,600

Debit

G2 Salaries Payable Explanation

PR G2

1,650

700

Debit

700

Acct. No. 209 Credit Balance 320

320

4-432

Last revised: September 2021.

Problem 4-11A (continued) Parts 1, 2, 3, 5

Date 2023 June 1 30 30

Date 2023 June 30 30

Date 2023 June 24 30 30

Date 2023 June 30 30

Sam Near, Capital Explanation

Sam Near, Withdrawals Explanation

Commissions Revenue Explanation

Debit

G1 G3 G3

1,070 2,850

105,000 103,930 101,080

Debit

Acct. No. 302 Credit Balance

G1 G3

2,850

PR G1 G2 G3

Depreciation Expense, Furniture Explanation

Salaries Expense Explanation

105,000

2,850

Debit

2,850 0

Acct. No. 405 Credit Balance

17,100

13,600 17,100 0

Debit

Acct. No. 610 Credit Balance

G2 G3

400

Depreciation Expense, Computer Equipment Date Explanation PR 2023 June 30 G2 30 G3

Date 2023 June 14 28 30 30

Acct. No. 301 Credit Balance

13,600 3,500

400 0

400

Debit

Acct. No. 612 Credit Balance

1,650 1,650

Debit

G1 G1 G2 G3

3,600 3,600 320

1,650 0

Acct. No. 622 Credit Balance

7,520

3,600 7,200 7,520 0

4-433

Last revised: September 2021.

Problem 4-11A (continued) Parts 1, 2, 3, 5

Date 2023 June 30 30

Date 2023 June 2 30

Date 2023 June 30 30

Date 2023 June 29 30

Date 2023 June 30 30 30

Insurance Expense Explanation

Rent Expense Explanation

Office Supplies Expense Explanation

Repairs Expense Explanation

Telephone Expense Explanation

Income Summary Explanation

Debit

G2 G3

400

Acct. No. 637 Credit Balance 400 0

400

Debit

G1 G3

3,200

Debit

G2 G3

800

Acct. No. 640 Credit Balance

3,200 Acct. No. 650

Credit

3,200 0

Balance 800 0

800

Debit

G1 G3

700

Debit

G1 G3

3,500

Debit

G3 G3 G3

18,170

Acct. No. 684 Credit Balance 700 0

700

Acct. No. 688 Credit Balance

3,500

3,500 0

Acct. No. 901 Credit Balance 17,100 1,070

17,100 1,070 0

4-434

Last revised: September 2021.

Problem 4-11A (continued) Parts 1, 2, 3, 5 Ledger as of June 30 (using the T-account format): Jun

Bal.

1 24

Cash 40,000 13,600

3,200 2,400 7,200 3,600 3,600 3,500 2,850

101 Jun 2 3 10 14 28 29 30

Accounts Receivable Jun 30 3,500

Prepaid Insurance Jun 1 7,200 400 Bal. 6,800

106

128 Jun 30

Jun 3 Bal.

Office Supplies 2,400 800 1,600

Jun 1

Furniture 5,000

124 Jun 30

160

27,250

Accum. Dep., Furniture 400

161 Jun 30

Accounts Payable 201 700 Jun 30

Computer Equipment Jun 1 60,000

167

Sam Near, Capital 301 Jun 30 1,070 105,000 Jun 1 30 2,850 101,080 Bal.

Accum. Deprec., Computer Equipment 168 1,650 Jun 30

Sam Near, Withdrawals 302 2,850 2,850 Jun 30 Jun 30 Bal.

-0-

Salaries Payable 209 320 Jun 30

4-435

Last revised: September 2021.

Problem 4-11A (concluded) Parts 1, 2, 3, 5 Commissions Revenue Jun 30 17,100 13,600 3,500 -0-

405 Jun 24 30 Bal.

Deprec. Expense, Furniture Jun 30 400 400 Bal.

610 Jun 30

-0-

Jun

Deprec. Expense, Computer Equip. 612 1,650 1,650 Jun 30 30 -0-

Bal.

Salaries Expense 622 Jun 14 3,600 7,520 Jun 30 28 3,600 30 320 Bal. -0-

Insurance Expense 637 400 400 Jun 30 Jun 30 Bal. -0-

Jun Bal.

Office Supplies Expense 650 Jun 30 800 800 Jun 30 Bal. -0-

Repairs Expense 684 700 700 Jun 30 Jun 30 -0Bal.

Telephone Expense 688 3,500 3,500 Jun 30 Jun 29 Bal. -0-

Jun Bal. Bal.

Rent Expense 640 3,200 3,200 Jun 30 -0-

Income Summary 901 18,170 17,100 Jun 30 30 1,070 1,070 30 -0-

4-436

Last revised: September 2021.

Problem 4-12A (15 minutes) 2020 Current ratio

Quick ratio

2019

=$382,239,000 / $297,085,000

=$399,732,000 / $235,605,000

=1.29

=1.70

=($120,473,000 + $7,640,000) / $297,085,000

=($41,290,000 + $87,150,000+10,543,000) / $235,605,000

=0.43

=.59 Debt to equity ratio

=$798,965,000 / $84,005,000

=$240,348,000 / $370,116,000

=9.51

=.65

Comments: Indigo‘s current ratio has declined slightly from 2019 to 2020 from 1.70 to 1.29, respectively. The company‘s quick ratio has also declined from 2019 to 2020 from .59 to 0.43, respectively. These results indicate that the company has lower liquidity in 2020 compared to 2019. As most of the company‘s current assets are in inventories, the quick ratio provides a better picture of Indigo‘s more liquid assets. The debt to equity ratio decreased from 2019 to 2020 from .65 to 9.51, respectively. This means that in 2019 Indigo‘s assets were financed by approximately 39%, but this percent increased dramatically to 90% debt in 2020. Indigo‘s also experienced a large deficit in 2020, which translated to a negative retained earnings value for that year. Being able to compare Indigo‘s ratios with its competitors and other companies in the industry would provide a better picture of the company‘s performance.

4-437

Last revised: September 2021.

Problem 4-13A* (30 minutes) Part 1 Adjusting entries: 2023 a) Dec. 31 Salaries Expense ..................................................... Salaries Payable ................................................. To record accrued salaries. b)

1,600 1,600

31 Supplies Expense .................................................... Supplies .............................................................. To record cost of consumed supplies; $9,000 - $3,600 on hand = $5,400 used.

5,400

31 Interest Expense ...................................................... Interest Payable .................................................. To record accrued interest expense.

2,500

31 Unearned Membership Revenue ............................. Membership Revenue ........................................ To record earned revenue; $48,000 - $32,000 still unearned = $16,000 earned.

16,000

31 Accounts Receivable ............................................... Membership Revenue ........................................ To record accrued revenues.

24,000

31 Depreciation Expense, Equipment ......................... Accumulated Depreciation, Equipment ............ To record depreciation.

30,000

5,400

2,500

16,000

24,000

30,000

4-438

Last revised: September 2021.

Problem 4-13A* (concluded) Part 2 a)

Reversing entries: 2024 Jan. 1 Salaries Payable ....................................................... Salaries Expense ................................................ To reverse accrued salaries.

1,600 1,600

1 Interest Payable ....................................................... Interest Expense ................................................ To reverse accrued interest expense.

2,500

1 Membership Revenue .............................................. Accounts Receivable ......................................... To reverse accrued revenues.

24,000

2,500

24,000

Part 3 2024 Jan. 8 Salaries Expense ....................................................... Cash ...................................................................... To record payroll.

2,400 2,400

15 Interest Expense ........................................................ Cash ...................................................................... To record interest payment.

3,000

21 Cash ($24,000 + $14,000) ........................................... Membership Revenue .......................................... To record collection of membership revenue.

38,000

3,000

38,000

4-439

Last revised: September 2021. Silva Rentals Work Sheet For Year Ended March 31, 2023

Account Number

Unadjusted Trial Balance

Adjustments

Adjusted Trial Balance

101 110 124 141 161 173 183 191 201 252 301 302 406 620 633 655 673 690

Account Debit Credit Debit Credit Debit Cash ..................................................................................................................................... 7,000 7,000 Rent receivable ................................................................................................................... 31,000 a) 5,000 36,000 Office supplies .................................................................................................................... 2,250 b) 1,830 420 Notes receivable, due 2023............................................................................................................... 46,000 46,000 Furniture .............................................................................................................................. 16,000 16,000 Building ............................................................................................................................... 216,000 216,000 Land ............................................................................................................................................ 41,000 41,000 Patent................................................................................................................................... 9,600 9,600 Accounts payable ............................................................................................................... 13,750 f) 2,620 Long-term note payable ..................................................................................................... 175,000 Stephen Silva, capital ......................................................................................................... 90,250 Stephen Silva, withdrawals ................................................................................................ 92,000 92,000 Rent revenue ....................................................................................................................... 328,800 a) 5,000 Office salaries expense ...................................................................................................... 52,000 d) 1,920 53,920 Interest expense.................................................................................................................. 5,250 g) 425 5,675 Advertising expense ........................................................................................................... 14,600 e) 2,400 12,200 Janitorial expense............................................................................................................... 41,000 41,000 Utilities expense ................................................................................................................. 34,100 f) 2,620 36,720

650 601 162 606 174 209 131 203

Office supplies expense ..................................................................................................... b) 1,830 1,830 Depreciation expense, furniture............................................................................................................... c) 3,500 3,500 Accumulated deprec., furniture ......................................................................................... c) 3,500 Deprec. expense, building.................................................................................................. c) 25,000 25,000 Accumulated deprec., building .......................................................................................... c) 25,000 Salaries payable .................................................................................................................. d) 1,920 Prepaid advertising............................................................................................................. e) 2,400 2,400 Interest payable................................................................................................................... g) 425

Income Statement

Credit

Debit

Credit

Balance Sheet & Statement of Changes in Equity Debit 7,000 36,000 420 46,000 16,000 216,000 41,000 9,600

16,370 175,000 90,250

Credit

16,370 175,000 90,250 92,000

333,800

333,800 53,920 5,675 12,200 41,000 36,720

Totals ............................................................................................................................ 607,800 607,800

Totals ............................................................................................................................ 42,695 42,695 646,265

1,830 3,500 3,500

3,500 25,000

25,000 1,920

25,000 1,920 2,400

425 646,265

425 179,845

Profit ....................................................................................................................................

153,955

Totals ............................................................................................................................

333,800

466,420

333,800

466,420

312,465 153,955 466,420

4-440

Last revised: September 2021.

*Problem 4-15A (25 minutes)

Parts 1, 2, and 3 Trenton Consulting Work Sheet For Year Ended June 30, 2023

Account Cash ................................... Accounts receivable ......... Prepaid rent ....................... Equipment ......................... Accounts payable ............. Toni Trenton, capital ......... Toni Trenton, withdrawals Consulting revenue........... Wages expense ................. Insurance expense ............ Rent expense..................... Totals .............................. Depreciation expense ....... Accumulated depreciation, equip. ......... Wages payable .................. Totals .............................. Loss ................................... Totals ..............................

Unadjusted Trial Adjusted Trial Balance Adjustments Balance Income Statement Debit Credit Debit Credit Debit Credit Debit Credit 680 680 2,900 d) 4,100 7,000 3,660 b) 2,440 1,220 9,600 9,600 1,730 1,730 26,650 26,650 6,880 6,880 30,200 d) 4,100 34,300 34,300 24,920 c) 3,200 28,120 28,120 1,620 1,620 1,620 8,320 b) 2,440 10,760 10,760 58,580 58,580 a) 1,500 1,500 1,500

11,240

a) 1,500 c) 3,200 11,240 67,380

1,500 3,200 67,380

42,000 42,000

34,300 7,700 42,000

Balance Sheet & Statement of Changes in Equity Debit Credit 680 7,000 1,220 9,600 1,730 26,650 6,880

25,380 7,700 33,080

1,500 3,200 33,080 33,080

4-441

Last revised: September 2021.

Part 4

$26,650 – $6,880 – $7,700 = $12,070 OR

Toni Trenton, Capital 26,650 (Beg. bal.) (With.) 6,880 (Loss)

7,700 12,070 (End. bal.)

Analysis component: A loss causes the equity in the accounting equation to decrease. To offset the decrease in equity, liabilities would have to increase and/or assets would have to decrease.

4-442

Last revised: September 2021.

*Problem 4-16A (90 minutes) Part 1 CHALLENGER CONSTRUCTION Work Sheet For Year Ended September 30, 2023

No. 101 126 128 149 167 168 191 201 203 210 251 301 302 401 612 623 633 637 640 652 683 684 690

Unadjusted Trial Balance Account Debit Credit Cash ........................................................... 22,000 Supplies .................................................... 17,200 Prepaid insurance .................................... 9,600 Land not currently used in op. ............... 50,000 Equipment ............................................... 106,000 Accum. deprec., equipment ................... 40,500 Copyright .................................................. 6,000 Accounts payable ..................................... 8,100 Interest payable ........................................... Wages payable .......................................... Long-term notes payable ......................... Chris Challenger, capital .......................... Chris Challenger, withdrawals .............. 68,000 Construction revenue ............................. Deprec. expense, equipment .................. Wages expense ........................................ 96,000 Interest expense...................................... 1,200 Insurance expense................................... Rent expense............................................. 26,400 Supplies expense...................................... Business taxes expense .......................... 10,000 Repairs expense ...................................... 5,020 Utilities expense....................................... 7,800 Totals ..................................................... 425,220 Profit .......................................................... Totals ......................................................

Adjustments Debit Credit (a) 14,000 (b) 8,400 (c) 17,600 (d) 750 (f) 120 (e) 4,200

50,000 71,000 255,620 (c) 17,600 (e) 4,200 (f) 120 (b) 8,400 (a) 14,000 (d) 425,220

750 45,070

45,070

Balance Sheet & Adjusted Trial Statement of Balance Income Statement Changes in Equity Debit Credit Debit Credit Debit Credit 22,000 22,000 3,200 3,200 1,200 1,200 50,000 50,000 106,000 106,000 58,100 58,100 6,000 6,000 8,850 8,850 120 120 4,200 4,200 50,000 50,000 71,000 71,000 68,000 68,000 255,620 255,620 17,600 17,600 100,200 100,200 1,320 1,320 8,400 8,400 26,400 26,400 14,000 14,000 10,000 10,000 5,020 5,020 8,550 8,550 447,890 447,890 191,490 255,620 256,400 192,270 64,130 64,130 255,620 255,620 256,400 256,400

4-443

Last revised: September 2021.

*Problem 4-16A (continued) Part 2 a)

2023 Sept. 30

Adjusting entries: Supplies Expense .......................................................... Supplies .................................................................... To record consumption of supplies.

14,000 14,000

Insurance Expense ........................................................ Prepaid Insurance .................................................... To record consumption of insurance coverage.

8,400

Depreciation Expense, Equipment ............................... Accumulated Depreciation, Equipment .................. To record depreciation.

17,600

Utilities Expense ............................................................ Accounts Payable ..................................................... To record accrued utilities costs.

750

Wages Expense .............................................................. Wages Payable ......................................................... To record accrued wages.

4,200

Interest Expense ............................................................ Interest Payable ........................................................ To record accrued interest expense.

120

8,400

17,600

750

4,200

120

4-444

Last revised: September 2021.

*Problem 4-16A (continued) Part 2 (continued) 2023 Sept. 30

Closing entries: Construction Revenue ..................................................... Income Summary ....................................................... To close the revenue account to the Income Summary account.

255,620 255,620

Income Summary ............................................................. Depreciation Expense, Equipment ........................... Wages Expense .......................................................... Interest Expense ........................................................ Insurance Expense .................................................... Rent Expense ............................................................. Supplies Expense ...................................................... Business Taxes Expense .......................................... Repairs Expense ........................................................ Utilities Expense ........................................................ To close the expense accounts to the Income Summary account.

191,490

Income Summary ............................................................. Chris Challenger, Capital .......................................... To close the Income Summary account to capital.

64,130

Chris Challenger, Capital ................................................ Chris Challenger, Withdrawals ................................. To close the withdrawals account to capital.

68,000

17,600 100,200 1,320 8,400 26,400 14,000 10,000 5,020 8,550

64,130

68,000

4-445

Last revised: September 2021.

*Problem 4-16A (continued) Part 3 CHALLENGER CONSTRUCTION Income Statement For Year Ended September 30, 2023 Revenues: Construction revenue ............................................... Operating expenses: Wages expense ......................................................... Rent expense ............................................................. Depreciation expense, equipment ........................... Supplies expense ...................................................... Business taxes expense ........................................... Utilities expense ........................................................ Insurance expense .................................................... Repairs expense........................................................ Interest expense ........................................................ Total operating expenses ...................................... Profit ................................................................................

CHALLENGER Statement of For Year Ended September 30, 2023

Changes

Chris Challenger, capital, October 1 ............................. Investments by owner .................................................... Profit ................................................................................ Total .............................................................................. Less: Withdrawals .......................................................... Chris Challenger, capital, September 30 .......................

$255,620 $100,200 26,400 17,600 14,000 10,000 8,550 8,400 5,020 1,320 191,490 $ 64,130

CONSTRUCTION Equity

$ 46,000 $25,000 64,130

89,130 $135,130 68,000 $ 67,130

4-446

Last revised: September 2021.

*Problem 4-16A (concluded) CHALLENGER CONSTRUCTION Balance Sheet September 30, 2023 Assets Current assets: Cash ............................................................................... Supplies ......................................................................... Prepaid insurance ......................................................... Total current assets ...................................................... Non-current investments: Land not currently used in operations ...................... Property, plant and equipment: Equipment .................................................................... Less: Accumulated depreciation ............................. Intangible assets: Copyright ..................................................................... Total assets ......................................................................... Liabilities Current liabilities: Accounts payable .......................................................... Interest payable ............................................................. Wages payable .............................................................. Current portion of long-term notes payable................ Total current liabilities .................................................. Non-current liabilities: Long-term notes payable (less current portion) ......... Total liabilities .................................................................. Equity Chris Challenger, capital ................................................. Total liabilities and equity ..................................................

$ 22,000 3,200 1,200 $ 26,400 50,000 $106,000 58,100

47,900 6,000 $130,300

$ 8,850 120 4,200 16,000 $29,170 34,000 $ 63,170

67,130 $130,300

Analysis component: a)

No, the error will not be discovered in completing the worksheet because it will balance. Profit will be overstated by $10,800 (= $14,000 – $3,200) as a result and Supplies on the balance sheet will be overstated by $10,800. Yes, the error will be discovered in completing the worksheet because the worksheet will not balance.

4-447

Last revised: September 2021.

ALTERNATE PROBLEMS Problem 4-1B (75 minutes) Part 1 ANARA CO. Income Statement For Year Ended December 31 Revenues Services revenue .............................................................. Rent revenue ....................................................................

$59,600 4,500

Interest revenue ................................................................ Total revenues .................................................................. Expenses Depreciation expense—Building ....................................... Depreciation expense—Equipment ................................... Wages expense ................................................................ Interest expense ............................................................... Insurance expense............................................................ Rent expense .................................................................... Supplies expense..............................................................

2,320

2,000 1,000 22,030 1,550 1,525 3,600 1,000

Property taxes expense ....................................................

4,825

Total expenses ................................................................. Net income ....................................................................

$28,890

$66,420

37,530

ANARA CO. Statement of Owner's Equity For Year Ended December 31 P. Anara, Capital, December 31 (prior year) ....................... $ 52,800 Add: Investments by owner ................................................ $40,000 Net income................................................................ 28,890 68,890 ....................................................... 121,690 Less: Withdrawals by owner ............................................... (8,000) P. Anara, Capital, December 31 (current year) ................... $113,690

4-448

Last revised: September 2021.

ANARA CO. Balance Sheet December 31 Assets Current assets Cash ................................................................................. .. $ 7,400 Supplies ............................................................................ .. 15,800 Prepaid insurance ............................................................. .. 1,000 Total current assets .......................................................... .. $ 24,200 Plant assets Equipment......................................................................... $24,000 Accumulated depreciation—Equipment ............................ (4,000)20,000 Building ............................................................................. 100,000 Accumulated depreciation—Building ................................. (10,000)90,000 Land.................................................................................. .. 30,500 Total plant assets .............................................................. .. 140,500 Total assets ........................................................................ .. $164,700 Liabilities Current liabilities Accounts payable.............................................................. .. $ 3,500 Interest payable ................................................................ .. 1,750 Rent payable ..................................................................... .. 400 Wages payable ................................................................. .. 1,280 Property taxes payable ..................................................... .. 3,330 Unearned revenue ............................................................ .. 9,150 Total current liabilities ....................................................... .. Long-term liabilities Long-term notes payable .................................................. .. Total liabilities ..................................................................... .. Equity P. Anara, Capital ................................................................. .. Total liabilities and equity .................................................... ..

$ 19,410 31,600 51,010 113,690 $164,700

4-449

Last revised: September 2021.

66,420

(2)Income Summary .............................................................. 37,530 Depreciation Expense—Building ............................... 2,000 Depreciation Expense—Equipment ........................... 1,000 Wages Expense ........................................................ 22,030 Interest Expense ....................................................... 1,550 Insurance Expense ................................................... 1,525 Rent Expense ........................................................... 3,600 Supplies Expense ..................................................... 1,000 Property Taxes Expense ...........................................

4,825

Close expense accounts. (3)Income Summary .............................................................. 28,890 P. Anara, Capital ....................................................... 28,890 Close Income Summary account. (4)P. Anara, Capital ............................................................... 8,000 P. Anara, Withdrawals............................................... Close withdrawals account.

8,000

Problem 4-2B (25 minutes) Part 1

4-450

Last revised: September 2021.

2023 Closing entries: Dec. 31 Sewing Revenue ........................................................... Income Summary ................................................... To close the revenue.

109,920 109,920

31 Income Summary.......................................................... Depreciation Expense, Equipment ....................... Wages Expense ..................................................... Insurance Expense ................................................ Rent Expense ......................................................... Store Supplies Expense ........................................ Utilities Expense .................................................... To close the expense accounts.

79,920

31 Income Summary.......................................................... Vy Dillan, Capital .................................................... To close the Income Summary account.

30,000

31 Vy Dillan, Capital .......................................................... Vy Dillan, Withdrawals.......................................... To close the withdrawals account.

32,000

5,400 61,200 2,200 4,800 2,600 3,720

30,000

32,000

Part 2 Dillan‘s Tailoring Services Post-Closing Trial Balance December 31, 2023 Acct. No. 101 125 128 167 168 201 210 301

Account Cash.................................................................. Store supplies .................................................. Prepaid insurance............................................ Equipment ........................................................ Accumulated depreciation, equipment .......... Accounts payable ............................................ Wages payable ................................................. Vy Dillan, capital* ............................................. Totals ................................................................

Debit $15,500 6,500 3,800 61,000

$86,800

Credit

$19,700 39,400 6,400 21,300 $86,800

*Beginning capital $23,300 + Profit $30,000 – Withdrawals $32,000 = Ending capital $21,300

4-451

Last revised: September 2021.

Problem 4-3B (90 minutes) Part 1 DILLAN‘S TAILORING SERVICES Income Statement For Year Ended December 31, 2023 Revenue: Sewing revenue..................................................... Operating expenses: Wages expense................................................... Depreciation expense, equipment ....................... Rent expense ...................................................... Utilities expense .................................................. Store supplies expense ....................................... Insurance expense .............................................. Total operating expenses .................................. Profit ....................................................................

$109,920 $61,200 5,400 4,800 3,720 2,600 2,200 79,920 $ 30,000

DILLAN‘S TAILORING SERVICES Statement of Changes in Equity For Year Ended December 31, 2023 Vy Dillan, capital, January 1 .................................... Profit .................................................................... Total .................................................................... Less: Withdrawals ................................................... Vy Dillan, capital, December 31 ...............................

$23,300 30,000 $53,300 32,000 $21,300

4-452

Last revised: September 2021.

Problem 4-3B (concluded) DILLAN‘S TAILORING SERVICES Balance Sheet December 31, 2023 Assets Current assets: Cash ................................................................................... Store supplies ................................................................... Prepaid insurance ............................................................. Total current assets .......................................................... Property, plant and equipment: Equipment ......................................................................... Less: Accumulated depreciation .................................. Total assets ............................................................................. Liabilities Current liabilities: Accounts payable .............................................................. Wages payable .................................................................. Total current liabilities ...................................................... Equity Vy Dillan, capital .................................................................. Total liabilities and equity ......................................................

$15,500 6,500 3,800 $25,800 $61,000 19,700

41,300 $67,100

$39,400 6,400 $45,800

21,300 $67,100

Analysis component: Profit is not a guarantee that a business can meet its current obligations. As a creditor, I would review the current assets on the balance sheet to determine Vy‘s ability to pay current obligations during the year 2024. At December 31, 2023 Dillan‘s Tailoring had $25,800 in current assets and $45,800 in current liabilities. Therefore, as a creditor, I would be concerned that current liabilities exceed current assets indicating that there are insufficient current assets to meet current obligations.

4-453

Last revised: September 2021.

Problem 4-4B (25 minutes) 2023 Dec. 31

Closing entries: Photography Revenue ............................................. Interest Income ........................................................ Income Summary ................................................ To close the revenue account.

214,000 480 214,480

31 Income Summary ..................................................... Depreciation Expense, Building ........................ Depreciation Expense, Equipment .................... Wages Expense ................................................... Interest Expense ................................................. Insurance Expense ............................................. Supplies Expense ............................................... Telephone Expense ............................................ Utilities Expense ................................................. To close expense accounts.

110,690

31 Income Summary ..................................................... David Sale, Capital .............................................. To close the income summary to capital.

103,790

31 David Sale, Capital ................................................... David Sale, Withdrawals ..................................... To close withdrawals to capital.

3,800

20,800 8,800 34,800 690 18,800 13,600 5,200 8,000

103,790

3,800

4-454

Last revised: September 2021.

Problem 4-5B (50 minutes) DESTINATION WEDDING PHOTO Income Statement For Year Ended December 31, 2023 Revenues: Photography revenue ...................................................... $214,000 Interest income ............................................................... 480 Total revenues .............................................................. $214,480 Operating expenses: Wages expense .............................................................. $34,800 Depreciation expense, building ....................................... 20,800 Utilities expense .............................................................. 8,000 Depreciation expense, equipment ................................... 8,800 Insurance expense .......................................................... 18,800 Interest expense ............................................................. 690 Supplies expense ............................................................ 13,600 Telephone expense......................................................... 5,200 Total operating expenses .............................................. 110,690 Profit .................................................................... $103,790 DESTINATION WEDDING PHOTO Statement of Changes in Equity For Year Ended December 31, 2023 David Sale, capital, January 1 ............................................. $16,290 Investments by owner ......................................................... $83,000 Profit .................................................... 103,790 186,790 Total .................................................................... $203,080 Less: Withdrawals ............................................................... 3,800 David Sale, capital, December 31 ....................................... $199,280

4-455

Last revised: September 2021.

Problem 4-5B (concluded) DESTINATION WEDDING PHOTO Balance Sheet December 31, 2023 Assets Current assets: Cash ........................................................................... ... $ 16,800 Current investments .................................................... ... 21,800 Supplies ...................................................................... ... 8,400 Total current assets .................................................... ... Non-current investments: Notes receivable ......................................................... ... Property, plant and equipment: Land ............................................................................ ... $90,000

$ 47,000 46,000

Building ....................................................................... $168,000 Less: Accumulated depreciation .............................. 45,000 123,000 Equipment ................................................................... $66,000 Less: Accumulated depreciation............................... 22,000 44,000 Total property, plant and equipment ............................ ... 257,000 Intangible assets: Franchise .................................................................... ... 35,000 Total assets .................................................................... ... $385,000 Liabilities Current liabilities: Accounts payable ..................................................... ... $ 17,800 Interest payable........................................................ ... 120 Unearned professional revenue ............................... ... 27,800 Current portion of long-term notes payable .............. ... 49,000 Total current liabilities............................................... ... Non-current liabilities: Long-term notes payable (less current portion) ........ ... 91,000 Total liabilities ............................................................. ...

$ 185,720

Equity David Sale, capital ...................................................... ... Total liabilities and equity ................................................ ...

199,280 $385,000

$ 94,720

Analysis component: Liabilities must be separated between those that are due within one year of the balance sheet date (current) and those that are due beyond one year of the balance sheet date (non-current) because decision makers must be able to assess whether the business has sufficient current assets to cover its current obligations. If the $49,000 current portion of the $140,000 long-term note was not shown as a current liability on the balance sheet, it would have appeared that Destination Wedding Photo had sufficient current assets to cover its current liabilities when in fact it does not. Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw-Hill Education Ltd.

4-456

Last revised: September 2021.

Problem 4-6B (30 minutes) Part 1

Date 2023 Dec

General Journal Account Titles and Explanation

Debit

31 Depreciation Expense, Equipment ....................... Accumulated Depreciation, Equipment ........ To record depreciation expense ($16,000/16 years).

1,000

31 Wages Expense ..................................................... Wages Payable ............................................... To record accrued wages for December ($3,100/10 x 2).

620

31 Accounts Receivable............................................. Consulting Revenue ....................................... To record accrued revenues.

5,000

31 Unearned Consulting Revenue............................. Consulting Revenue ....................................... To record amount of advance payment earned.

3,000

Credit

1,000

620

5,000

3,000

4-457

Last revised: September 2021.

Problem 4-6B (Continued) Part 2 Bullseye Market Research Company Adjusted Trial Balance December 31, 2023 No.

Account

Debit

Credit

101

Cash ..................................................................

$ 1,500

104

Short-term investments......................................

4,000

108

Accounts receivable (2,000+5,000) ...................

7,000

126

Supplies .............................................................

750

145

Notes receivable ................................................

5,000

167

Equipment .........................................................

16,000

168

Accumulated depreciation, equipment (7,250+1,000) ..........................................................................

183

Office furniture ...................................................

184

Accumulated depreciation, office furniture .........

194

201

Accounts payable ..............................................

100

202

Wages payable (0+620) ....................................

620

203

Unearned consulting revenue (3,375-3,000) ......

375

233

Long-term notes payable ...................................

4,000

251

Dan Eagle, capital..............................................

24,715

301

Dan Eagle, withdrawals .....................................

302

Consulting revenue (44,000+5,000+3,000) ........

52,000

401

Interest income ..................................................

604

Depreciation expense, equipment (0+1,000) .....

1,000

606

Depreciation expense, office furniture................

700

612

Wages expense (37,380+620)...........................

38,000

623

Interest expense ................................................

633

Insurance expense ............................................

600

637

Supplies expense ..............................................

2,150

652

Telephone expense ...........................................

470

688

Utilities expense.................................................

3,230

Totals

$93,230

8,250 5,100 3,100 4,200

3,500

$93,230

4-458

Last revised: September 2021.

2023 Dec. 3 1

Closing entries: Consulting Revenue .................................................

52,000

Interest Income ......................................................... Income Summary ................................................. To close the revenue accounts.

31 Income Summary ...................................................... Depreciation Expense, Equipment ..................... Depreciation Expense, Office Furniture ............. Insurance Expense .............................................. Interest Expense .................................................. Supplies Expense ................................................ Telephone Expense ............................................. Utilities Expense .................................................. Wages Expense.................................................... To close expense accounts.

46,180

31 Income Summary .................................................. Dan Eagle, Capital ............................................. To close the income summary to capital.

5,890

31 Dan Eagle, Capital .................................................. Dan Eagle, Withdrawals ................................... To close withdrawals to capital.

3,500

52,070

1,000 700 600 30 2,150 470 3,230 38,000

5,890

3,500

4-459

Last revised: September 2021.

Problem 4-7B (40 minutes) Bullseye Market Research Company Income Statement For Year Ended December 31, 2023 Revenues: Consulting revenue ................................................................ Interest income....................................................................... Total revenues ................................................................... Operating expenses: Wages expense ...................................................................... Utilities expense ..................................................................... Supplies expense ................................................................... Depreciation expense, equipment ........................................ Depreciation expense, office furniture ................................. Insurance expense ................................................................. Telephone expense ................................................................ Interest expense ..................................................................... Total operating expenses ................................................. Profit ..........................................................................................

$52,000 70 $52,070 $38,000 3,230 2,150 1,000 700 600 470 30 46,180 $ 5,890

Bullseye Market Research Company Statement of Changes in Equity For Year Ended December 31, 2023 Dan Eagle, capital, January 1 .......................................................... Profit ................................................................................................. Less: Withdrawals by owner .......................................................... Dan Eagle, capital, December 31 ....................................................

$24,715 5,890 $3,500 $27,105

4-460

Last revised: September 2021.

Problem 4-7B (concluded) Bullseye Market Research Company Balance Sheet December 31, 2023 Assets Current assets: Cash ........................................................................... Current investments ................................................. Accounts receivable ................................................. Supplies ..................................................................... Current portion of notes receivable ......................... Total current assets .................................................. Non-current investments: Notes receivable (less current portion) .................. Property, plant and equipment: Equipment .................................................................... Less: Accumulated depreciation .......................... Office furniture ........................................................... Less: Accumulated depreciation .......................... Total property, plant and equipment ....................... Intangible assets: Copyright ................................................................... Total assets Liabilities Current liabilities: Accounts payable ...................................................... Wages payable .......................................................... Unearned consulting revenue .................................. Current portion of long-term notes payable............ Total current liabilities .............................................. Non-current liabilities: ................................................... Long-term notes payable (less current portion) ....... Total liabilities.................................................................... Equity Dan Eagle, capital .......................................................... Total liabilities and equity ..................................................

$1,500 4,000 7,000 750 1,500 $ 14,750 3,500 $16,000 8,250 5,100 3,100

$7,750 2,000 9,750 4,200 $32,200

$ 100 620 375 2,500 $3,595 1,500 $ 5,095

27,105 $32,200

Analysis component: The business experienced an increase in equity during 2023 of $2,390 which will have caused assets to increase and/or liabilities to decrease by a net amount of $2,390.

4-461

Last revised: September 2021.

Problem 4-8B (20 minutes) 1. Greenway Gardening Services Income Statement For Year Ended October 31, 2023 Revenues: Service revenue .......................................................................... Operating expenses: Wages expense ........................................................................... Supplies expense........................................................................ Depreciation expense, vehicles ................................................. Depreciation expense, gardening equipment ........................... Fuel expense ............................................................................... Insurance expense ...................................................................... Utilities expense ......................................................................... Telephone expense ..................................................................... Interest expense.......................................................................... Total operating expenses ..................................................... Loss ..................................................................................................

2. $76,000 – $41,290 – $10,000 = $24,710 OR

(Loss) (With.)

$136,000 $112,000 24,800 10,600 9,950 9,200 6,900 1,800 1,700 340 177,290 $ 41,290 Grant Greenway, Capital 76,000 (Beg. bal.) 41,290 10,000 24,710 (End. bal.)

4-462

Last revised: September 2021.

Problem 4-9B (50 minutes) FairQuest Equipment Servicing Income Statement For Year Ended August 31, 2023 Revenues: Equipment servicing revenue ............................................... Interest income....................................................................... Total revenues ................................................................... Operating expenses: Wages expense ...................................................................... Insurance expense ................................................................. Telephone expense ................................................................ Depreciation expense, furniture............................................ Utilities expense ..................................................................... Total operating expenses ................................................. Profit .......................................................................................... FairQuest Equipment Servicing Statement of Changes in Equity For Year Ended August 31, 2023 Jade Fairquest, capital, September 1 ............................................. Owner investments .......................................................................... Profit ................................................................................................. Total ........................................................................................... Less: Withdrawals by owner .......................................................... Jade Fairquest, capital, August 31, 2023 ........................................

$171,080 2,600 $173,680 $116,000 16,680 2,800 2,060 460 138,000 $ 35,680

$11,400 $50,000 35,680

85,680 $97,080 4,000 $93,080

4-463

Last revised: September 2021.

Problem 4-9B (concluded) FairQuest Equipment Servicing Balance Sheet August 31, 2023 Assets Current assets: Cash ...................................................................... Accounts receivable............................................. Interest receivable ................................................ Office supplies ..................................................... Total current assets ............................................. Non-current investments: Investment in Nova shares ................................ Property, plant and equipment: Furniture ................................................................. Less: Accumulated depreciation ........................ Intangible assets: Franchise ................................................................. Total assets ................................................................... Liabilities Current liabilities: Accounts payable .................................................... Notes payable, due in 7 months ............................ Unearned servicing revenue .................................. Current portion of long-term notes payable.......... Total current liabilities ............................................ Non-current liabilities: Long-term notes payable (less current portion) ... Total liabilities ............................................................ Equity Jade Fairquest, capital .............................................. Total liabilities and equity ............................................

$ 7,500 16,000 280 1,700 $ 25,480 35,000 $81,000 21,400

$59,600 16,500 $136,580

$ 4,300 3,200 5,000 18,000 $30,500 13,000 $ 43,500 93,080 $136,580

Analysis component: FairQuest Equipment Servicing might be tempted to report the investment in Nova shares as a current asset on the August 31, 2023 balance sheet because total current assets would then be greater than total current liabilities giving the misimpression that FairQuest is in a position to cover its current obligations.

4-464

Last revised: September 2021.

Problem 4-10B (30 minutes) Part 1 Jan Delta, Capital 95,434

Jan Delta, capital = $95,434 - $10,700 - $250* = $84,484 OR (Loss) (With.)

250* 10,700 84,484

*Loss = Revenues – Expenses = (146,000 + 700) – (700 + 5,250 + 1,300 + 139,700) = 146,700 – 146,950 = 250 loss Part 2 Delta Balance July 31, 2023 Assets Current assets: Cash ............................................................................................ Accounts receivable .................................................................. Interest receivable...................................................................... Notes receivable......................................................................... Prepaid insurance ...................................................................... Total current assets ................................................................... Property, plant and equipment: Furniture ..................................................................................... Less: Accumulated depreciation......................................... Total assets ................................................................................... Liabilities Current liabilities: Accounts payable .................................................................... Wages payable ........................................................................ Unearned tour revenue ........................................................... Total liabilities ............................................................................... Equity Jan Delta, capital .......................................................................... Total liabilities and equity ...............................................................

Tours Sheet

$25,300 21,300 100 56,000 2,100 $104,800 $29,000 700

28,300 $133,100

$27,000 2,016 19,600 $ 48,616

84,484 $133,100

4465

Last revised: September 2021.

Problem 4-10B (Continued) Part 3 Current Ratio

=$104,800 / $48,616 =2.16

Debt to Equity Ratio

=$48,616/ 84,484 =0.58

Problem 4-11B (90 minutes) Part 2 NOTE: The general ledger accounts are shown at the end of the solution (in both balance column and T-account format) as they would appear after all entries have been posted. Note: The account numbers in the PR column below would be included only during the posting of these journal entries into the ledger accounts in Part 2 of Problem 4-11B. General Journal Date 2023 July

Account Titles and Explanation 1

Page G1 PR

Debit

Cash ................................................................ 101 Land...................................................................170 Buildings .......................................................... 173 Amy Young, Capital ................................. 301 Owner invested in the business.

40,000 320,000 240,000

Equipment Rental Expense.............................. 640 Cash ........................................................ 101 Paid one month’s rent.

3,600

Office Supplies................................................. 124 Cash ........................................................ 101 Acquired office supplies.

4,600

Prepaid Insurance ............................................ 128 Cash ........................................................ 101 Paid one year’s premium in advance.

10,800

Salaries Expense ............................................. 622 Cash ........................................................ 101 Paid two weeks’ salary.

1,800

Cash ................................................................ 101 Storage Revenue ..................................... 401 Collected revenue from customers.

17,600

Credit

600,000

3,600

4,600

10,800

1,800

17,600

4-466

Last revised: September 2021.

Salaries Expense ............................................. 622 Cash ........................................................ 101 Paid two weeks’ salary.

1,800

Telephone Expense ......................................... 688 Cash ........................................................ 101 Paid the telephone bill.

600

Repairs Expense.............................................. 684 Accounts Payable .................................... 201 Repaired the roof on account.

1,700

Amy Young, Withdrawals ................................. 302 Cash ........................................................ 101 Owner withdrew cash.

3,200

1,800

600

1,700

3,200

4-467

Last revised: September 2021.

Problem 4-11B (continued) Part 3 Date 2023 July 31

General Journal Account Titles and Explanation PR Adjusting entries: Insurance Expense .......................................... 637 Prepaid Insurance .................................... 128 To record expired insurance ($10,800/12 = $900/month; 2/3 × $900 per month).

Debit

Page G2 Credit

600 600

Office Supplies Expense .................................. 650 Office Supplies ......................................... 124 To record the cost of consumed supplies ($4,600 – $3,100).

1,500

Depreciation Expense, Buildings...................... 606 Accumulated Depreciation, Buildings ........ 174 To record depreciation.

2,400

Salaries Expense ............................................. 622 Salaries Payable ...................................... 209 To record accrued salaries.

360

Accounts Receivable ....................................... 106 Storage Revenue ..................................... 401 To record accrued storage revenue.

1,900

1,500

2,400

360

1,900

Note: The account numbers in the PR column above would be included only during the posting of these journal entries into the ledger accounts in Part 3 of Problem 4-13B.

4468

Last revised: September 2021.

Problem 4-11B (continued) Part 4 YOUNG CO. Income Statement For Month Ended July 31, 2023 Revenue: Storage revenue .................................................. Operating expenses: Salaries expense ................................................. Equipment rental expense ................................... Depreciation expense, buildings .......................... Repairs expense.................................................. Office supplies expense ...................................... Insurance expense .............................................. Telephone expense ............................................. Total operating expenses .................................. Profit ....................................................................

$19,500 $3,960 3,600 2,400 1,700 1,500 600 600 14,360 $ 5,140

YOUNG CO. Statement of Changes in Equity For Month Ended July 31, 2023 Amy Young, capital, July 1 ...................................... $ 0 Investments by owner.............................................. $600,000 Profit ..................................................... 5,140 $605,140 Total ............................................................ $605,140 Less: Withdrawals by owner .................................... 3,200 Amy Young, capital, July 31 .................................... $601,940

4469

Last revised: September 2021.

Problem 4-11B (continued) Part 4 (continued)

YOUNG CO. Balance Sheet July 31, 2023 Assets Current assets: Cash ........................................................................................ Accounts receivable .............................................................. Office supplies ....................................................................... Prepaid insurance .................................................................. Total current assets ............................................................... Property, plant and equipment: Land ...................................................................................... Buildings................................................................................. $240,000 Less: Accumulated depreciation ....................................... 2,400 Total property, plant and equipment ................................... Total assets ............................................................................... Liabilities Current liabilities: Accounts payable ................................................................ Salaries payable ..................................................................... Total liabilities .............................................................................. Equity Amy Young, capital .................................................................. Total liabilities and equity ...........................................................

$ 31,200 1,900 3,100 10,200 $ 46,400 $320,000 237,600

557,600 $604,000

$ 1,700 360 $

2,060

601,940 $604,000

4470

Last revised: September 2021.

Problem 4-11B (continued) Part 5 Date 2023 July 31

General Journal Account Titles and Explanation PR Closing entries: Storage Revenue .............................................. 401 Income Summary ..................................... 901 To close the revenue account.

Debit

Page G3 Credit

19,500 19,500

Income Summary............................................. 901 Depreciation Expense, Buildings .............. 606 Salaries Expense ..................................... 622 Insurance Expense .................................. 637 Equipment Rental Expense ...................... 640 Office Supplies Expense .......................... 650 Repairs Expense ...................................... 684 Telephone Expense ................................. 688 To close the expense accounts.

14,360

Income Summary............................................. 901 Amy Young, Capital ................................. 301 To close the Income Summary account.

5,140

Amy Young, Capital ......................................... 301 Amy Young, Withdrawals ......................... 302 To close the withdrawals account.

3,200

2,400 3,960 600 3,600 1,500 1,700 600

5,140

3,200

Note: The account numbers in the PR column above would be included only during the posting of these journal entries into the ledger accounts in Part 5 of Problem 4-13B.

Part 6

Acct. No. 101 106 124 128 170 173 174 201 209 301

YOUNG CO. Post-Closing Trial Balance July 31, 2023 Account Debit . Credit Cash ............................................................ $ 31,200 Accounts receivable ..................................... 1,900 Office supplies ............................................. 3,100 Prepaid insurance ........................................ 10,200 Land............................................................. 320,000 Buildings ...................................................... 240,000 Accumulated depreciation, buildings ............ $ 2,400 Accounts payable......................................... 1,700 Salaries payable .......................................... 360 Amy Young, capital ...................................... 601,940 .......................................................... Totals $606,400

$606,400

4471

Last revised: September 2021.

Problem 4-11B (continued) Parts 1, 2, 3, 5: Ledger as of July 31 (using balance column format): Cash Date Explanation PR 2023 July 1 G1 2 G1 5 G1 10 G1 14 G1 24 G1 28 G1 29 G1 31 G1

Date 2023 July 31

Date 2023 July 5 31

Date 2023 July 10 31

Debit

40,000 36,400 31,800 21,000 19,200 36,800 35,000 34,400 31,200

3,600 4,600 10,800 1,800 17,600 1,800 600 3,200

Accounts Receivable Explanation PR

Debit

Acct. No. 106 Credit Balance

1,900

Debit

Acct. No. 124 Credit Balance

G1 G2

4,600

Office Supplies Explanation

Prepaid Insurance Explanation PR G1 G2

Debit

Explanation

1,500

4,600 3,100

Credit

Acct. No. 128 Balance

600

10,800 10,200

10,800

Debit

Acct. No. 170 Credit Balance

320,000

Debit

Acct. No. 173 Credit Balance

240,000

Buildings Date 2023 July 1

Acct. No. 101 Balance

40,000

Land Date 2023 July 1

Credit

4472

Last revised: September 2021.

Problem 4-11B (continued)

Date 2023 July 31

Date 2023 July 30

Date 2023 July 31

Date 2023 July 1 31 31

Date 2023 July 31 31

Date 2023 July 24 31 31

Date 2023 July 31 31

Accumulated Depreciation, Buildings Explanation PR

Debit

G2 Accounts Payable Explanation PR

2,400

Debit

G2 Salaries Payable Explanation PR

Debit

1,700

Acct. No. 209 Credit Balance 360

Debit

2,400

Acct. No. 201 Credit Balance 1,700

G2 Amy Young, Capital Explanation PR

Acct. No. 174 Credit Balance

360

Acct. No. 301 Credit Balance

G1 G3 G3

3,200

600,000 605,140 601,940

Amy Young, Withdrawals Explanation PR

Debit

Acct. No. 302 Credit Balance

G1 G3 Storage Revenue Explanation PR G1 G2 G3 Depreciation Expense, Buildings Explanation PR G2 G3

600,000 5,140

3,200 3,200

Debit

3,200 0

Acct.No. 401 Credit Balance 17,600 1,900

19,500

17,600 19,500 0

Debit

Acct. No. 606 Credit Balance

2,400 2,400

2,400 0

4-473

Last revised: September 2021.

Problem 4-11B (continued) Date 2023 July 14 28 31 31

Date 2023 July 31 31

Date 2023 July 2 31

Date 2023 July 31 31

Date 2023 July 30 31

Date 2023 July 29 31

Date 2023 July 31 31 31

Salaries Expense Explanation PR G1 G1 G2 G3 Insurance Expense Explanation PR G2 G3 Equipment Rental Expense Explanation PR G1 G3 Office Supplies Expense Explanation PR G2 G3 Repairs Expense Explanation PR G1 G3 Telephone Expense Explanation PR G1 G3

Debit

Acct. No. 622 Credit Balance

1,800 1,800 360 3,960

Debit

Acct. No. 637 Credit Balance

600 600

Debit

3,600

1,500

1,700

600

Debit

G3 G3 G3

14,360 5,140

1,700 0

Acct. No. 688 Credit Balance

600

Income Summary Explanation PR

1,500 0

Acct. No. 684 Credit Balance

1,700

Debit

3,600 0

Acct. No. 650 Credit Balance

1,500

Debit

600 0

Acct. No. 640 Credit Balance

3,600

Debit

1,800 3,600 3,960 0

600 0

Acct. No. 901 Credit Balance 19,500

19,500 5,140 0

4-474

Last revised: September 2021.

Problem 4-11B (continued) Parts 1, 2, 3, 5 Ledger as of July 31 (using the T-account format):

Bal.

Cash 40,000 3,600 17,600 4,600 10,800 1,800 1,800 600 3,200 31,200

Jul 1

Land 320,000

Jul 1 24

101 Jul 2 5 10 14 28 29 31

Accounts Receivable Jul 31 1,900

106

Prepaid Insurance Jul 10 10,800 600 Bal. 10,200

128 Jul 31

Office Supplies Jul 5 4,600 1,500 Bal. 3,100

124 Jul 31

Accum. Deprec., Building 2,400

174 Jul 31

Amy Young, Capital 3,200 600,000 5,140 601,940

301 Jul 31 31 Bal.

4-475

170 Jul 1

Accounts Payable 201 1,700 Jul 30

Buildings 240,000

173

Salaries Payable 209 360 Jul 31

Jul 31 Bal.

Amy Young, Withdrawals 3,200 3,200

Jul 31

302 Jul 31

-0-

Last revised: September 2021.

Problem 4-11B (concluded) Parts 1, 2, 3, 5 Storage Revenue 401 Jul 31 19,500 17,600 Jul 24 1,900 31 -0- Bal.

Deprec. Expense, Building Jul 31 2,400 2,400

Bal.

Salaries Expense Jul 14 1,800 3,960 Jul 28 1,800 31 360 Bal. -0-

622 31

640 Jul 31

Office Supplies Expense Jul 31 1,500 1,500 Jul Bal. -0-

650 31

688 Jul 31

Income Summary 901 Jul 31 14,360 19,500 Jul 31 31 5,140 5,140 Bal. -0- Bal.

-0-

637 31

Equipment Rental Expense Jul 2 3,600 3,600 Bal. -0-

Repairs Expense 684 Jul 30 1,700 1,700 Jul 31 Bal. -0-

Telephone Expense Jul 29 600 600 Bal. -0-

Insurance Expense Jul 31 600 600 Jul Bal. -0-

606 Jul 31

4-476

Last revised: September 2021.

Problem 4-12B (15 minutes) 2020 Current ratio

Quick ratio

Debt to equity ratio

2019

=$789.3M / $405.4M

=$760.7M / $399.0M

=1.95

=1.91

=($320.6+$265.2+$73.4) / $405.4

=($115.3 + $370.7 + 57 )/ $399.0

=1.63

=1.36

=$499.2 / $842.9

=$496 / $760.4

=0.59

=0.65

Comments: Spin Master‘s current ratio is strong for 2020 and indicates that the company has sufficient current assets to pay its current liabilities. The current ratio increased from 2019 to 2020 from 1.91 to 1.95 respectively. This increase is favourable. The company‘s quick ratio is above one for 2020, which is favourable. The quick ratio increased from 2019 to 2020 primarily due to a increase in cash and accounts receivable. The company has more liquid assets (cash) in 2020, and enough liquid assets to cover its current obligations. The company‘s debt to equity is low and is fairly stable between 2019 and 2020. The debt to equity ratio indicates that the company is financed primarily through equity, which is associated with lower risk than debt. Overall, Spin Master shows a strong balance sheet through these three ratios. Being able to compare Spin Master‘s ratios with its competitors and other companies in the industry would provide a better picture of the company‘s performance.

4-477

Last revised: September 2021.

*Problem 4-13B (30 minutes) Part 1 a)

2023 Dec.

Adjusting entries: 31 Salaries Expense........................................................... Salaries Payable .................................................... To record accrued salaries.

5,250 5,250

31 Accounts Receivable ..................................................... Service Revenue .................................................... To record accrued service revenue.

8,250

31 Rent Receivable ............................................................ Rent Revenue ......................................................... To record accrued rent revenue; $1,125 – $450.

675

31 Office Supplies Expense ............................................. Office Supplies ...................................................... To record supplies used; $4,200 – $675 left on hand = $3,525 used.

3,525

31 Insurance Expense ...................................................... Insurance Payable ................................................. To record insurance payable.

450

31 Interest Expense ......................................................... Interest Payable ..................................................... To record accrued interest; $900 + $900 + $450 or 2,700 × 2.5/3.

2,250

31 Unearned Service Revenue ........................................... Service Revenue .................................................... To record revenue; $18,000 – $6,300 still unearned = $11,700 earned.

11,700

8,250

675

3,525

450

2,250

11,700

4-478

Last revised: September 2021.

31 Interest Receivable ...................................................... Interest Income ...................................................... To record accrued interest.

175 175

4-479

Last revised: September 2021.

*Problem 4-13B (continued) Part 2 2024 Jan.

Reversing entries: 1 Salaries Payable ........................................................ Salaries Expense ................................................. a. To reverse accrued salaries.

5,250 5,250

1 Service Revenue........................................................ Accounts Receivable........................................... b. To reverse accrued service revenue.

8,250

1 Rent Revenue ............................................................ Rent Receivable ................................................... c. To reverse accrued rent revenue.

675

1 Insurance Payable ..................................................... Insurance Expense .............................................. e. To reverse accrued insurance.

450

1 Interest Payable ......................................................... Interest Expense .................................................. f. To reverse accrued interest expense.

2,250

1 Interest Income.......................................................... Interest Receivable .............................................. h. To reverse accrued interest income. Reversing entries not required for d & g.

175

8,250

675

450

2,250

175

*Problem 4-13B

4-480

Last revised: September 2021.

Part 3 January 2021 transactions: 2024 Jan.

4 Salaries Expense ....................................................... Cash ..................................................................... To record payment of salaries.

7,500

12 Cash............................................................................ Rent Revenue ...................................................... To record receipt of rent revenue; $675 + $1,125.

1,800

12 Insurance Expense.................................................... Cash ..................................................................... To record payment of insurance.

450

7,500

1,800

450

Part 3 (concluded) 2024 Jan.

15 Interest Expense ....................................................................... Cash ................................................................................... To record payment of interest.

2,700

22 Cash ......................................................................................... Note Receivable ................................................................ Interest income ................................................................. To record receipt of note plus interest; $37,500 + $575.

38,075

24 Cash ......................................................................................... Service Revenue ............................................................... To record receipt of service revenue; $8,250 + $3,100.

11,350

2,700

37,500 575

11,350

*Problem 4-14B (30 minutes) Parts 1, 2 and 3

4-481

Last revised: September 2021.

Daimler For Month Ended July 31, 2023

Account Number Account 101 Cash 106 Accounts receivable 111 Notes receivable 128 Prepaid insurance 161 Furniture 201 Accounts payable 230 Unearned tour revenue 301 Jan Rider, capital 302 Jan Rider, withdrawals 403 623 109 409 690 601 162 637 210

Tour revenue Wages expense Totals Interest receivable Interest income Utilities expense Depreciation expense, furniture Accumulated depreciation, furniture Insurance expense Wages payable Totals Loss Totals

Tours--

Unadjusted Trial Balance Debit Credit 9,100 18,700 16,000 5,100 6,750 6,925 12,430 60,975 0

Work

Adjustments Debit Credit (g) 1,600 (d) 850 (b) (f) 7,530

Adjusted Trial Balance Debit Credit 9,100 20,300 16,000 4,250 6,750 7,100 4,900 60,975 0

(f) 7,530 (g) 1,600

16,700 41,380 97,030

175

(e)

252

(a)

Sheet

Income Statement Debit Credit

25,830 41,632

Balance Sheet & Statement of Changes in Equity Debit Credit 9,100 20,300 16,000 4,250 6,750 7,100 4,900 60,975 0

25,830 41,632

97,030 40 (a) (b) (c)

(d)

175 210

175 210 (c)

210

(e)

252* 10,657

850 10,657

40 40

40 175 210

210 850 99,307

210 850

252 99,307

42,867 42,867

25,870 16,997 42,867

56,440 16,997 73,437

*$315/5 days per week = $63/day × 2 days × 2 employees = $252

4-482

252 73,437 73,437

Last revised: September 2021.

*Problem 4-15B (25 minutes) Parts 1, 2, and 3 Tucker Photographers Work Sheet For Month Ended December 31, 2023

Unadjusted Trial Balance Debit Credit 9,100 13,000 3,860 49,000

Account Cash .............................................. Accounts receivable .................... Prepaid equipment rental ............ Automobile ................................... Accumulated deprec., 0 automobile ..................................... Accounts payable ........................ 1,920 Unearned revenue .......................... 5,740 Jim Tucker, capital ....................... 65,700 Jim Tucker, withdrawals ............. 2,600 Service revenue ........................... 8,400 Deprec. expense, automobile...... 0 Equipment rental expense .......... 4,200 Totals ......................................... 81,760 81,760 Utilities expense........................... Totals ......................................... Profit ............................................. Totals .........................................

Adjusted Trial Balance Debit Credit 9,100 13,000 a) 2,000 1,860 49,000

Adjustments Debit Credit

b) c) d)

610 940

Income Statement Debit Credit

610 2,860 5,280 65,700

460

610 2,860 5,280 65,700

2,600 d) b) 610 a) 2,000 c)

940 4,010

Balance Sheet & Statement of Changes in Equity Debit Credit 9,100 13,000 1,860 49,000

460

2,600 8,860

8,860

610 6,200

940 4,010 83,310 83,310

940 7,750 1,110 8,860

8,860

75,560

8,860

75,560

74,450 1,110 75,560

4-483

Last revised: September 2021.

*Problem 4-15B (concluded) Part 4

$65,700 – $2,600 + $1,110 = $64,210 OR

Jim Tucker, Capital 65,700 (Beg. bal.) (With.) 2,600 1,110 (Profit) 64,210 (End. bal.)

Analysis component: A profit causes the equity in the accounting equation to increase. To offset the increase in equity, liabilities would decrease and/or assets would increase.

4-484

Last revised: September 2021.

*Problem 4-16B (90 minutes) Part 1 WEBSTER DEMOLITION COMPANY Work Sheet For Year Ended June 30, 2023 Unadjusted Trial Balance Equity No. Title Debit Credit 101 Cash.............................................. 4,500 126 Supplies ........................................ 8,200 128 Prepaid insurance......................... 7,300 167 Equipment..................................... 72,000 168 Accumulated deprec., equipment .................................. 5,000 201 Accounts payable ......................... 9,100 203 Interest payable ............................ 210 Wages payable............................. 251 Long-term notes payable.............. 45,000 301 Rusty Webster, capital ................. 21,400 302 Rusty Webster, withdrawals ......... 2,100 401 Demolition Revenue ..................... 83,300 612 Depreciation expense, equipment .................................. 623 Wages expense............................ 27,400 633 Interest expense ........................... 1,100 637 Insurance expense ....................... 640 Rent expense................................ 24,400 652 Supplies expense ......................... 683 Business tax expense................... 4,200 684 Repairs expense........................... 4,200 690 Utilities expense ............................ 8,400 Totals ......................................... 163,800 163,800 Loss .............................................. Totals .........................................

Adjustments Debit

Credit. (a) 1,400 (b) 5,750

Adjusted Trial Balance Debit Credit 4,500 6,800 1,550 72,000

Income Statement Debit

Credit

(d) 375 17,435

Credit

13,700 9,475 110 1,100 45,000 21,400 2,100

83,300

(a) 1,400

Debit 4,500 6,800 1,550 72,000

13,700 9,475 110 1,100 45,000 21,400 2,100

Balance Sheet and Statement of Changes in

8,700 28,500 1,210 5,750 24,400 1,400 4,200 4,200 8,775 17,435 174,085 174,085

83,300 8,700 28,500 1,210 5,750 24,400 1,400 4,200 4,200 8,775 87,135

86,950 3,835 90,785

90,785

4-485

87,135

83,300 3,835 87,135

90,785

Last revised: September 2021.

*Problem 4-16B (continued) Part 2 (a)

(b)

(c)

(d)

(e)

(f)

2023 June 30

Adjusting entries: Supplies Expense ........................................................ Supplies .................................................................. To record consumption of supplies.

1,400 1,400

Insurance Expense ...................................................... Prepaid Insurance .................................................. To record consumption of insurance coverage.

5,750

Depreciation Expense, Equipment ............................. Accumulated Depreciation, Equipment ................ To record depreciation.

8,700

Utilities Expense............................................................. Accounts Payable ................................................... To record accrued utilities costs.

375

Wages Expense ............................................................. Wages Payable ....................................................... To record accrued wages.

1,100

Interest Expense ........................................................... Interest Payable ...................................................... To record accrued interest expense.

110

5,750

8,700

375

1,100

110

4-486

Last revised: September 2021.

*Problem 4-16B (continued) Part 2 (continued) 2023 Closing entries: June 30 Demolition Revenue ..................................................... Income Summary ................................................... To close the revenue account.

83,300 83,300

30 Income Summary.......................................................... Depreciation Expense, Equipment ....................... Wages Expense ..................................................... Interest Expense .................................................... Insurance Expense ................................................ Rent Expense ......................................................... Supplies Expense .................................................. Business Tax Expense .......................................... Repairs Expense .................................................... Utilities Expense .................................................... To close the expense accounts.

87,135

30 Rusty Webster, Capital................................................. Income Summary ................................................... To close the Income Summary account.

3,835

30 Rusty Webster, Capital................................................. Rusty Webster, Withdrawals ................................. To close the withdrawals account.

2,100

8,700 28,500 1,210 5,750 24,400 1,400 4,200 4,200 8,775

3,835

2,100

Part 3 WEBSTER DEMOLITION COMPANY Income Statement For Year Ended June 30, 2023 Revenue: Demolition Revenue..................................... Operating expenses: Wages expense ........................................... Rent expense............................................... Depreciation expense, equipment ................ Utilities expense ........................................... Insurance expense....................................... Supplies expense......................................... Business tax expense .................................. Repairs expense .......................................... Interest expense .......................................... Total operating expenses........................... Loss .................................................................... *Problem 4-16B (continued)

$83,300 $28,500 24,400 8,700 8,775 5,750 1,400 4,200 4,200 1,210 87,135 $ 3,835

4-487

Last revised: September 2021.

Part 3 (continued) WEBSTER DEMOLITION COMPANY Statement of Changes in Equity For Year Ended June 30, 2023 Rusty Webster, capital, July 1 ................................. Investments by owner.............................................. Total .................................................................... Less: Withdrawals by owner .................................... Loss ............................................................. Rusty Webster, capital, June 30 ..............................

$ 3,900 17,500 $21,400 $2,100 3,835

5,935 $15,465

WEBSTER DEMOLITION COMPANY Balance Sheet June 30, 2023 Assets Current assets: Cash ............................................................................. Supplies ....................................................................... Prepaid insurance ....................................................... Total current assets .................................................... Property, plant and equipment: .................................... Equipment ................................................................... Less: Accumulated depreciation, equipment Total assets ....................................................................... Liabilities Current liabilities: Accounts payable ........................................................ Interest payable ........................................................... Wages payable ............................................................ Current portion of long-term note payable ............... Total current liabilities ................................................ Non-current liabilities: Long-term note payable (less current portion) .............. Total liabilities ................................................................ Equity Rusty Webster, capital .................................................. Total liabilities and equity ................................................

$ 4,500 6,800 1,550 $12,850 $72,000 13,700

58,300 $71,150

$9,475 110 1,100 2,000 $12,685 43,000 $55,685

15,465 $71,150

*Problem 4-16B (concluded) Analysis component: (a) This error enters the wrong amount in the correct accounts. The ending balance of the Prepaid Insurance account should be $1,550, but the entry reduces that account by $1,550. Because its unadjusted balance was $7,300, the adjusted balance will be Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw-Hill Education Ltd.

4-488

Last revised: September 2021.

$5,750 (= $7,300 – $1,550), which is $4,200 greater than the correct $1,550 balance. In addition, the Insurance Expense account balance will be only $1,550 instead of $5,750. The adjusted trial balance columns in the work sheet will be equal, but the error will cause the work sheet‘s profit to be overstated by $4,200 because of the understatement of the expense. In addition, the balance sheet columns will include the overstated balance for the Prepaid Insurance account. The Rusty Webster, Capital account will also be overstated. This error is not likely to be detected as a result of completing the work sheet. If it is not, the income statement will overstate profit by $4,200, and the balance sheet will overstate the cost of the unexpired insurance and equity by $4,200. (b) This error inserts a debit in the balance sheet columns instead of the income statement columns. In the unlikely event that this error is not immediately detected, it will cause the work sheet measure of profit to be overstated because the total debits will incorrectly omit the $4,200 expense for repairs. In all likelihood, the error will be discovered in the process of drafting the balance sheet because the accountant will realize that repairs expense is not an asset. If it is detected and corrected, the financial statements will be unaffected. However, if the repairs expense is erroneously included on the balance sheet, the reported profit will be overstated by $4,200. On the balance sheet, a nonexistent asset will be reported for the repairs expense and equity will be overstated by $4,200.

4-489

Last revised: September 2021.

ANALYTICAL AND REVIEW PROBLEMS A&R Problem 4-1 Part 1 Profit

= $105,000 – ($147,000 – $126,000) = $84,000 Or Owner, Capital 147,000 105,000

X = 84,000 NI 126,000

Total revenues

= $84,000 + $168,000 = $252,000

Part 2 Dec. 31 Revenue ............................................... Income Summary......................... To close revenue.

252,000

31 Income Summary ............................... Wages Expense ........................... Advertising Expense ................... To close expenses.

168,000

252,000

126,000 42,000

31 Income Summary ............................... 84,000 Owner, Capital ............................ To close the Income Summary to capital.

84,000

31 Owner, Capital .................................... Owner, Withdrawal ..................... To close withdrawals to capital.

105,000

4-490

Last revised: September 2021.

A&R Problem 4-2 Part 1 SANDY‘S DELIVERY SERVICE Work Sheet For the Year Ended December 31, 2023

Unadjusted Trial Balance Account Debit Credit Cash .......................................................................................................... 10,650 Accounts receivable ................................................................................ 7,000 Supplies .................................................................................................. 4,200 Prepaid insurance ................................................................................... 2,400 Prepaid rent ............................................................................................. 1,800 Delivery trucks ......................................................................................... 40,000 Accounts payable .................................................................................... 3,130 Unearned delivery revenue ..................................................................... 4,500 Sandra Berlasty, capital .......................................................................... 50,000 Sandra Berlasty, withdrawals ................................................................. 3,000 Delivery service revenue ......................................................................... 18,500 Advertising expense................................................................................ 600 Gas and oil expense ................................................................................ 680 Salaries expense ..................................................................................... 5,600 Utilities expense ...................................................................................... 200 Totals ..................................................................................................... 76,130 76,130 Insurance expense .................................................................................. Rent expense ........................................................................................... Supplies expense .................................................................................... Depreciation expense, delivery trucks................................................... Accumulated depreciation, delivery trucks ........................................... Salaries payable ...................................................................................... Totals ..................................................................................................... Profit ......................................................................................................... Totals .....................................................................................................

Adjustments Debit Credit a) 2,000 b) 2,600 c) 800 d) 900 a) 2,500 a) 4,500 e) 400 c) 800 d) 900 b) 2,600 f) 2,000 11,200

f) 2,000 e) 400 11,200

Adjusted Trial Balance Debit Credit 10,650 9,000 1,600 1,600 900 40,000 3,130 2,000 50,000 3,000 23,000 600 680 6,000 200

Balance Sheet and Income Statement of Statement Changes in Equity Debit Credit Debit Credit 10,650 9,000 1,600 1,600 900 40,000 3,130 2,000 50,000 3,000 23,000 600 680 6,000 200

800 900 2,600 2,000

80,530

2,000 400 80,530

13,780 9,220 23,000

23,000

66,750

23,000

66,750

4-491

2,000 400 57,530 9,220 66,750

Last revised: September 2021.

A&R Problem 4-2 (concluded) Part 2 Adjusting entries:

2023 a)

Dec.

Accounts Receivable ........................................................ Unearned Delivery Revenue ............................................. Delivery Service Revenue ...........................................

2,000 2,500

Supplies Expense ............................................................. Supplies .......................................................................

2,600

Insurance Expense ........................................................... Prepaid Insurance .......................................................

800

Rent Expense .................................................................... Prepaid Rent ................................................................

900

Salaries Expense ................................................................ Salaries Payable .........................................................

400

Depreciation Expense, Delivery Trucks .......................... Accumulated Depreciation, Delivery Trucks .............

2,000

Closing entries: Delivery Service Revenue ................................................. Income Summary ........................................................

4,500

2,600

800

900

400

2,000

23,000 23,000

Income Summary ................................................................ Advertising Expense ................................................... Gas and Oil Expense................................................... Salaries Expense ......................................................... Utilities Expense ......................................................... Insurance Expense ...................................................... Rent Expense .............................................................. Supplies Expense........................................................ Depreciation Expense, Delivery Trucks .....................

13,780

Income Summary .............................................................. Sandra Berlasty, Capital .............................................

9,220

Sandra Berlasty, Capital ................................................... Sandra Berlasty, Withdrawals .......................................

3,000

600 680 6,000 200 800 900 2,600 2,000

9,220

3,000

4-492

Last revised: September 2021.

ETHICS CHALLENGE 1.

There are several courses of action that Jennifer could have taken: a. Probably she should have consulted with the president and told him that the finalized financial statements would not be ready by the time of the meeting. She should explain that delay in final statement preparation is a normal event given the need to wait for final information to prepare accurate adjustments. Possibly the meeting could be rescheduled or Jennifer could have asked how the president preferred her to proceed. b. The estimation route was not a bad choice in itself. Jennifer probably should have used worst case estimates instead of recording expenses on the low side. Users of financial statements usually prefer knowing worst case scenarios over best case outcomes. The use of estimates gets the financial statements closer to their final form than ignoring the adjustments completely.

Students may offer one of the above alternatives or another response they may think of, given the situation.

4-493

Last revised: September 2021.

FOCUS ON FINANCIAL STATEMENTS

FFS 4-1 Part 1 Sarda Electrical Servicing Income Statement For Year Ended December 31, 2023 Revenues Electrical revenue ..................................................................... Operating expenses: Salaries expense ....................................................................... Rent expense ............................................................................ Depreciation expense, truck .................................................... Depreciation expense, tools .................................................... Insurance expense .................................................................... Interest expense........................................................................ Total operating expenses ....................................................... Profit ............................................................................................. Sarda Electrical Servicing Statement of Changes in Equity For Year Ended December 31, 2023 Nymeth Sarda, capital, January 1 ............................................... Profit ............................................................................................. Investments by owner ................................................................ Total ......................................................................................... Less: Withdrawals for the year ................................................. Nymeth Sarda, capital, December 31..........................................

$126,600 $27,000 21,000 3,600 2,250 1,275 900 56,025 $ 70,575

$ 7,825 $70,575 20,000

90,575 $98,400 61,500 $36,900

4-494

Last revised: September 2021.

FFS 4-1 (continued) Sarda Electrical Servicing Balance Sheet December 31, 2023 Assets Current assets: ............................................................. Cash .......................................................................... Accounts receivable ................................................ Prepaid insurance .................................................... Prepaid rent .............................................................. Electrical supplies.................................................... Current portion of notes receivable ........................ Total current assets ................................................. Non-current investments: Notes receivable (less current portion) .................. Property, plant and equipment: Tools ......................................................................... Less: Accumulated depreciation ........................ Truck ......................................................................... Less: Accumulated depreciation ........................ Total property, plant and equipment ...................... Intangible assets: Copyright .................................................................. Total assets ....................................................................... Liabilities Current liabilities: Accounts payable.................................................... Salaries payable ...................................................... Unearned electrical revenue .................................. Notes payable, due June 1, 2024 ........................... Total current liabilities ............................................ Non-current liabilities: Notes payable, due August 31, 2025........................... Total liabilities................................................................. Equity Nymeth Sarda, capital ................................................... Total liabilities and equity ................................................

$ 5,000 10,500 1,050 7,200 19,000 2,000 $44,750 10,000 $21,000 4,500 $40,500 21,000

$16,500 19,500 36,000 5,100 $95,850

$21,000 3,150 5,250 2,550 $31,950 27,000 $58,950

36,900 $95,850

4-495

Last revised: September 2021.

FFS 4-1 (continued) Part 2 2023 Dec.

Closing entries: Electrical Revenue ............................................................ 126,600 Income Summary ....................................................... To close revenue accounts. Income Summary ................................................................ Depreciation Expense, Tools .................................... Depreciation Expense, Truck .................................... Insurance Expense .................................................... Interest Expense .......................................................... Rent Expense ............................................................. Salaries Expense ....................................................... To close expense accounts.

56,025

Income Summary .............................................................. Nymeth Sarda, Capital ............................................... To close Income Summary to capital.

70,575

Nymeth Sarda, Capital ...................................................... Nymeth Sarda, Withdrawals ...................................... To close withdrawals to capital.

61,500

126,600

2,250 3,600 1,275 900 21,000 27,000

70,575

61,500

Part 3 Sarda Electrical Servicing Post-Closing Trial Balance December 31, 2023 Cash ................................................................................................ Accounts Receivable ..................................................................... Electrical Supplies ......................................................................... Prepaid Insurance .......................................................................... Prepaid Rent ................................................................................... Notes Receivable ........................................................................... Tools ............................................................................................... Accumulated Depreciation, Tools ................................................. Truck ............................................................................................... Accumulated Depreciation, Truck ................................................. Copyright ........................................................................................ Accounts Payable .......................................................................... Salaries Payable ............................................................................. Unearned Electrical Revenue ........................................................ Notes Payable, due June 1, 2024 .................................................. Notes Payable, due August 31, 2025............................................. Nymeth Sarda, Capital ................................................................... Totals .............................................................................................. FFS 4-1 (concluded)

Debits $ 5,000 10,500 19,000 1,050 7,200 12,000 21,000

Credits

$ 4,500 40,500 21,000 5,100

$121,350

21,000 3,150 5,250 2,550 27,000 36,900 $121,350

4-496

Last revised: September 2021.

Nymeth Sarda is not reinvesting profits. This is evident by the amount of his withdrawals: $61,500 which represents 87% of profit ($61,500/$70,575 × 100 = 87%). Reinvesting profits means that as profit causes equity to increase, assets are retained by the business for the purpose of growth rather than withdrawn which depletes assets. A

Withdrawals cause equity and assets to decrease which depletes rather than grows the assets. FFS 4-2 Part 1 a.

Cash ..................................................................... Accounts receivable............................................ Inventories and prepaid expenses ..................... Income taxes receivable ..................................... Total current assets ............................................

December 31, 2024 $ 1,567 3,743 6,848 1,322 $13,480

December 31, 2023 $ 1,447 3,238 5,289 176 $10,150

Accounts payable and accrued liabilities .......... Current borrowings ............................................. Customer deposits and prepaid dues................ Current portion of mortgages ............................ Total current liabilities ........................................

December 31, 2024 $20,706 25,817 10,965 1,411 $58,899

December 31, 2023 $17,755 24,839 6,037 61 $48,692

Part 2 *c. Current ratio.

December 31, 2024 13,480/58,899 = 0.23:1

December 31, 2023 10,150/48,692 = 0.21:1

*d. The change in the ratio was favourable. GolfLink had greater current assets at December 31, 2024 to cover current obligations ($0.23 of current assets to cover every $1.00 of current liability) than it had at December 31, 2023. However, it appears that GolfLink may have difficulty in meeting current obligations.

4-497

Last revised: September 2021.

CRITICAL THINKING QUESTION CT 4-1 Note to instructor: Student responses will vary therefore the answer here is only suggested and not inclusive of all possibilities; it is presented in point form for brevity. Problem(s): — Delton Property Rentals cannot pay employees in March and the bank will not lend it money Goal(s)*: — From the perspective of the bank, the bank needs to follow internal policies and procedures regarding to whom it is appropriate to lend cash Assumption(s)/Principle(s): — That a decision to lend money will be based on the balance sheet prepared below Facts: — as presented in balance sheet below prepared from information provided Conclusion(s)/Consequence(s): — the balance sheet was weakened significantly from 2022 to 2023 given that liabilities were 32% of total assets (240,000/750,000 × 100) in 20 and 98% in 2023 (2,780,000/2,850,000 × 100). It appears that the increase was caused by a note payable used to purchase land and buildings. — The $2,440,000 note payable requires a $200,000 annual payment and current assets on hand as of March 31, 2023 total $98,000 (75,000 + 15,000 + 8,000); it appears that Delton Property Rentals will be unable to make the payment. — Given that accounts receivable have decreased significantly from 2022 to 2023, it could be assumed that sales have decreased in a corresponding manner. — Accounts payable have increased from $7,000 in 2022 to $340,000 in 2023 yet there are current assets on hand as of March 31, 2023 totalling $98,000 (75,000 + 15,000 + 8,000); it appears that Delton Property Rentals will be unable to pay its creditors. — The 2023 current ratio is: (75,000 + 15,000 + 8,000)/540,000 = $0.18:$1.00 which indicates that Delton will have difficulty meeting its current obligations; the 2022 current ratio was: (215,000 + 40,000 + 50,000)/(7,000 + 200,000 + 29,000) = $1.29:$1.00 which indicates a dramatic deterioration in Delton‘s liquidity.

4-498

Last revised: September 2021.

— If the bank lends Delton money, it risks noncollection; on the assumption that the $2,440,000 loan is with the same bank and that it is secured by the land and building, the bank should not lend Delton the money. *The goal is highly dependent on ―perspective.‖

4-499

Last revised: September 2021.

CT 4-1 (concluded)

Delton Property Rentals Balance Sheet March 31 Assets Current assets Cash ................................................................ Accounts receivable ....................................... Supplies .......................................................... Total current assets ..................................... Property, plant and equipment Land................................................................. Buildings ......................................................... Accumulated depreciation, buildings ......... Equipment ....................................................... Accumulated depreciation, equipment ....... Total property, plant and equipment ........... Non-current investments Notes receivable, due Nov. 30, 2024 ............. Total assets.......................................................... Liabilities Current liabilities Accounts payable ........................................... Unearned revenue .......................................... Current portion of notes payable .................. Total current liabilities ................................. Non-current liabilities Notes payable (less current portion) ............ Total liabilities ..................................................... Equity Teal Delton, capital ............................................ Total liabilities and equity...................................

2023 $

2022

15,000 75,000 8,000 98,000

$ 40,000 215,000 50,000 $305,000

$ 675,000 2,112,000 -165,000 45,000 -35,000 $2,632,000

$150,000 430,000 -150,000 45,000 -30,000 $445,000

120,000 $2,850,000

0 $750,000

$ 340,000 0 200,000 $ 540,000

2,240,000 $2,780,000

4,000 $240,000

70,000 $2,850,000

510,000 $750,000

7,000 29,000 200,000 $236,000

4-500

Last revised: September 2021.

Cumulative Problem, Echo Systems (45 minutes) Part 1 Closing entries and general ledger accounts: General Journal

Page

G6 Date 2023 Dec.

Note:

Account Titles and Explanation PR Credit Closing entries: Computer Services Revenue ............................. 403 Income Summary ....................................... 901 To close the revenue account.

Debit

Income Summary............................................... 901 Depreciation Expense, Office Equipment .............................................. 612 Depreciation Expense, Computer Equipment .............................................. 613 Wages Expense ......................................... 623 Insurance Expense .................................... 637 Rent Expense............................................. 640 Computer Supplies Expense ...................... 652 Advertising Expense................................... 655 Mileage Expense ........................................ 676 Repairs Expense, Computer ...................... 684 Charitable Donations Expense ................... 699 To close the expense accounts.

35,940

Income Summary............................................... 901 Mary Graham, Capital ................................ 301 To close the Income Summary account.

16,260

Mary Graham, Capital ........................................ 301 Mary Graham, Withdrawals ........................ 302 To close the withdrawals account.

14,400

All accounts with numbers that start with or 2 (Liabilities) are unaffected by the closing process.

52,200 52,200

1,500 2,250 6,200 1,080 6,750 5,430 5,820 2,800 2,610 1,500

16,260

14,400

the

digit

(Assets)

4-501

Last revised: September 2021.

Cumulative Problem (continued) NOTE: This solution includes all entries from prior months in the accounts. However, the Working Papers shorten the solution by simply showing the balances of the accounts as of December 31, 2023. Cash Date 2023 Oct.

Nov.

Dec.

Explanation 1 2 5 8 15 17 20 22 31 31 1 2 5 18 22 28 30 30 3 3 4 10 14 20 28 31 31

Debit

G1 G1 G1 G1 G1 G1 G1 G1 G2 G2 G2 G2 G2 G2 G2 G2 G2 G3 G4 G4 G4 G4 G4 G4 G4 G4 G4

90,000

Acct. No. 101 Credit Balance

9,000 4,320 2,640 6,600 1,410 3,720 2,400 1,400 7,200 1,000 9,300 1,920 3,750 1,500 1,200 2,800 3,600 2,100 1,200 7,500 1,200 3,000 11,250 5,700 600 3,600

90,000 81,000 76,680 74,040 80,640 79,230 75,510 77,910 76,510 69,310 68,310 77,610 75,690 79,440 77,940 76,740 73,940 70,340 68,240 67,040 74,540 73,340 76,340 87,590 93,290 92,690 89,090

4-502

Last revised: September 2021.

Cumulative Problem (continued) Date 2023 Oct.

Nov.

Dec.

Date 2023 Oct. Nov. Dec.

Date 2023 Oct. Dec.

Date 2023 Oct.

Date 2023 Dec.

Accounts Receivable Explanation 6 12 15 22 28 8 18 24 4 28 Computer Supplies Explanation 3 5 17 31 Prepaid Insurance Explanation 5 31 Prepaid Rent Explanation 2 31 Office Equipment Explanation 1

Debit

G1 G1 G1 G1 G2 G2 G2 G2 G4 G4

6,600 2,400

Debit

G1 G2 G4 G5

2,640 1,920 2,310

Debit

G1 G5

4,320

6,600 2,400 6,450 8,700 3,750 7,500 7,500 5,700

6,600 9,000 2,400 0 6,450 15,150 11,400 18,900 11,400 5,700

Acct. No. 126 Credit Balance

5,430

2,640 4,560 6,870 1,440

Acct. No. 128 Credit Balance

1,080

4,320 3,240

Acct. No. 131 Credit Balance

Debit

G1 G5

9,000

Debit

Acct. No. 163 Credit Balance

18,000

Accumulated Depreciation, Office Equipment Explanation PR 31

Acct. No. 106 Credit Balance

6,750

Debit

9,000 2,250

Credit

Acct. No.164 Balance

1,500

Cumulative Problem (continued)

4-503

Last revised: September 2021.

Date 2023 Oct.

Date 2023 Dec.

Date 2023 Oct. Dec.

Date 2023 Dec.

Date 2023 Oct. Dec.

Date 2023 Oct. Nov. Dec.

Debit

Acct. No. 167 Credit Balance

36,000

Accumulated Depreciation, Computer Equipment Explanation PR Debit

Acct. No. 168 Credit Balance

Computer Equipment Explanation 1

31 Accounts Payable Explanation 3 8 17 Wages Payable Explanation 31

2,250

Debit

Acct. No. 201 Credit Balance

G1 G1 G4

2,640

14 Mary Graham, Capital Explanation

Debit

2,640 0 2,310

Acct. No. 210 Credit Balance 800

Debit

800

Acct. No. 236 Credit Balance

3,000

Acct. No. 301 Credit Balance

G2 G6 G6 Mary Graham, Withdrawals Explanation PR

31 30 31 31

2,310

G5 Unearned Computer Services Revenue Explanation PR

1 31 31

2,640

2,250

G2 G3 G4 G6

Debit

144,000 16,260

3,000

14,400

144,000 160,260 145,860

Debit

Acct. No. 302 Credit Balance

7,200 3,600 3,600 14,400

7,200 10,800 14,400 0

4-504

Last revised: September 2021.

Cumulative Problem (continued) Date 2023 Oct.

Nov.

Dec.

Date 2023 Dec.

Date 2023 Oct. Nov. Dec.

Date 2023 Dec.

Computer Services Revenue Explanation PR 6 12 28 2 8 24 20 31

Debit

Acct. No. 403 Credit Balance

G1 G1 G2 G2 G2 G2 G4 G6

52,200

6,600 9,000 15,450 24,750 33,450 40,950 52,200 0

Depreciation Expense, Office Equipment Explanation PR

Debit

Acct. No. 612 Credit Balance

31 31

G5 G6 Depreciation Expense, Computer Equipment Explanation PR

31 31 Wages Expense Explanation 31 30 10 31 31 Insurance Expense Explanation 31 31 Rent Expense Explanation

31 31 Cumulative Problem (continued)

6,600 2,400 6,450 9,300 8,700 7,500 11,250

1,500 1,500

Debit

G5 G6

2,250

Debit

G2 G2 G4 G5 G6

1,400 2,800 1,200 800

Acct. No. 613 Credit Balance

2,250

Debit

G5 G6

1,080

Debit

G5 G6

6,750

1,400 4,200 5,400 6,200 0

Acct. No. 637 Credit Balance

1,080

2,250 0

Acct. No. 623 Credit Balance

6,200

1,500 0

1,080 0

Acct. No. 640 Credit Balance

6,750

6,750 0

4-505

Last revised: September 2021.

Date 2023 Dec.

Date 2023 Oct. Dec.

Date 2023 Nov. Dec.

Date 2023 Oct. Dec.

Date 2023 Nov. Dec.

Date 2023 Dec.

Computer Supplies Expense Explanation PR 31 31 Advertising Expense Explanation 20 3 31 Mileage Expense Explanation 1 28 31 31

Debit

G5 G6

5,430

Debit

G1 G4 G6

3,720 2,100

5,430

Debit

G2 G2 G4 G6

1,000 1,200 600

G1 G4 G6

2,610

22 31

Income Summary Explanation

31 31 31 Cumulative Problem (concluded)

Debit

G2 G6

1,500

Debit

G6 G6 G6

35,940 16,260

1,000 2,200 2,800 0

Acct. No. 684 Credit Balance

1,410 1,200

Charitable Donations Expense Explanation PR

3,720 5,820 0

Acct. No. 676 Credit Balance

2,800

Debit

5,430 0

Acct. No. 655 Credit Balance

5,820

Repairs Expense, Computer Explanation PR 17 3 31

Acct. No. 652 Credit Balance

1,410 2,610 0

Acct. No. 699 Credit Balance

1,500

1,500 0

Acct. No. 901 Credit Balance 52,200

52,200 16,260 0

4-506

Last revised: September 2021.

Acct. No. Account ............. Debit Credit 101 ....................................................... Cash ........ $ 89,090 106 ..............................Accounts receivable ........ 5,700 126 ................................ Computer supplies ........ 1,440 128 ................................. Prepaid insurance ........ 3,240 131 ........................................... Prepaid rent ........ 2,250 163 ................................... Office equipment ........ 18,000 164Accumulated depreciation, office equipment $ 1,500 167 ............................ Computer equipment ........ 36,000 168Accum. depreciation, computer equipment .. 2,250 201 .................................. Accounts payable ........ 2,310 210 ...................................... Wages payable ........ 800 236 ................ Unearned computer revenue ........ 3,000 301 ............................ Mary Graham, capital ........ 145,860 ........................................................... Totals ........ $155,720 ....................................................... $155,720

4-507

Last revised: September 2021.

SOLUTIONS MANUAL to accompany

Fundamental Accounting Principles th

17 Canadian Edition by Larson/Dieckmann/Harris

Revised for the 17th Edition by: John Harris, Seneca College

Technical checks by: Rhonda Heninger, SAIT

4-508

Last revised: September 2021.

Chapter 5

Accounting for Merchandising Activities

Chapter Opening Critical Thinking Challenge Questions* Why do many retail stores, such as large grocery chains, invest additional resources in technology that supports using a perpetual inventory system? Why would a retail store choose a perpetual inventory system over a periodic inventory system? Is the periodic inventory system acceptable under GAAP?

A perpetual inventory system allows real-time information, meaning that at any given time it is known what has been sold and what is in inventory to a high level of detail. The better the information, the better planning and control. Yes, the periodic inventory system is acceptable under GAAP.

*The Chapter 5 Critical Thinking Challenge questions are asked at the beginning of this chapter. Students are reminded at the conclusion of the chapter to refer to the Critical Thinking Challenge questions at the beginning of the chapter. The solutions to the Critical Thinking Challenge questions are available here in the Solutions Manual and accessible to students in the print and ebook.

Knowledge Check-Up Questions 1. a)

2. c)

3. c)

4. b)

5. c)

6. a) 7. b)

8. b)

9. d)

10. a) 11* a) 12* a)

Concept Review Questions

4-509

Last revised: September 2021.

1. Recipe Unlimited Corporation is a Canadian company that operates several restaurant chains, as well as major food distribution for correctional facilities, educational facilities and other large operations. It manufactures food and packages these for delivery to clients. It therefore has revenue from these products as well as through delivery and sale of them. 2. A detailed calculation of the cost of goods sold is not provided but some minor additional information is available in Note 7 to the financial statements. 3. Additional accounts of a merchandising company include Merchandise Inventory, Sales, Cost of Goods Sold, Sales Discounts, and Sales Returns and Allowances. 4. Only merchandising companies present merchandise inventory on the balance sheet. Only merchandising companies present sales and cost of goods sold on the income statement. 5. Mason, I disagree with you. Gross profit is calculated by Sales less cost of goods sold. Profit is calculated by taking gross profit and further deducting operating expenses. Therefore, a company can have a positive gross profit and a loss if its operating expenses are greater than its gross profit from sales of merchandise. 6. Volume purchase discounts (trade discounts) are deducted from the list or catalogue price to determine the purchase price. Trade discounts are not recorded in the accounting records. Early payment (cash discounts) are granted in return for early payment and reduce the amount paid below the negotiated price. 7. A company‘s manager is concerned about the quantity of its purchase returns because the company incurs costs in receiving, inspecting, identifying, and returning the merchandise. Therefore, more returns create more expenses. By knowing more about the returns, the manager can decide if there is a problem. 8. FOB shipping point is when the ownership of merchandise inventory transfers from the seller to the buyer when the inventory is shipped from the seller‘s place of business. The buyer is responsible for paying shipping costs and bears the risk of damage or loss when goods are in transit. FOB destination is the ownership of merchandise inventory transfers from the seller to the buyer at the buyer‘s place of business. The seller is responsible for paying shiping charges and bears the risk of damage or loss in transit. The following is a sample diagram.

4-510

Last revised: September 2021.

9. Spin Master should attempt to negotiate the shipping terms to FOB destination. Title will pass after the goods are safely delivered to Spin Master‘s store and transportation charges will be the responsibility of the vendor Spin Master is buying from. 10. The sender of a debit memo records a debit and the recipient records a credit. 11. Sales discount is a term used by a seller to describe a cash discount granted to a customer. Purchase discount is a term used by a purchaser to describe a cash discount received from a supplier. 12. In today‘s business world, organizations must concentrate on meeting their customers‘ needs and avoiding the possibility of their dissatisfaction. If the needs aren‘t met and dissatisfaction grows, the customers will deal with other companies or entities. One measure of the dissatisfaction of a merchandiser‘s customers is the amount of sold goods that is later returned by those customers. Their dissatisfaction needs to be understood and then dealt with promptly to encourage them to remain loyal to the company. The reasons for the return also need to be determined to allow the problem to be avoided in the future. For example, the returns might arise from product defects, shipping damage, misleading information provided at the time of sale, or fickle customers. An important early step in controlling returns is to have information about their dollar amount. In addition, managers can set goals for reducing the dollar amount of sales returns. Both purposes can be helped by having the company‘s accounting system record the sales value of returned goods in a separate contra account instead of the Sales account. Although this information can be gathered in other ways, this approach captures the information at the time of the return and allows it to be easily reported. Although a company‘s sales return record can be highly important for managers, there is relatively little value in the information for external decision makers because they are not concerned with day-to-day operating details. Although management might choose to report the amount of sales returns as evidence of the effectiveness of a program to reduce them, their amount is virtually never reported in financial statements provided to investors, creditors, and other external users. 13. Inventory shrinkage is determined by taking a physical count of the inventory on hand and comparing the cost of that inventory with the amount recorded in the Merchandise Inventory account. 14. The single-step format presents the cost of goods sold and operating expenses in one list, totals the list, and subtracts the total from net sales in one step. The multiple-step format presents intermediate totals, including gross profit (the difference between net sales and cost of goods sold). 15. Disagree. A 50% mark-up percentage on a cost of $20 gives a selling price of $30 ($20 x (1+0.50) = 30). A 50% target gross margin on a cost of $20 gives a selling price of $40 ($20 / (1-0.50)) = $40. QUICK STUDY Quick Study 5-1

4-511

Last revised: September 2021.

G. Merchandise inventory

H. Purchases discount

B. Credit period

F. Gross profit

A. Sales discount

C. Discount period

E. FOB shipping point

D. FOB destination

Quick Study 5-2 Answer: $5,600 "Free on Board Shipping Point." The term means that the buyer takes delivery of goods being shipped to it by a supplier once the goods leave the supplier's shipping dock. Buyer absorbs all costs after $5,000 original cost Quick Study 5-3 (15 minutes) a. (1) Computation of goods available for sale Beginning inventory ........................................................... Plus: Net purchases ........................................................... Goods available for sale ....................................................

$5,000 2,900 $87900

(2) Computation of cost of goods sold Beginning inventory ........................................................... Plus: Net purchases ........................................................... Goods available for sale .................................................... Less: Ending inventory ...................................................... Cost of goods sold .............................................................

$5,000 2,900 $7,900 1,700 $6,200

(3) Computation of gross profit Net sales ............................................................................. Less: Cost of goods sold (see 2) ...................................... Gross profit.........................................................................

$9,500 6,200 $3,300

Computation of net income McNeil Merchandising Company Net sales ............................................................................. Less: Cost of goods sold (see 2) ...................................... Gross profit......................................................................... Less: Expenses .................................................................. Net income ..........................................................................

$9,500 6,200 $3,300 1,450 $ 1,850

Krug Service Company Revenues ............................................................................ Less: Expenses .................................................................. Net income ..........................................................................

$14,000 12,500 $ 1,500

4-512

Last revised: September 2021.

Quick Study 5-4 a.

Payment $ 4,900

Computations $ 5,000 – ($ 5,000 x 2%) = $ 5,000 x 98%

$19,800

$20,000 – ($20,000 x 1%) = $20,000 x 99%

$74,250

$75,000 – ($75,000 x 1%) = $75,000 x 99%

$ 9,700

$10,000 – ($10,000 x 3%) = $10,000 x 97%

Quick Study 5-5 Nov. 5

Merchandise Inventory 6,000 Accounts Payable ......................................................... Record credit purchase [(600 x $10].

6,000

Accounts Payable 250 Merchandise Inventory ................................................. Returned defective units [(25 x $10].

250

Nov. 7

Nov. 15

Accounts Payable 5,750 Cash .............................................................................. Merchandise Inventory* ............................................... Paid for net purchase less cash discount *[(6,000 - $250) x 2%].

5,635 115

Quick Study 5-6 Aug.

1 Merchandise Inventory 60,000 Accounts Payable .......................................................... Record credit purchase.

60,000

Aug. 11 Accounts Payable 60,000 Merchandise Inventory.................................................. Cash* .............................................................................. Paid for goods less discount. *$60,000 x (100% - 3%) Quick Study 5-7 Sep. 15

1,800 58,200

Merchandise Inventory 35,000 Accounts Payable .......................................................... Record credit purchase.

35,000

Sep. 29

Accounts Payable 35,000 Cash ............................................................................... Paid for goods outside discount period. Quick Study 5-8 Apr. 1

Apr. 1

35,000

Accounts Receivable .............................................................. Sales ............................................................................... Record sale of goods.

3,000

Cost of Goods Sold ................................................................

1,800

3,000

4-513

Last revised: September 2021.

Merchandise Inventory ................................................. Record cost of sale. Apr. 4

Apr. 4

Apr. 8

Apr. 11

1,800

Sales Returns and Allowances ............................................... Accounts Receivable ..................................................... Record sales return.

300

Merchandise Inventory ............................................................ Cost of Goods Sold ....................................................... Returned goods to inventory.

180

Accounts Receivable .............................................................. Sales ............................................................................... Record sale of goods.

1,000

Cost of Goods Sold ................................................................. Merchandise Inventory.................................................. Record cost of sale.

700

300

180

1,000

Cash .................................................................... 2,700 Accounts Receivable.................................... .................... Received payment less return.

700

2,700

Quick Study 5-9 A Net sales ................................. $14,000 Cost of goods sold ................ 8,000 Gross profit from sales ......... $ 6,000 Operating expenses............... 9,000 Profit (loss)............................. $ (3,000)

B $102,000 64,000 $ 38,000 31,000 $ 7,000

C $68,000 31,000 $37,000 22,000 $15,000

D $540,000 320,000 $220,000 261,000 $(41,000)

E $398,000 215,000 $183,000 106,000 $ 77,000

Quick Study 5-10 a. b. c. d. e.

Periodic AND perpetual inventory systems Perpetual inventory systems Perpetual inventory systems Periodic inventory systems Perpetual inventory systems

Quick Study 5-11 a. This information reflects a perpetual inventory system. 150 + 340 – 60 = 430 Cost of Goods Sold (credit to Merchandise Inventory and debit to Cost of Goods Sold) b. This information reflects a periodic inventory system. 150 + 340 – 60 = 430 Cost of Goods Sold

4-514

Last revised: September 2021.

Quick Study 5-12 a. This information reflects a periodic inventory system. 170 + 700 – 120 = 750 Cost of goods sold b. This information reflects a perpetual inventory system. 200 + 1,000 – 75 = 1,125 Cost of Goods Sold Quick Study 5-13 a. The terms 3/15, n/30 means there is a 3% discount if the company pays within 15 days. The net balance is due within 30 days. b. $150 ($5,000 x 3%) c. 13 days Oct.

28 Accounts Payable .......................................................

5,000

Merchandise Inventory ........................................

150

Cash ......................................................................

4,850

To record payment of credit purchase within discount period; $5,000 x 3% = $150 discount. d. 17 days Nov.

1 Accounts Payable ....................................................... Cash ...................................................................... To record payment of credit purchase.

5,000 5,000

Quick Study 5-14 May

1 Merchandise Inventory ............................................... Accounts Payable ................................................ To record purchase of merchandise; terms 1/10, n/30.

1,200

14 Accounts Payable ....................................................... Cash ...................................................................... To record payment of credit purchase.

1,200

4-515

Last revised: September 2021.

15 Merchandise Inventory ............................................... Accounts Payable ................................................ To record purchase of merchandise; terms 2/15, n/30.

3,000

30 Accounts Payable ....................................................... Merchandise Inventory ........................................ Cash ...................................................................... To record payment of credit purchase within discount period; $3,000 x 2% = $60 discount.

3,000

60 2,940

Quick Study 5-15 Aug.

2 Merchandise Inventory ............................................... Accounts Payable ................................................ To record purchase of merchandise; terms 1/5, n/15.

14,000

4 Accounts Payable ....................................................... Merchandise Inventory ........................................ To record allowance regarding August 2 credit purchase.

1,500

17 Accounts Payable ....................................................... Cash ...................................................................... To record payment of credit purchase less allowance; 14,000 – 1,500 = 12,500.

12,500

14,000

1,500

12,500

Quick Study 5-16 Mar.

Merchandise Inventory ........................................... Accounts Payable .......................................... To record purchase of merchandise; terms 2/10, n/60 (500  $5) × 80% = $2,000 Accounts Payable .................................................. Merchandise Inventory ................................... To record purchase return; (50/500) × $2,000 = $200

2,000 2,000

200

Accounts Payable .................................................. 1,800 Cash .............................................................. Merchandise Inventory ................................... To record payment within discount period; $2,000 - $200 = $1,800; $1,800 – ($1,800 × 2%) = $1,764

200

1,764 36

Quick Study 5-17

4-516

Last revised: September 2021.

a. The discount period begins on October 1, 2023 and ends on October 21, 2023. b. $120 ($3,000 x 4%) c. Oct.

20 Cash ............................................................................. Sales Discounts .......................................................... Accounts Receivable – Liu and Li Co. ................ To record collection within discount period; $3,000 x 4% = $120 discount.

2,880 120

23 Cash ............................................................................. Accounts Receivable – Liu and Li Co. ................ To record collection from credit customer.

3,000

d. Oct.

3,000

Quick Study 5-18 Sept.

1 Accounts Receivable – JenAir ................................... Sales ..................................................................... To record sale; terms 2/10, n/30.

6,000

1 Cost of Goods Sold..................................................... Merchandise Inventory ........................................ To record cost of sales.

4,200

14 Cash ............................................................................. Accounts Receivable – JenAir ............................ To record collection from credit customer.

6,000

15 Accounts Receivable – Dennis Leval......................... Sales ..................................................................... To record sale; terms 2/10, n/30.

1,800

15 Cost of Goods Sold..................................................... Merchandise Inventory ........................................ To record cost of sales.

1,500

6,000

4,200

6,000

1,800

1,500

4-517

Last revised: September 2021.

25 Cash ............................................................................. Sales Discounts .......................................................... Accounts Receivable – Dennis Leval.................. To record collection within discount period; $1,800 x 2% = $36 discount.

1,764 36 1,800

Quick Study 5-19 Oct.

15 Accounts Receivable – Leslie Garth .......................... Sales ..................................................................... To record sale; terms 1/5, n/20.

900

15 Cost of Goods Sold..................................................... Merchandise Inventory ........................................ To record cost of sales.

600

16 Sales Returns and Allowances .................................. Accounts Receivable – Leslie Garth ................... To record allowance.

100

25 Cash ............................................................................. Accounts Receivable – Leslie Garth ................... To record collection; 900 – 100 = 800.

800

900

600

100

800

Quick Study 5-20 Apr.

Accounts Receivable ............................................. Sales .............................................................. To record credit sale; terms 2/10, EOM.

2,000

Cost of Goods Sold ................................................ Merchandise Inventory ................................... To record cost of sales.

1,400

Sales Returns and Allowances................................ Accounts Receivable ...................................... To record sales return.

500

Merchandise Inventory ........................................... Cost of Goods Sold ........................................ To restore goods to inventory.

350

Cash ...................................................................... Sales Discounts ..................................................... Accounts Receivable ....................................... To record payment on account; $2,000 – $500 = $1,500; $1,500 × 98% = $1,470.

1,470 30

2,000

1,400

500

350

1,500

4-518

Last revised: September 2021.

Quick Study 5-21 July

Cost of Goods Sold ................................................ Merchandise Inventory ................................... To adjust for shrinkage; $34,800 – $32,900 = $1,900

1,900 1,900

Gross profit from sales = Net sales – Cost of goods sold = (157,200 – 1,700 – 3,500) – (102,000 + 1,900) = 152,000 – 103,900 = 48,100

Quick Study 5-22 July 31

Cost of Goods Sold ................................................................ 1,900 Merchandise Inventory.................................................. Adjust for shrinkage based on physical count [$37,800 - $35,900].

1,900

4-519

Last revised: September 2021.

Quick Study 5-23 a. Classified Multi-Step Income Statement JETCO Income Statement For Year Ended December 31, 2023 Sales .................................................................................. Less: Sales discounts ..................................................... Net sales ............................................................................ Cost of goods sold ........................................................... Gross profit from sales .................................................... Operating expenses: Selling expenses: Sales salaries expense .............................................. Advertising expense .................................................. Total selling expenses ............................................... General and administrative expenses: Office salaries expense ............................................. Office supplies expense ............................................ Total general and administrative expenses ............. Total operating expenses ............................................. Income from operations ................................................... Other revenues/expenses: Interest income ............................................................ Profit ..................................................................................

$100 4 $ 96 60 $ 36

$ 15 6 $ 21 $ 10 3 13 34 $ 2 5 $ 7

b. Single-Step Income Statement JETCO Income Statement For Year Ended December 31, 2023 Revenues: Net sales ....................................................................... Interest income ............................................................ Total revenues.............................................................. Expenses: Cost of goods sold ...................................................... Selling expenses .......................................................... General and administrative expenses ........................ Total expenses ............................................................. Profit ..................................................................................

$ 96 5 $101 $ 60 21 13 94 $ 7

4-520

Last revised: September 2021.

Quick Study 5-24 Sales ........................................................ Sales discounts ....................................... Sales returns and allowances ................. Net sales .................................................. Cost of goods sold ................................. Gross profit from sales ........................... Gross profit ratio ........................................

(a)

(b)

(c)

(d)

$130,000 (4,200) (17,000) $108,800 (76,600) $ 32,200 29.60%1

$512,000 (16,500) (5,000) $490,500 (326,700) $163,800 33.39%2

$35,700 (400) (5,000) $30,300 (21,300) $ 9,000 29.70%3

$245,700 (3,500) (700) $241,500 (125,900) $115,600 47.87%4

Gross profit ratio calculations*: 1. ($32,200/$108,800) x 100 = 29.60% 2. ($163,800/$490,500)) x 100 = 33.39% 3. ($9,000/$30,300) x 100 = 29.70% 4. ($115,600/$241,500) x 100 = 47.87% *rounded to two decimal places Quick Study 5-25 Carrier Sales .................................................... $150,000 Sales discounts................................... (5,000) Sales returns and allowances ............ (20,000) Net sales .............................................. 125,000

Lennox $550,000 (17,500) (6,000) 526,500

Trane $38,700 (600) (5,100) 33,000

York $255,700 (4,800) (900) 250,000

Cost of goods sold ............................. (79,750) Gross profit $ 45,250

(329,589) $196,911

(24,453) $ 8,547

(126,500) $123,500

37.4%

25.9%

49.4%

Gross margin ratio: (Gross profit / Net sales) ...............

36.2%

Interpretation of gross margin ratio for a: The ratio of 36.2% implies that for each dollar in net sales the company earns 36.2 cents in gross profit. The company must still deduct other expenses that it incurs in running the business when computing net income. Quick Study 5-26 ($248,000 – $114,080)/$248,000 = 0.54 or 54% This means that Willaby realizes a gross margin of 54¢ for each $1 of sales. Willaby‘s gross profit ratio of 54% is favourable in comparison to the industry average of 53%, or 53¢ for each $1 of sales.

4-521

Last revised: September 2021.

The selling price of non-organic bananas will be $1.26 ($0.81 x (1+0.55)) and the selling price of organic bananas will be $2.12 ($1.21 x (1+0.75). Quick Study 5-28 1. a. 25% (($100 - $80) / $80) b. 60% (($160 – $100) / $100) c. 100% (($320 – $160) / $160) 2. 300% (($320 – $80) /$ 80) Quick Study 5-29 The selling price of jeans will be $50 (($30/(1-0.40)) and the selling price of tops will be $42 (($30 x 1.40).

4-522

Last revised: September 2021.

*Quick Study 5-30 a. QS5-14 – Periodic May

1 Purchases .................................................................... Accounts Payable ................................................ To record purchase; terms 1/10, n/30.

1,200

14 Accounts Payable ....................................................... Cash ...................................................................... To record payment of credit purchase.

1,200

15 Purchases .................................................................... Accounts Payable ................................................ To record purchase; terms 2/15, n/30.

3,000

30 Accounts Payable ....................................................... Purchase Discounts ............................................. Cash ...................................................................... To record payment within discount period; $3,000 x 2% = $60 discount.

3,000

1,200

3,000

60 2,940

b. QS5-15 – Periodic Aug.

2 Purchases .................................................................... Accounts Payable ................................................ To record purchase; terms 1/5, n/15.

14,000

4 Accounts Payable ....................................................... Purchase Returns and Allowances ..................... To record allowance.

1,500

17 Accounts Payable ....................................................... Cash ...................................................................... To record payment less allowance.

12,500

14,000

1,500

12,500

4-523

Last revised: September 2021.

*Quick Study 5-3 0 (concluded) c. QS5-16 - Periodic Mar.

5 Purchases .................................................................... Accounts Payable ............................................... To record purchase; terms 2/10, n/60. (500 × $5) × 80% = $2,000

2,000

7 Accounts Payable ....................................................... Purchase Returns and Allowances .................... (50/500) × $2,000 = $200

200

15 Accounts Payable ....................................................... Cash .................................................................... Purchase Discounts ........................................... $1,800 – ($1,800 × 2%) = $1,764

1,800

2,000

200

1,764 36

*Quick Study 5-31 a. QS5-18 - Periodic Sept.

1 Accounts Receivable – JenAir ................................... Sales ..................................................................... To record sale; terms 2/10, n/30.

6,000

14 Cash ............................................................................. Accounts Receivable – JenAir ............................ To record collection from credit customer.

6,000

15 Accounts Receivable – Dennis Leval......................... Sales ..................................................................... To record sale; terms 2/10, n/30.

1,800

1,764 36

6,000

1,800

4-524

Last revised: September 2021.

*Quick Study 5-31 (concluded) b. QS5-19 - Periodic Oct.

15 Accounts Receivable – Leslie Garth ............................ Sales ...................................................................... To record sale; terms 1/5, n/20.

900

16 Sales Returns and Allowances .................................... Accounts Receivable – Leslie Garth ................... To record sales allowance.

100

25 Cash ............................................................................... Accounts Receivable – Leslie Garth ................... To record payment less allowance.

800

900

100

800

c. QS5-20 - Periodic Apr.

1 Accounts Receivable .................................................... Sales ...................................................................... To record sales; terms 2/10, EOM.

2,000

4 Sales Returns and Allowances .................................... Accounts Receivable............................................ To record sales return; returned to inventory.

500

11 Cash ............................................................................... Sales Discounts ............................................................ Accounts Receivable............................................ To record payment less return and discount.

1,470 30

2,000

500

1,500

*Quick Study 5-32 Merchandise inventory, January 1, 2023 .................................... Purchases ..................................................................................... Less: Purchase discounts .......................................................... Add: Transportation-in ............................................................... Net Purchases .............................................................................. Cost of Goods Available for Sale ................................................ Less: Merchandise inventory, December 31, 2023 ................... Cost of Goods Sold......................................................................

$ 40,000 $180,000 1,400 14,000 192,600 $232,600 22,000 $210,600

4-525

Last revised: September 2021.

*Quick Study 5-33

Sales .......................................................... Sales discounts ........................................ Net Sales ...................................................

a $130,000 (4,200) $125,800

b $512,000 (16,500) $495,500

c $35,700 (400) $35,300

d $245,700 (3,500) $242,200

Merchandise inventory, Jan. 1, 2023 ....... Purchases ................................................. Purchase returns and allowances ........... Cost of goods available for sale .............. Merchandise inventory, Dec. 31, 2023........ Cost of goods sold ...................................

$ 8,000 120,000 (4,000) $124,000 (7,500) $116,500

$ 21,000 350,000 (14,000) $357,000 (22,000) $335,000

$ 1,500 29,000 (750) $29,750 (900) $28,850

Gross profit from sales ............................ Gross profit ratio ......................................

$ 9,300 1 7.39%

$160,500 2 32.39%

$ 6,450 3 18.27%

$114,100 47.11%4

4,300 131,000 (3,100) $132,200 (4,100) $128,100

Calculations*: 1. 9,300/125,800 x 100 = 7.39% 2. 160,500/495,500 x 100 = 32.39% 3. 6,450/35,300 x 100 = 18.27% 4. 114,100/242,200 x 100 = 47.11% *Rounded to two decimal places *Quick Study 5-34 Mar. 1 Merchandise Inventory ............................................. GST Receivable ....................................................... Accounts Payable ............................................ To record credit purchase; $5,000 x 5% = 250 GST.

5,000 250 5,250

*Quick Study 5-35 Mar.

Accounts Receivable ............................................... PST Payable .................................................... GST Payable .................................................... Sales ................................................................ To record credit sale; $5,800 x 7% = $406 PST; $5,800 x 5% = $290 GST.

6,496

Cost of Goods Sold ................................................... Merchandise Inventory ..................................... To record cost of sale.

5,000

406 290 5,800

5,000

4-526

Last revised: September 2021.

*Quick Study 5-36 Mar.

Purchases .............................................................. GST Receivable ..................................................... Accounts Payable .......................................... To record credit purchase; $5,000 x 5% = 250 GST.

5,000 250 5,250

*Quick Study 5-37 Mar.

Accounts Receivable ............................................. PST Payable .................................................. GST Payable .................................................. Sales .............................................................. To record credit sale; $5,800 x 7% = $406 PST; $5,800 x 5% = $290 GST.

6,496 406 290 5,800

EXERCISES Exercise 5-1 (15 minutes) a $ 208,800 Sales ................................................... Cost of goods sold ............................. 100,600 Gross profit from sales ...................... 108,200 Operating expenses ........................... 91,600 Profit (loss) ......................................... 16,600

b $ 165,000 103,000 62,000 93,000 (31,000)

c $ 73,800 41,600 32,200 38,100 (5,900)

d $ 466,000 303,000 163,000 106,000 57,000

1 Merchandise Inventory ............................................... Accounts Payable ................................................ To record purchase; terms 2/10, n/30.

17,100

5 Merchandise Inventory ............................................... Cash ...................................................................... To record purchase for cash.

8,300

6 Merchandise Inventory ............................................... Accounts Payable ................................................ To record purchase; terms 3/15, n/45.

22,100

9 Office Supplies ............................................................ Accounts Payable ................................................ To record purchase; n/15.

1,950

e $ 280,800 205,600 75,200 103,600 (28,400)

Exercise 5-2 (25 minutes) Feb.

17,100

8,300

22,100

1,950

10 No entry. 11 Accounts Payable .......................................................

17,100

4-527

Last revised: September 2021.

Cash ...................................................................... Merchandise Inventory ........................................ To record payment within discount period; $17,100 x 2% = $342 discount.

Mar.

16,758 342

24 Accounts Payable ....................................................... Cash ...................................................................... To record payment.

1,950

23 Accounts Payable ....................................................... Cash ...................................................................... To record payment.

22,100

1,950

22,100

Exercise 5-3 (30 minutes) 2023 Mar.

Merchandise Inventory ........................................... 4,200 Accounts Payable — Paige Denim .................. Purchased merchandise on credit; terms 2/15, n/60, FOB shipping. Merchandise Inventory ........................................... Cash ............................................................... Paid shipping charges for purchased merchandise.

350

Accounts Payable — Paige Denim ........................ Merchandise Inventory ................................... Returned unacceptable merchandise.

400

Accounts Payable — Paige Denim ......................... Merchandise Inventory .................................... Cash ............................................................... Paid balance within the discount period; 4,200 – 400 = 3,800; 3,800 x 2% = 76.

3,800

4,200

350

400

76 3,724

Merchandise Inventory ........................................... 9,600 Accounts Payable — J Brand .......................... Purchased merchandise; terms 2/10, n/30, FOB destination.

9,600

Accounts Payable — J Brand ................................. Merchandise Inventory ................................... Received an allowance on purchase.

2,100 2,100

Accounts Payable —J Brand. ................................. Merchandise Inventory .................................... Cash ............................................................... Paid balance within the discount period;

7,500 150 7,350

4-528

Last revised: September 2021.

9,600 – 2,100 = 7,500; 7,500 x 2% = 150.

4-529

Last revised: September 2021.

Exercise 5-4 (25 minutes) Apr.

May

5 Accounts Receivable .................................................. Sales ..................................................................... To record sale; terms 3/10, n/30.

6,400

5 Cost of Goods Sold..................................................... Merchandise Inventory ........................................ To record cost of sales.

3,680

7 Cash ............................................................................. Sales ..................................................................... To record cash sale.

4,700

7 Cost of Goods Sold..................................................... Merchandise Inventory ........................................ To record cost of sales.

2,660

8 Accounts Receivable .................................................. Sales ..................................................................... To record sale; terms 3/10, n/30.

12,000

8 Cost of Goods Sold..................................................... Merchandise Inventory ........................................ To record cost of sales.

7,040

15 Cash ............................................................................. Sales Discounts .......................................................... Accounts Receivable ........................................... To record collection within discount period; $6,400 x 3% = $192 discount.

6,208 192

4 Cash ............................................................................. Accounts Receivable ........................................... To record collection.

12,000

6,400

3,680

4,700

2,660

12,000

7,040

6,400

12,000

4-530

Last revised: September 2021.

Exercise 5-5 (30 minutes) Feb.

1 Accounts Receivable .................................................. Sales ..................................................................... To record sale; terms 2/10, n/30, FOB destination.

2,100

1 Cost of Goods Sold..................................................... Merchandise Inventory ........................................ To record cost of sales.

1,500

2 Delivery Expense or Freight-Out ................................ Cash ...................................................................... To record delivery expenses for goods sold.

225

3 Sales Returns and Allowances .................................. Accounts Receivable ........................................... To record return of merchandise.

1,050

3 Merchandise Inventory ............................................... Cost of Goods Sold.............................................. To return merchandise to inventory.

750

4 Accounts Receivable .................................................. Sales ..................................................................... To record sale; terms 2/10, n/30, FOB destination.

3,800

4 Cost of Goods Sold..................................................... Merchandise Inventory ........................................ To record cost of sales.

2,280

11 Cash ............................................................................. Sales Discounts .......................................................... Accounts Receivable ........................................... To record collection, less return and discount; $2,100 - $1,050 = $1,050 x 2% = $21 discount.

1,029 21

23 Cash ............................................................................. Sales ..................................................................... To record cash sale.

1,200

23 Cost of Goods Sold..................................................... Merchandise Inventory ........................................ To record cost of sales.

720

28 Cash ............................................................................. Accounts Receivable ........................................... To record collection.

3,800

2,100

1,500

225

1,050

750

3,800

2,280

1,050

1,200

720

3,800

4-531

Last revised: September 2021.

Date

Account Titles and Explanation Oct. 1 Merchandise Inventory Accounts Payable – Orbit Pro

Debit

Credit

1,400 1,400

Purchased merchandise on credit; terms 3/10, n/30, FOB shipping point. 1 Merchandise Inventory Cash

200 200

Paid for shipping cost. 5 Accounts Receivable – Barber & Co. Sales

600 600

To record sale; terms 2/10, n/30, FOB shipping point. Cost of Goods Sold Merchandise Inventory

420 420

To record the cost of sales and reduce inventory. 7 Accounts Payable – Orbit Pro Merchandise Inventory

500 500

To record return of merchandise. 10 Accounts Payable – Orbit Pro Merchandise Inventory

900 27

Cash

873

Paid accounts payable within the discount period; 900 x 3% = 27. 14 Sales return and allowances Accounts Receivable – Barber & Co.

100 100

To record return of merchandise.

4-532

Last revised: September 2021.

Exercise 5-6 (Continued) 14 Merchandise Inventory Cost of Goods Sold

70 70

To record cost of the return of merchandise. 22 Cash

500 Accounts Receivable – Barber & Co.

500

Collected accounts receivable outside the discount period. 23 Merchandise Inventory Accounts Payable – Keratin Hair

2,000 2,000

To record purchase of merchandise on credit, terms 2/10, n/30, FOB shipping point. 23 Merchandise Inventory Cash

300 300

To record payment of shipping cost. 25 Accounts Receivable – Styling Room Sales

1,000 1,000

To record sale; 2/10, n/30, FOB destination. Cost of Goods Sold Merchandise Inventory

700 700

To record cost of sales and reduce inventory. 25 Freight-out Cash

150 150

To record payment of shipping cost.

4-533

Last revised: September 2021.

Exercise 5-6 (Concluded) 26 Accounts Payable – Keratin Hair Merchandise Inventory

2,000 40

Cash

1,960

Paid accounts payable within the discount period; 2,000 x 2% = 40. 31 Cash Sales Discount Accounts Receivable – Styling Room

980 20 1,000

Collected accounts receivable within the discount period; 1,000 x 2% = 20.

Exercise 5-7 (25 minutes) a. Entries journalized by Wilson Purchasing: 2023 May 11 Merchandise Inventory ........................................... Accounts Payable – Happy Sales.................... Purchased merchandise on credit; 2/10, n/90. 11

23,000 23,000

Merchandise Inventory ........................................... Cash ............................................................... Paid shipping charges on purchased merchandise.

1,300

Accounts Payable – Happy Sales ............................... Merchandise Inventory ....................................... Returned unacceptable merchandise.

3,600

Accounts Payable – Happy Sales ............................... Merchandise Inventory ........................................ Cash ................................................................... Paid balance within the discount period; 23,000 – 3,600 = 19,400; 19,400 x 2% = 388.

19,400

1,300

3,600

388 19,012

4-534

Last revised: September 2021.

b. Entries journalized by Happy Sales: 2023 May 11 Accounts Receivable – Wilson Purchasing ................. Sales ................................................................... Sold merchandise on account; 2/10, n/90. 11

23,000 23,000

Cost of Goods Sold ..................................................... Merchandise Inventory ........................................ To record cost of sale.

18,000

Sales Returns and Allowances.................................... Accounts Receivable – Wilson Purchasing ......... Accepted a return from a customer.

3,600

Merchandise Inventory ............................................... Cost of Goods Sold ............................................. Returned goods to inventory.

2,800

Cash ........................................................................... Sales Discounts .......................................................... Accounts Receivable – Wilson Purchasing ......... Collected account receivable; 23,000 – 3,600 = 19,400; 19,400 x 2% = 388.

19,012 388

18,000

3,600

2,800

19,400

Exercise 5-7 (concluded) Analysis Component Amount borrowed to pay the amount owing ........................ Annual rate of interest ........................................................... Interest per year ......................................................................

$19,012.00 × 4% $ 760.48

Interest per day ($760.48/365) ................................................

2.08

Discount taken ........................................................................ Interest paid on the 80-day* loan (80 × $2.08)** .................... Net savings from borrowing to pay within the discount period ..........................................................

388.00 (166.40)

221.60

*90 days in credit period – 10 days in discount period = 80 days.

**Alternate calculation: 19,012 × 4% × 80/365 = 166.68 (instead of 166.40) resulting in net savings from borrowing to pay within the discount period of 221.32 (instead of 221.60).

4-535

Last revised: September 2021.

Exercise 5-8 (10 minutes) 1. 2. 3. 4. 5.

d. c. f. a. h.

6. 7. 8. 9. 10.

e. j. i. b. g.

Exercise 5-9 (30 minutes) Merchandise Inventory Balance, Dec. 31, 2022 ............. Invoice cost of purchases ........ Returns by customers ............. Transportation-in .....................

35,000 186,000 2,200 1,900

Balance, Dec. 31, 2023 ..............

8,400

Purchase discounts received ....... Purchase returns and allowances received ................ Cost of sales transactions ........... Shrinkage ......................................

1,600 4,100 180,000 31,000

Cost of Goods Sold Represents all entries to record the cost component of sales transactions ................ Inventory shrinkage recorded in December 31, 2023, adjusting entry .......................... Balance .....................................

Represents all entries to record merchandise returned by customers 180,000 and restored to inventory during 2023

2,200

31,000 208,800

Analysis component: The shrinkage was $31,000. The cost of merchandise actually sold to customers was $180,000 (186,000 original invoice cost – 2,200 customer returns + 1,900 transportationin – 1,600 purchase discounts – 4,100 purchase returns = 180,000). The cost of goods sold was $208,800. Shrinkage therefore was 17% of the actual cost of merchandise sold ($31,000/$180,000 × 100) or 15% of the total cost of goods sold ($31,000/$208,800 × 100). As the inventory manager, I would want to know the cause of this significant shrinkage. Is it breakage or spoilage that can be controlled? Is it theft caused by weak internal controls? Reviewing the numbers allows the inventory manager to ask appropriate questions for the purpose of making good decisions.

4-536

Last revised: September 2021.

b) 23,500 + 115,000 = 138,500 total operating expenses c) 468,900 – 115,000 = 353,900 cost of goods sold d) (115,000/468,900) × 100 = 24.53% Analysis component: The change in the gross profit ratio for the year ended May 31, 2023 was an increase of 2.53% (from 22% to 24.53%). This is a favourable change because Westlawn is generating more gross profit per sales dollar that will contribute towards the covering of operating expenses.

4-537

Last revised: September 2021.

Exercise 5-11 (30 minutes)

Sales Sales discounts Sales returns and allowances Net sales Cost of goods sold Gross profit from sales Selling expenses Administrative expenses Total operating expenses Profit (loss) Gross profit ratio .................................

Company A 2023 2022 $263,000 $187,000 2,630 1,350 51,570 16,700 $208,800 $168,950 157,100 106,450 $ 51,700 $ 62,500 18,620 19,700 26,300 27,700 $ 44,920 $ 47,400 $ 6,780 $ 15,100 24.761 36.992

Company B 2023 2022 $114,200 $48,500 1,200 570 6,200 2,430 $106,800 $45,500 57,700 23,400 $ 49,100 $22,100 25,700 9,700 30,400 9,700 $ 56,100 $19,400 $ (7,000) $ 2,700 45.973 48.574

Calculations: 1. (51,700/208,800) × 100 = 24.76% 2. (62,500/168,950) × 100 = 36.99% 3. (49,100/106,800) × 100 = 45.97% 4. (22,100/45,500) × 100 = 48.57% Analysis component: Company B has more favourable gross profit ratios for both 2022 and 2023. Company A is showing a lower gross profit ratio than Company B and decreasing gross profit as a percentage of net sales. Note to instructor: You may wish to engage students in a discussion of other interesting comparisons in this information. For example: — COGS as a percentage of sales is lower for Company B than Company A. — Sales discounts as a percentage of sales is similar for both companies. — Sales returns and allowances are higher as a percentage of sales for Company A than Company B (which is particularly interesting considering that Company A has a higher COGS than Company B … you might assume higher quality but then why the higher returns/allowances?). — Company B has higher operating expenses as a percentage of sales than Company A. Company B has more than doubled its sales from 2022 to 2023 in comparison to the slower growth for Company A.

4-538

Last revised: September 2021.

Exercise 5-12 (30 minutes) Multiple-step income statement: COMPU-SOFT Income For Month Ended November 30, 2023 Net sales ...................................................................... Cost of goods sold ..................................................... Gross profit ................................................................. Operating expenses: Wages expense .................................................... Utilities expense .................................................. Depreciation expense, store equipment ............ Total operating expenses ................................ Profit from operations ................................................ Other revenues and expenses: Rent revenue ........................................................

Statement

$28,635* 14,800 $13,835 $6,300 2,100 120 8,520 $ 5,315

2,500 $ 7,815

Profit ............................................................................ *Calculated as: 29,400 – 45 – 720 = 28,635

Analysis component: The gross profit ratio for October is 40% ($32,000 - $19,200 = $12,800 gross profit; $12,800/$32,000 × 100 = 40%). The gross profit ratio for November is 48% ($13,835/$28,635 × 100 = 48.31%). Compu-Soft generated a higher gross profit per sales dollar in November than in October which is favourable because this represents a greater contribution towards the coverage of operating expense. Exercise 5-13 (60 minutes) a) 2023 Dec. 31

Sales salaries expense .......................................... Salaries payable .............................................. Accrued salaries to be paid.

3,200

Other selling expense ............................................ Prepaid selling expense ..................................

5,200

Depreciation expense, store equpiment .................. Accumulated Depreciation, store equipment .. To record depreciation expense.

2,500 2,500

3,200

5,200

4-539

Last revised: September 2021.

Exercise 5-13 (Continued) Note: A work sheet is not required for this question. The following shows the adjusted balances.

Perdu Sales Work Sheet For Year Ended December 31, 2023 Unadjusted Trial Balance Account Cash Merchandise inventory Prepaid selling expenses Store equipment Accumulated depreciation, store equipment Accounts payable Salaries payable Eldon Perdu, capital Eldon Perdu, withdrawals Sales Sales returns and allowances Sales discounts Cost of goods sold Sales salaries expense Utilities expense, store Depreciation expense, store equip. Other selling expenses Other administrative expenses Totals Profit Totals

Debit 8,000 9,800 8,000 40,000

Credit

Adjustments Debit

Credit

5,200

Adjusted Trial Balance Debit 8,000 9,800 2,800 40,000

9,800

2,500

12,300

14,840 0 25,360

3,200

14,840 3,200 25,360

3,600

3,600 858,000

858,000

33,000

8,000 431,000 94,000 12,600 -

8,000 431,000 97,200 12,600 2,500

3,200 2,500

70,000 190,000 908,000

Credit

5,200

908,000

10,900

75,200 190,000 10,900

913,700

4-540

Last revised: September 2021.

Exercise 5-13 (Concluded) b) Classified multiple-step income statement: PERDU SALES Income Statement For Year Ended December 31, 2023 Sales .................................................................................. Less: Sales returns and allowances............ Sales discounts .................................. Net sales ............................................................................ Cost of goods sold ........................................................... Gross profit from sales .................................................... Operating expenses: Selling expenses: Sales salaries expense .............................................. $97,200 Other selling expenses.............................................. 75,200 Utilities expense, store .............................................. 12,600 Depreciation expense, store equipment. ................. 2,500 Total selling expenses ............................................... General and administrative expenses: ........................ Total operating expenses ............................................. Profit ..................................................................................

$858,000 $33,000 8,000

41,000 $817,000 431,000 $386,000

$187,500 190,000 377,500 $ 8,500

Analysis component: The gross profit ratio for 2023 is $386,000/$817,000 × 100 = 47.25%. The gross profit ratio for 2022 was $330,000*/$600,000 × 100 = 55%. The gross profit ratio decreased from 2022 to 2023 which is unfavourable since the gross profit generated per net sales dollar has decreased thereby contributing less towards the coverage of operating expenses in 2023 than in 2022. *Sales – COGS = GP – Operating Expenses = Loss, therefore, $600,000 - ? = ? - $344,000 = -$14,000; GP - $344,000 = -$14,000 so GP = $330,000.

4-541

Last revised: September 2021.

Exercise 5-14 (10 minutes) 1. $100 ($40 / (1-0.60)) 2. $64 ($40 x (1+0.60) 3. $1,800 (($100-$64) x 50 running shoes)

*Exercise 5-15 (20 minutes) (a)

(b)

(c)

Purchases.................................................... Purchase discounts ................................... Purchase returns and allowances ............ Transportation-in ....................................... Cost of goods purchased ..........................

$92,000 (4,000) (3,000) 4,400 $89,400

$158,000 (10,000) (6,000) 14,000 $156,000

$120,000 (2,600) (4,400) 16,000 $129,000

Beginning inventory .................................. Cost of goods purchased .......................... Ending inventory........................................ Cost of goods sold ....................................

$ 5,000 89,400 (4,400) $90,000

$ 40,400 156,000 (30,000) $166,400

$ 34,000 129,000 (26,480) $136,520

Transportation-in is calculated as the amount needed to make cost of goods purchased equal the given amount. Cost of goods sold is calculated the usual way.

Purchase discounts is calculated as the amount needed to make cost of goods purchased equal the given amount. The beginning inventory is calculated as the amount needed to make cost of goods sold equal the given amount.

Cost of goods purchased is calculated the usual way. Then, that amount is transferred to the lower section and the ending inventory is calculated as the amount needed to make cost of goods sold equal the given amount.

4-542

Last revised: September 2021.

Exercise 5-16 (30 minutes)

Sales Cost of goods sold: Merchandise inventory (beginning) Net cost of merchandise purchases Merchandise inventory (ending) Cost of goods sold Gross profit from sales Operating expenses Profit (loss) Gross profit ratio

Company A 2023 110,000

2022 178,000

Company B 2023 90,000

2022 42,000

8,700 82,000 (8,400) 82,300 27,700 26,000 1,700 1 25.18%

27,300 100,700 (22,000) 106,000 72,000 54,000 18,000 2 40.45%

8,875 50,500 (8,920) 50,455 39,545 27,000 12,545 3 43.94%

6,000 26,100 (9,875) 22,225 19,775 13,500 6,275 4 47.08%

Calculations: 1. (27,700/110,000) × 100 = 25.18% 2. (72,000/178,000) × 100 = 40.45% 3. (39,545/90,000) × 100 = 43.94% 4. (19,775/42,000) × 100 = 47.08% Analysis component: Company B has a more stable and favourable gross profit ratio than Company A. Company A‘s gross profit ratio decreased substantially from 2022 to 2023 which is unfavourable. Exercise 5-17 (20 minutes) Invoice cost of merchandise purchases ............. Purchase discounts received ......................... Purch. returns and allow. received................. Cost of transportation-in ................................. Net cost of merchandise purchases...............

(a) $44,000 (2,000) (1,500) 4,200 $44,700

(b) $21,000 (2,250) (750) 1,750 $19,750

Merchandise inventory (beginning) ................ Net cost of merchandise purchases............... Merchandise inventory (ending) ..................... Cost of goods sold ..........................................

$ 4,500 44,700 (2,200) $47,000

4,800 19,750 (3,750) $20,800

$ 3,500 17,375 (3,810) $17,065

Transportation-in is calculated as the amount needed to make cost of merchandise purchased equal the given amount. Cost of goods sold is calculated the usual way.

Purchase discounts is calculated as the amount needed to make cost of merchandise purchases equal the given amount. The merchandise inventory (beginning) is calculated as the amount needed to make cost of goods sold equal the given amount.

Net cost of merchandise purchases is calculated the usual way. Then, that amount is transferred to the lower section and the merchandise inventory (ending) is Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw-Hill Education Ltd.

4-543

Last revised: September 2021.

calculated as the amount needed to make cost of goods sold equal the given amount.

4-544

Last revised: September 2021.

*Exercise 5-18 (20 minutes) Nov. 1

Nov. 5

Nov. 7

(a) Periodic Purchases ....................... Accounts Payable ...... To record purchases on account; 2/10, n/30.

Accounts Payable ........... Purchases Discount Cash ........................ To record cash payment within discount period; 4,400 x 2% = 88.

Cash ............................... Purchase Returns and Allowances .............

4,400 4,400

4,400 88 4,312

490

Nov. 13

4,400

Accounts Payable ......... Merchandise Inventory Cash........................ To record cash payment within discount period; 4,400 x 2% = 88.

4,400

Cash .................................. Merchandise Inventory

490

88 4,312

490

To record cheque received for return of merchandise previously paid for with discount already taken; 500 – 2% = 490.

Transportation-In ............ Cash ........................ To record payment of freight charges.

400

Accounts Receivable ...... Sales ....................... To record sale of merchandise on credit.

6,500

No entry.

4,400

490

To record cheque received for return of purchases previously paid for with discount already taken; 500 – 2% = 490.

Nov.

(b) Perpetual Merchandise Inventory .... Accounts Payable ..... To record purchases on account; 2/10, n/30.

400

6,500

Merchandise Inventory .... Cash ........................... To record payment of freight charges.

400 400

Accounts Receivable ....... Sales .......................... To record sale of merchandise on credit.

6,500

Cost of Goods Sold ......... Merchandise Inventory . To record cost of merchandise sold.

4,200

6,500

4,200

4-545

Last revised: September 2021.

*Exercise 5-18 (concluded) Nov. 16

Sales Returns and Allowances .................... Accounts Receivable To record return of merchandise bought on account. No entry.

1,200 1,200

Sales Returns and Allowances .................... Accounts Receivable To record return of merchandise bought on account.

1,200

Merchandise Inventory .... Cost of Goods Sold .. To record return of merchandise by customer.

780

1,200

780

4-546

Last revised: September 2021.

*Exercise 5-19 (20 minutes) Feb.

1 Purchases .................................................................... Accounts Payable ................................................. To record purchase; terms 2/10, n/30.

17,100

5 Purchases .................................................................... Cash....................................................................... To record purchase for cash.

8,300

6 Purchases .................................................................... Accounts Payable ................................................. To record purchase; terms 3/15, n/45.

22,100

9 Office Supplies ............................................................ Accounts Payable ................................................. To record purchase; n/15.

1,950

17,100

8,300

22,100

1,950

10 No entry.

Mar.

11 Accounts Payable ........................................................ Cash....................................................................... Purchase Discounts ............................................. To record payment within discount period; $17,100 x 2% = $342 discount.

17,100

24 Accounts Payable ........................................................ Cash....................................................................... To record payment.

1,950

23 Accounts Payable ....................................................... Cash ...................................................................... To record payment.

22,100

16,758 342

1,950

22,100

4-547

Last revised: September 2021.

*Exercise 5-20 (20 minutes) 2023 Mar 2 Purchases ........................................................................... Accounts Payable — Paige Denim ....................... Purchased merchandise on credit; terms 2/15, n/60, FOB shipping.

4,200 4,200

3 Freight-in............................................................................. Cash ...................................................................... Paid shipping charges on purchased merchandise.

350

4 Accounts Payable — Paige Denim .................................... Purchase Returns and Allowances ................................... Returned unacceptable merchandise.

400

350

17 Accounts Payable — Paige Denim .................................... 3,800 Purchase Discounts ........................................................... Cash .................................................................................... Paid balance within the discount period; 4,200 – 400 = 3,800; 3,800 x 2% = 76. 18 Purchases ........................................................................... 9,600 Accounts Payable — J Brand ............................................ Purchased merchandise on credit; terms 2/10, n/30, FOB destination.

400

76 3,724

9,600

21 Accounts Payable — J Brand ............................................ 2,100 Purchase Returns and Allowances ................................... Received an allowance on purchase.

2,100

28 Accounts Payable — J Brand ............................................ 7,500 Purchase Discounts ........................................................... Cash .................................................................................... Paid balance within the discount period; 9,600 – 2,100 = 7,500; 7,500 x 2% = 150.

150 7,350

4548

Last revised: September 2021.

*Exercise 5-21 (20 minutes) Apr.

May

5 Accounts Receivable .................................................. Sales ..................................................................... To record sale; terms 3/10, n/30.

6,400

7 Cash ............................................................................. Sales ..................................................................... To record cash sale.

4,700

8 Accounts Receivable .................................................. Sales ..................................................................... To record sale; terms 3/10, n/30.

12,000

6,208 192

4 Cash ............................................................................. Accounts Receivable ........................................... To record collection.

12,000

6,400

4,700

12,000

6,400

12,000

4-549

Last revised: September 2021.

*Exercise 5-22 (20 minutes) Feb.

1 Accounts Receivable .................................................. Sales ..................................................................... To record sale; terms 2/10, n/30, FOB destination.

2,100

2 Delivery Expense or Freight-Out ................................ Cash ...................................................................... To record delivery expenses for goods sold.

225

3 Sales Returns and Allowances .................................. Accounts Receivable ........................................... To record return of merchandise.

1,050

4 Accounts Receivable .................................................. Sales ..................................................................... To record sale; terms 2/10, n/30, FOB destination.

3,800

1,029 21

23 Cash ............................................................................. Sales ..................................................................... To record cash sale.

1,200

28 Cash ............................................................................. Accounts Receivable ........................................... To record collection.

3,800

2,100

225

1,050

3,800

1,050

1,200

3,800

4-550

Last revised: September 2021.

*Exercise 5-23 (30 minutes) Date

Account Titles and Explanation Oct. 1 Purchases Accounts Payable – Orbit Pro

Debit

Credit

1,400 1,400

Purchased merchandise on credit; terms 3/10, n/30, FOB shipping point. Freight-in .....................................................................

200

Cash ...................................................................

200

Paid for shipping cost. 5 Accounts Receivable – Barber & Co. Sales ..................................................................

600 600

To record sale; terms 2/10, n/30, FOB shipping point. 7 Accounts Payable – Orbit Pro Purchase return and allowances .....................

500 500

To record return of merchandise. 10 Accounts Payable – Orbit Pro Purchase discount ............................................

900 27

Cash ...................................................................

873

Paid accounts payable within the discount period; 900 x 3% = 27. 14 Sales return and allowance Accounts Receivable – Barber & Co. ...............

100 100

To record return of merchandise. 22 Cash

500 Accounts Receivable – Barber & Co. ...............

500

Collected accounts receivable outside the discount period.

4-551

Last revised: September 2021.

*Exercise 5-23 (Concluded) 23 Purchases ........................................................................... 2,000 Accounts Payable .............................................

2,000

To record purchase of merchandise on credit, terms 2/10, n/30, FOB shipping point. 23 Freight-in ............................................................................ 300 Cash ...................................................................

300

To record payment of shipping cost. 25 Accounts Receivable ......................................................... 1,000 Sales ..................................................................

1,000

To record sale; 2/10, n/30, FOB destination. Freight-out .......................................................................... 150 Cash ...................................................................

150

To record payment of shipping cost. 26 Accounts Payable .............................................................. 2,000 Purchase discount ............................................

Cash ...................................................................

1,960

Paid accounts payable within the discount period; 2,000 x 2% = 40. 31 Cash .................................................................................... 980 Sales Discount ................................................................... 20 Accounts Receivable ........................................

1,000

Collected accounts receivable within the discount period; 1,000 x 2% = 20.

4-552

Last revised: September 2021.

*Exercise 5-24 (20 minutes) a) Entries journalized by Wilson Purchasing: 2023 May 11 Purchases ........................................................................... Accounts Payable – Happy Sales ......................... Purchased merchandise on credit; terms 2/10, n/90.

23,000 23,000

11 Transportation-In................................................................ Cash ....................................................................... Paid shipping charges on purchased merchandise.

1,300

12 Accounts Payable – Happy Sales ...................................... Purchase Returns and Allowances ...................... Returned unacceptable merchandise.

3,600

20 Accounts Payable – Happy Sales ......................................... Purchase Discounts .............................................. Cash ....................................................................... Paid balance within the discount period; 23,000 – 3,600 = 19,400; 19,400 x 2% = 388.

19,400

1,300

3,600

388 19,012

b) Entries journalized by Happy Sales: 2023 May 11 Accounts Receivable – Wilson Purchasing ...................... Sales ....................................................................... Sold merchandise on account.

23,000 23,000

12 Sales Returns and Allowances.......................................... Accounts Receivable – Wilson Purchasing ......... Accepted a return from a customer.

3,600

21 Cash .................................................................................... Sales Discounts.................................................................. Accounts Receivable – Wilson Purchasing ......... Collected account receivable; 23,000 – 3,600 = 19,400; 19,400 x 2% = 388.

19,012 388

3,600

19,400

4-553

Last revised: September 2021.

*Exercise 5-25 (35 minutes) a.

Gross profit from sales ............................................... $143,600 Less: Operating expenses .......................................... ? Profit .................................................................... $ 65,800 Therefore: Total operating expenses ........................................... $ 77,800

Sales .................................................................... $363,000 Less: Sales discounts ............................................... $ 6,300 Sales returns and allowances .......................... 14,800 21,100 Net sales .................................................................... $341,900 Less: Cost of goods sold ............................................ ? Gross profit from sales ............................................... $143,600 Therefore: Cost of goods sold ..................................................... $198,300

Merchandise inventory (beginning) ............................. $ 31,800 Invoice cost of merchandise purchases ..................... $182,000 Less: Purchase discounts ......................................... 4,400 Purchase returns and allowances .................... 6,800 Net purchases ........................................................... $170,800 Add: Transportation-in ............................................... 11,800 Total cost of merchandise purchased ......................... 182,600 Goods available for sale ............................................ $214,400 Less: Merchandise inventory (ending) ........................ ? Cost of goods sold (from b) ........................................ $198,300 Therefore: Merchandise inventory (ending) ................................. $ 16,100

d. (143,600/341,900) x 100 = 42.00% Gross Profit Ratio (rounded to two decimal places) Analysis component: The gross profit ratio for 2023 is 42.00%. In comparison with the 2022 gross profit ratio of 47%, this represents an unfavourable change. This is unfavourable because the gross profit generated per net sales dollar decreased in 2023 from 2022 thereby contributing less towards the coverage of operating expenses in 2023 than in 2022.

4554

Last revised: September 2021.

*Exercise 5-26 (40 minutes) a) $38,200 – $1,830 = $36,370 Net sales b) $6,600 + $17,040 – $110 – $37 + $470 – $2,550 = $21,413 Cost of goods sold c) Classified multiple-step income statement: JOHN‘S ELECTRONICS Income Statement For Month Ended April 30, 2023 Sales .................................................................................. Less: Sales returns and allowances .............................. Net sales ............................................................................ Cost of goods sold: Merchandise inventory, March 31, 2023 ....................... Purchases ...................................................................... $17,040 Less: Purchase discounts .......................................... 37 Purchase returns and allowances ................... 110 Net purchases ................................................................ $16,893 Add: Transportation-in................................................ 470 Cost of goods purchased ............................................... Cost of goods available for sale ..................................... Less: Merchandise inventory, April 30, 2023 ................. Cost of goods sold ............................................................. Gross profit from sales.................................................... Operating expenses:........................................................ Selling expenses: Wages expense, selling ................................................. $8,900 Depreciation expense, delivery trucks ....................... 730 Telephone expense, store ........................................... 430 Total selling expenses.................................................... General and administrative expenses: Wages expense, office................................................... $5,800 Telephone expense, office .......................................... 150 Total general and administrative expenses Total operating expenses ............................................... Operating loss .................................................................. Other revenues and expenses: Interest expense .......................................................... Loss ..................................................................................

$38,200 1,830 $36,370 $ 6,600

17,363 $23,963 2,550 21,413 $14,957

$10,060

5,950 16,010 $ 1,053 130 $ 1,183

4-555

Last revised: September 2021.

*Exercise 5-27 (15 minutes) June

Merchandise Inventory ........................................... GST Receivable ..................................................... Accounts Payable .......................................... To record credit purchase; $2,000 x 5% = $100 GST.

2,000 100

1,582

Cost of Goods Sold ................................................. Merchandise Inventory ................................... To record cost of sale.

1,000

2,100

112 70 1,400

1,000

*Exercise 5-28 (15 minutes) June

2,000 100

1,582

2,100

112 70 1,400

*Exercise 5-29 (15 minutes) Accounts Receivable ($ 300,000 x 1.11 x 40%) ......................... Cash ($ 300,000 x 1.11 x 60%) .................................................... Sales Revenue ...................................................................... GST Payable ($ 300,000 x 5%) ............................................. PST Payable ($ 30,000 x 6%)................................................ PROBLEMS

133,200 199,800 300,000 15,000 18,000

4-556

Last revised: September 2021.

Problem 5-1A (40 minutes)

Part 1 June

1 Accounts Receivable – Avery & Wiest ....................... Sales ..................................................................... To record sales; terms 2/5, n/15, FOB destination.

9,500

1 Cost of Goods Sold..................................................... Merchandise Inventory ........................................ To record cost of sales.

6,650

2 Merchandise Inventory ............................................... Accounts Payable – Angolac Suppliers.............. To record purchase of merchandise; terms 1/10, n/20, FOB shipping point.

4,900

4 Merchandise Inventory ............................................... Accounts Payable – Bastille Sales...................... To record purchase of merchandise; terms 1/15, n/45, FOB Bastille Sales.

11,400

5 Accounts Receivable – Gelgar ................................... Sales ..................................................................... To record sales; terms 2/5, n/15, FOB destination.

11,000

5 Cost of Goods Sold..................................................... Merchandise Inventory ........................................ To record cost of sales.

7,700

6 Cash ............................................................................. Sales Discounts .......................................................... Accounts Receivable – Avery & Wiest ................ To record collection within discount period; $9,500 x 2% = $190 discount.

9,310 190

12 Accounts Payable – Angolac Suppliers..................... Cash ...................................................................... Merch`andise Inventory ....................................... To record payment within discount period; $4,900 x 1% = $49 discount.

4,900

9,500

6,650

4,900

11,400

11,000

7,700

9,500

4,851 49

4-557

Last revised: September 2021.

Problem 5-1A (concluded) June

20 Cash ............................................................................. Accounts Receivable – Gelgar ............................ To record collection.

11,000

30 Accounts Payable – Bastille Sales............................. Cash ...................................................................... To record payment.

11,400

11,000

11,400

Part 2 a. Net sales = $20,310 ($9,500 + $11,000 - $190) b. Cost of goods sold = $14,350 ($6,650 + $7,700) c. Gross profit from sales = $5,960 ($20,310 - $14,350)

4-558

Last revised: September 2021.

Problem 5-2A (40 minutes) July

Merchandise Inventory ............................................ Accounts Payable—Jones Co. ....................... Purchased goods; terms 1/15, n/30, FOB factory.

14,800

Accounts Receivable—Terra Co. ........................... Sales ............................................................... Sold goods; terms 2/10, n/60, FOB shipping point.

2,600

Cost of Goods Sold. ................................................ Merchandise Inventory .................................... To record the cost of the July 2 sale.

1,950

Merchandise Inventory ............................................ Cash ............................................................... Paid freight on incoming goods.

450

Cash ....................................................................... Sales ............................................................... Sold goods for cash.

5,100

Cost of Goods Sold. ................................................ Merchandise Inventory .................................... To record the cost of the July 8 sale.

3,825

Merchandise Inventory ............................................ Accounts Payable—Keene Co. ....................... Purchased goods; terms 2/15, n/60, FOB destination.

9,100

Accounts Payable—Keene Co. .............................. Merchandise Inventory. ................................... Received credit memo.

1,500

Cash ....................................................................... Sales Discounts ...................................................... Accounts Receivable—Terra Co. .................... Collected receivable within the discount period; 2,600 x 2% = 52.

2,548 52

Office Supplies ....................................................... Accounts Payable—EastCo. ........................... Purchased goods; terms n/30.

960

14,800

2,600

1,950

450

5,100

3,825

9,100

1,500

2,600

Accounts Payable—Jones Co. ............................... 14,800 Merchandise Inventory .................................... Cash ............................................................... Paid payable within the discount period; 14,800 x 1% = 148.

960

148 14,652

4-559

Last revised: September 2021.

Problem 5-2A (continued) 19

Accounts Receivable—Urban Co. .......................... Sales ............................................................... Sold goods; terms 2/15, n/60, FOB shipping point.

3,800

Cost of Goods Sold. ................................................ Merchandise Inventory .................................... To record the cost of the July 19 sale.

2,850

Sales Returns and Allowances................................ Accounts Receivable—Urban Co. .................. Issued credit memo.

300

Sales....................................................................... Accounts Receivable—Urban Co. .................. Received debit memo for error.

200

3,800

2,850

300

200

Accounts Payable—Keene Co. .............................. 7,600 Cash ............................................................... Paid payable beyond the discount period; 9,100 – 1,500. Cash ....................................................................... Sales Discounts ...................................................... Accounts Receivable—Urban Co. .................. Collected receivable within the discount period; 3,800 – 300 – 200 = 3,300; 2% × 3,300 = 66.

3,234 66

Accounts Receivable—Terra Co. ........................... Sales ............................................................... Sold goods; terms 2/10, n/60, FOB shipping point.

10,000

Cost of Goods Sold. ................................................ Merchandise Inventory .................................... To record the cost of the July 31 sale.

7,500

7,600

3,300

10,000

7,500

4-560

Last revised: September 2021.

Problem 5-2A (continued) Analysis component: Email To: Accounts Payable Department From: Senior Purchaser, Belton Company Re: Maximizing purchase discounts Hello Accounts Payable Department, Thank you for your hard work in processing the transactions for the month of July. I have reviewed the purchase transactions for the past month and want to highlight some best practices going forward. th

For the July 9 purchase from Keene Co. for $9,100, Keene Co. offers Belton Company credit terms of 2/15, n/60, FOB destination. Our company was not able to receive a discount of $152.00 as we did not pay our invoice by July 24. The cost of the lost discount regarding the July 9 purchase is $145.88* (see my calculations below). If Belton Company did not have the cash flow to make the payment on July 24, the company has the option of taking out a loan to take advantage of the discount. Assuming an interest rate of 6%, the cost of borrowing would have been $6.12 in interest expense. The net savings from borrowing to pay within the discount period would be $145.88. By itself, the $145.88 does not appear to be a significant amount. However, if you multiply this by the number of lost discounts it could be a large sum that does impact profit. If a net savings results from borrowing to enable paying within the discount period, the company should borrow. th

Also, the July 9 transaction was paid on July 29 , which is five days after the discount th period. With credit terms of 60 days, Belton Company had until September 7 to pay. If net savings do not result from borrowing, payment should be made on the last day of the payment period to maximize the company‘s cash flow. Regards, Senior Purchaser, Belton Company

4-561

Last revised: September 2021.

Problem 5-2A (continued) *Calculations: Amount borrowed to pay within the discount period ................... Annual rate of interest .................................................................... Interest per year ...............................................................................

$ 7,448.00 × 6% $ 446.88

Interest per day ($446.88/365) .........................................................

1.2243

Discount ........................................................................................... Interest that would be paid on the 5-day** loan (5×$1.2243)*** ... Net savings from borrowing to pay within the discount period ..............................................................

152.00 (6.12)

145.88

**5 days from July 15, the end of the discount period, to July 29, the payment date. ***Alternate calculation: 7,448 × 6% × 5/365 = 6.12 therefore net savings would be 145.88 (152.00 – 6.12).

4-562

Last revised: September 2021.

Problem 5-3A (40 minutes) Aug.

Merchandise Inventory ........................................................ Accounts Payable—Luu Company .............................. Purchased goods; terms 1/10, n/30, FOB destination.

4,000

Accounts Payable—Luu Company...................................... Cash ........................................................................... Paid freight for Luu Company.

350

Accounts Receivable—Green Ruby. ................................... Sales ........................................................................... Sold goods; 2/10, n/60, FOB destination.

3,800

Cost of Goods Sold. ............................................................ Merchandise Inventory ................................................ To record the cost of the July 5 sale.

2,470

Merchandise Inventory ........................................................ Accounts Payable—Jane Co......................................... Purchased goods; 1/10, n/45, FOB shipping point.

5,200

Delivery Expense or Freight-Out ......................................... Cash ........................................................................... Paid shipping charges on August 5 sale.

325

Sales Returns and Allowances............................................ Accounts Receivable—Green Ruby ........................... Customer returned merchandise.

800

Merchandise Inventory ........................................................ Cost of Goods Sold ..................................................... Returned goods to inventory.

440

Accounts Payable—Jane Co. ............................................. Merchandise Inventory ................................................ Received a credit memo for August 8 purchase.

400

Cash ................................................................................... Sales Discounts .................................................................. Accounts Receivable—Green Ruby ........................... Collected receivable within the discount period; 3,800 – 800 = 3,000; 2% × 3,000 = 60.

2,940 60

4,000

350

3,800

2,470

5,200

325

800

440

400

3,000

4-563

Last revised: September 2021.

Problem 5-3A (concluded) 17

Office Equipment ................................................................ Accounts Payable–WestCo. ........................................ Purchased office equipment; terms n/45.

6,000

Accounts Payable—Jane Co. ............................................. Merchandise Inventory ................................................ Cash ........................................................................... Paid payable within the discount period; 5,200 – 400 = 4,800; 1% × 4,800 = 48.

4,800

Accounts Receivable—Chic Jewellery ................................ Sales ........................................................................... Sold goods; terms 1/10, n/30, FOB shipping point.

1,800

Cost of Goods Sold. ............................................................ Merchandise Inventory ................................................ To record the cost of the August 19 sale.

990

Sales Returns and Allowances............................................ Accounts Receivable—Chic Jewellery......................... Issued credit memo.

300

Cash ................................................................................... Sales Discounts .................................................................. Accounts Receivable—Chic Jewellery......................... Collected receivable within the discount period; 1,800 – 300 = 1,500; 1% × 1,500 = 15.

1,485 15

Accounts Payable—Luu Company...................................... Cash ........................................................................... Paid payable; $4,000 – $350 = 3,650

3,650

6,000

48 4,752

1,800

990

300

1,500

3,650

4-564

Last revised: September 2021.

Problem 5-4A (80 minutes) Date

Account Titles and Explanation

Debit

Credit

2023 a.

Dec. 31

Depreciation expense ............................................

6,100

Accumulated depreciation, equipment ..............

6,100

To record depreciation expense ($75,590 – 14,590/10 years= $6,100 depreciation per year). b.

Dec. 31 Insurance expense.................................................

3,095

Prepaid insurance ..............................................

3,095

To record prepaid insurance expired. (3,355 – 260 = 3,095) c.

Dec. 31 Supplies expense...................................................

1,080

Store supplies ....................................................

435

Office supplies

645

To record supplies used (store supplies 2,465 – 2,030 = $435 + office supplies $645). d.

Dec. 31 Salaries expense ...................................................

1,850

Salaries payable ................................................

1,850

To record accrued salaries expense. e.

Dec. 31 Cost of goods sold ................................................. Merchandise inventory ......................................

810 810

To adjust for $810 shrinkage determined by physical count of inventory. (34,700 – 33,890) Problem 5-4A (continued) Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw-Hill Education Ltd.

4-565

Last revised: September 2021.

Note: The following work sheet is not required for the question. Work sheet is presented to show the impact of the adjusting entries on the account balances. ELECTRIC BIKE Work Sheet For Year Ended December 31, 2023 Unadjusted Balance Sheet and Trial Income Statement of Balance Adjustments Statement Changes in Equity Debit Credit Debit Credit Debit Credit Debit Credit Cash ........................................................ 8,200 8,200 Accounts receivable ................................. 22,765 22,765 Merchandise inventory ............................. 34,700 (e) 810 33,890 Store supplies .......................................... 2,465 (c) 435 2,030 Office supplies ......................................... 785 (c) 645 140 Prepaid insurance .................................... 3,355 (b) 3,095 260 Equipment................................................ 75,590 75,590 Accumulated depreciation, equipment ..... 13,755 (a) 6,100 19,855 Accounts payable..................................... 8,100 8,100 Salaries payable ...................................... (d) 1,850 1,850 Braeden Li, capital ................................... 170,715 170,715 Braeden Li, withdrawals ........................... 62,500 62,500 Interest income ........................................ 320 320 Sales ........................................................ 529,500 529,500 Sales returns and allowances .................. 5,170 5,170 Cost of goods sold ................................... 381,260 (e) 810 382,070 Salaries expense ..................................... 96,400 (d) 1,850 98,250 Rent expense ........................................... 29,200 29,200 Supplies expense ..................................... (c) 1,080* 1,080 Depreciation expense, equipment ............ (a) 6,100 6,100 Insurance expense................................... (b) 3,095 3,095 Totals ................................................... 722,390 722,390 12,935 12,935 524,965 529,820 205,375 200,520 Profit ........................................................ 4,855 ______ ______ 4,855 Totals ................................................... 529,820 529,820 205,375 205,375 *Calculated as a credit to Store supplies of $435 + a credit to Office supplies of $645.

4-566

Last revised: September 2021.

Problem 5-4A (concluded) 2. Multiple-step income statement: ELECTRIC BIKE Income Statement For Year Ended December 31, 2023 Net sales1 ................................................................... Cost of goods sold ...................................................... Gross profit from sales ................................................ Operating expenses: Salaries expense ..................................................... Rent expense ........................................................... Supplies expense..................................................... Depreciation expense, equipment ............................ Insurance expense................................................... Total operating expenses ......................................... Income from operations .............................................. Other revenues and expenses: Interest income .................................................... Profit ...........................................................................

$524,330 382,070 $142,260 $98,250 29,200 1,080 6,100 3,095 137,725 $ 4,535 320 $ 4,855

Calculations: 1. 529,500 – 5,170 = 524,330 Analysis component: Interest income is shown under Other revenues and expenses because it is not a day-today operating activity for Electric Bikes. Revenues and expenses not related to day-today operations are listed under Other revenues and expenses.

4-567

Last revised: September 2021.

Problem 5-5A 1.

Classified, multiple-step income statement: DAVISON COMPANY Income Statement For Year Ended October 31, 2023

Sales ................................................................ Less: Sales discounts .............................................. Sales returns and allowances ....................... Net sales ................................................................ Cost of goods sold ....................................................... Gross profit from sales ................................................ Operating expenses: Selling expenses: Sales salaries expense ......................................... Advertising expense ............................................. Rent expense, selling space................................. Store supplies expense ........................................ Total selling expenses .......................................... General and administrative expenses: Office salaries expense ........................................ Rent expense, office space .................................. Office supplies expense ....................................... Total general and administrative expenses ........ Total operating expenses ......................................... Income from operations ............................................... Other revenues and expenses: Interest income ...................................................... Profit ................................................................

$424,000 $ 6,500 28,000 $389,500

34,500 169,300 $220,200

$52,000 29,400 19,000 5,000 $105,400 $53,000 5,200 1,600 59,800 165,200 $ 55,000 1,120 $ 56,120

4-568

Last revised: September 2021.

Problem 5-5A (concluded) 2.

Single-step income statement: DAVISON COMPANY Income Statement For Year Ended October 31, 2023 Revenues: Net sales Interest income Total revenues Expenses: Cost of goods sold Selling expenses General and administrative expenses Total expenses Profit ...............................................................................

$389,500 1,120 $390,620 $169,300 105,400 59,800 334,500 $ 56,120

Problem 5-6A (20 minutes) a) The selling price for tank tops will be $32.00 (20 x (1+0.60)) and the selling price for pullovers will be $48.00 ($30 x (1+0.60)). b) The mark-up on yoga pants is 75% ($100 x (1-0.30) = $70; (($70 - $40))/$40 = 0.75) c) Gross profit margin is calculated with the formula: Gross Profit Margin = Net Sales – Cost of Goods Sold Net Sales Tank Tops Pullovers Yoga Pants Sale price 32.00 48.00 70.00 Cost 20.00 30.00 40.00 Gross Profit 12.00 18.00 30.00 Gross Profit % 37.50% 37.50% 42.86% ((32-20)/32) ((48-30)/48) ((70-40)/70) d) The selling price for tank tops will be $36.36 ($20 / (1-0.45)). The selling price for pullovers will be $54.55 ($30 / (1-0.45)). The selling price for yoga pants will be $72.73 ($40 / (1-0.45)).

4-569

Last revised: September 2021.

Problem 5-7A (60 minutes) 1. Classified, multiple-step income statement: PLYMOUTH ELECTRONICS Income Statement For Year Ended December 31, 2023 Sales ......................................................................... Less: Sales returns and allowances ................... Sales discounts........................................ Net sales ............................................................ Cost of goods sold .................................................... Gross profit from sales .............................................. Operating expenses: Selling expenses: Sales salaries expense ...................................... Rent expense, selling space .............................. Depreciation expense, store equipment ............. Store supplies expense ...................................... Total selling expenses ....................................... General and administrative expenses: Office salaries expense...................................... Insurance expense............................................. Rent expense, office space ................................ Depreciation expense, office equipment ............ Office supplies expense ..................................... Total general and administrative expenses ........ Total operating expenses ...................................... Income from operations ............................................ Other revenues and expenses: Interest income .................................................. Profit .........................................................................

$942,000 $ 5,715 14,580

20,295 $921,705 719,000 $202,705

$79,200 33,000 8,910 1,620 $122,730 $56,500 3,390 3,000 2,760 735 66,385 189,115 $ 13,590 720 $ 14,310

4-570

Last revised: September 2021.

Problem 5-7A (concluded) 2. Single-step income statement: PLYMOUTH ELECTRONICS Income Statement For Year Ended December 31, 2023 Revenues: Net sales ........................................................................... Interest income .................................................................. Total revenues ............................................................... Expenses: Cost of Goods sold ............................................................ Selling expenses................................................................ General and administrative expenses ................................ Total expenses ............................................................... Profit .....................................................................................

$921,705 720 $922,425 $719,000 122,730 66,385 908,115 $ 14,310

Analysis component: The gross profit ratio for Plymouth Electronics‘ year ended December 31, 2023 is 21.99% ($921,705 - $719,000 = $202,705 gross profit; $202,705/$921,705 × 100 = 21.99%). This represents an unfavourable change when compared to the 32% gross profit ratio for the prior year.

4-571

Last revised: September 2021.

Problem 5-8A (60 minutes) 1. Classified multiple-step income statement Bell Servicing Income Statement For Year Ended December 31, 2023 Sales ......................................................................... Less: Sales discounts ........................................ Net sales ............................................................ Cost of goods sold .................................................... Gross profit from sales .............................................. Operating expenses: Selling expenses: Sales salaries expense ...................................... Advertising expense ........................................... Rent expense, selling space .............................. Depreciation expense, store equipment ............. Store supplies expense ...................................... Insurance expense, store ................................... Total selling expenses ....................................... General and administrative expenses: Office salaries expense...................................... Rent expense, office space ................................ Depreciation expense, office equipment ............ Insurance expense, office .................................. Office supplies expense ..................................... Total general and administrative expenses ........ Total operating expenses ...................................... Profit .........................................................................

$291,800 2,000 $289,800 74,800 $215,000

$46,000 17,600 17,000 5,200 2,400 2,000 $90,200 $32,000 13,000 3,800 1,600 1,200 51,600 141,800 $ 73,200

4-572

Last revised: September 2021.

Problem 5-8A (concluded) 2. Multiple-step income statement

Bell Servicing Income For Year Ended December 31, 2023

Statement

Net sales.................................................................. Cost of goods sold ................................................... Gross profit from sales ............................................ Operating expenses: Salaries expense .................................................. Rent expense ....................................................... Advertising expense ............................................. Depreciation expense, equipment ........................ Insurance expense ............................................... Supplies expense ................................................. Total operating expenses ................................. Profit ........................................................................

$289,800 74,800 $215,000 $78,000 30,000 17,600 9,000 3,600 3,600 141,800 $ 73,200

3. Single-step income statement Bell Servicing Income For Year Ended December 31, 2023 Revenues: Net sales .............................................................. Expenses: Cost of goods sold ............................................... Selling expenses .................................................. General and administrative expenses .................. Total expenses ................................................. Profit ........................................................................

Statement

$289,800 $74,800 90,200 51,600 216,600 $ 73,200

Analysis component: If I were a decision maker external to Bell Servicing, I would prefer the classified multi-step income statement format because it provides the greatest level of detail of the three income statement formats. As an external user, I would expect the single-step income statement format because it provides information but without giving details that might provide Bell‘s competition with an edge. For example, total Selling Expenses is provided without disclosing how much Bell spends on advertising. Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw-Hill Education Ltd.

4-573

Last revised: September 2021.

*Problem 5-9A (40 minutes) June

1 Accounts Receivable – Avery & Wiest ....................... Sales ..................................................................... To record sales; terms 2/5, n/15, FOB destination.

9,500

2 Purchases .................................................................... Accounts Payable – Angolac Suppliers ............. To record purchase of merchandise; terms 1/10, n/20, FOB shipping point.

4,900

4 Purchases .................................................................... Accounts Payable – Bastille Sales...................... To record purchase of merchandise; terms 1/15, n/45, FOB Bastille Sales.

11,400

5 Accounts Receivable – Gelgar ................................... Sales ..................................................................... To record sales; terms 2/5, n/15, FOB destination.

11,000

9,310 190

12 Accounts Payable – Angolac Suppliers .................... Cash ...................................................................... Purchase Discounts............................................. To record payment within discount period; $4,900 x 1% = $49 discount.

4,900

20 Cash ............................................................................. Accounts Receivable – Gelgar ............................ To record collection.

11,000

30 Accounts Payable – Bastille Sales............................. Cash ...................................................................... To record payment.

11,400

9,500

4,900

11,400

11,000

9,500

4,851 49

11,000

11,400

4-574

Last revised: September 2021.

*Problem 5-10A (30 minutes) Oct.

1 2 7 7 8 12 13 13 15 15

16 19 25

Purchases ........................................................................ Accounts Payable — Zeon Company ..........................

15,800.00

Cash ................................................................................. Sales ............................................................................

2,100.00

Purchases ........................................................................ Accounts Payable — Billings Company .......................

11,600.00

Transportation-In .............................................................. Cash .............................................................................

450.00

Delivery Equipment .......................................................... Accounts Payable — Finlay Supplies ...........................

24,000.00

Accounts Receivable — Comry Holdings ......................... Sales ............................................................................

5,800.00

Accounts Payable — Billings Co....................................... Purchase Returns and Allowances ..............................

1,500.00

Office Supplies ................................................................. Accounts Payable — Staples .......................................

620.00

Accounts Receivable — Tom Willis .................................. Sales ............................................................................

4,650.00

Accounts Payable — Billings Co....................................... Purchase Discounts................................................... Cash ............................................................................. $11,600 – $1,500 = $10,100; $10,100 × 2% = $202.

10,100.00

Accounts Payable — Staples ........................................... Office Supplies .............................................................

120.00

Sales Returns and Allowances ......................................... Accounts Receivable — Tom Willis .............................

420.00

Cash ................................................................................. Sales Discounts ................................................................ Accounts Receivable — Tom Willis $4,650 – $420 = $4,230; $4,230 × 2% = $84.60.

4,145.40 84.60

Cash ................................................................................. Sales Discounts ................................................................ Accounts Receivable — Comry Holdings..................... $5,800 × 1% = $58; $5,800 - $58 = $5,742.

5,742.00 58.00

Accounts Payable — Zeon Company ............................... Cash ..........................................................................

15,800.00

15,800.00 2,100.00 11,600.00 450.00 24,000.00 5,800.00 1,500.00 620.00 4,650.00 202.00 9,898.00

120.00 420.00

4,230.00

5,800.00

15,800.00

4-575

Last revised: September 2021.

*Problem 5-11A (40 minutes) 1.

Net sales: Sales Less: Sales returns and allowances ......................................... Sales discounts............................................................. Net sales ..................................................................................

$103,400 8,200 1,195 $94,005

Cost of goods purchased: Purchases ................................................................................ Less: Purchase returns and allowances ................................. Purchase discounts....................................................... Transportation-in ...................................................................... Cost of goods purchased ..........................................................

$44,200 2,500 970 5,400 $46,130

Cost of goods sold: Beginning inventory .................................................................. Cost of goods purchased (from 2) ............................................ Less: Ending inventory ............................................................. Cost of goods sold ....................................................................

$ 1,750 46,130 13,300 $34,580

Multiple-step income statement: MENDELSTEIN COMPANY Income Statement For Year Ended October 31, 2023 Net Sales .......................................................................... Cost of goods sold ............................................................ Gross profit from sales ..................................................... Operating expenses: Salaries expense.......................................................... Rent expense ............................................................... Advertising expense ..................................................... Supplies expense ......................................................... Total operating expenses .......................................... Loss from operations ........................................................ Other revenues and expenses: Interest income ............................................................. Loss ..................................................................................

$94,005 34,580 $59,425 $41,200 18,200 9,700 7,540 76,640 $17,215 185 $17,030

4-576

Last revised: September 2021.

*Problem 5-11A (concluded)

Single-step income statement: MENDELSTEIN COMPANY Income Statement For Year Ended October 31, 2023

Revenues: Net sales .................................................................. Interest income......................................................... Total revenues ...................................................... Expenses: ..................................................................... Cost of goods sold ................................................... Selling expenses ...................................................... General and administrative expenses ...................... Total expenses ..................................................... Loss .........................................................................

$ 94,005 185 $ 94,190 $34,580 42,000 34,640

1 2

111,220 $ 17,030

Calculations: 1. 18,500 + 9,900 + 3,900 + 9,700 = 42,000 2. 22,700 + 8,300 + 3,640 = 34,640

4-577

Last revised: September 2021.

*Problem 5-12A (60 minutes) Part 1 Note: A work sheet is not required to be prepared for this question. The work sheet is shown for illustrative purposes to show how the adjusting entries impact the unadjusted trial balance numbers. WOODSTOCK STORE Work Sheet For Year Ended December 31, 2023 Unadjusted Income B/S and Stmt of T/B Adjustments Statement Changes in Equity Debit Credit Debit Credit Debit Credit Debit Credit Cash .............................................................. 3,500 3,500 Merchandise inventory ................................... 31,400 31,400 29,000 29,000 Store supplies ................................................ 1,715 (a) 1,535 180 Office supplies ............................................... 645 (b) 590 55 Prepaid insurance .......................................... 3,960 (c) 1,320 2,640 Store equipment ............................................ 57,615 57,615 Accumulated depreciation, store equipment 6,750 (d) 4,500 11,250 Office equipment ........................................... 13,100 13,100 Accumulated depreciation, office equipment 6,550 (e) 3,275 9,825 Accounts payable........................................... 4,000 4,000 Zen Woodstock, capital ................................. 52,000 52,000 Zen Woodstock, withdrawals ......................... 31,500 31,500 Rental revenue .............................................. 14,600 14,600 Sales.............................................................. 501,520 501,520 Sales returns and allowances ........................ 2,915 2,915 Sales discounts .............................................. 5,190 5,190 Purchases ...................................................... 331,315 331,315 Purchase returns and allowances .................. 2,140 2,140 Purchase discounts........................................ 4,725 4,725 Transportation-in............................................ 3,690 3,690 Sales salaries expenses ................................ 34,710 34,710 Rent expense, selling space .......................... 24,000 24,000 Advertising expense....................................... 6,400 6,400 Store supplies expense .................................. (a) 1,535 1,535 Depreciation expense, store equipment ......... (d) 4,500 4,500 Office salaries expense.................................. 27,630 27,630 Rent expense, office space ............................ 13,000 13,000 Office supplies expense ................................. (b) 590 590 Insurance expense......................................... (c) 1,320 1,320 Depreciation expense, office equipment ........ (e) 3,275 3,275 Totals ......................................................... 592,285 592,285 11,220 491,470 551,985 137,590 77,075 11,220 Profit .............................................................. 60,515 60,515 Totals ......................................................... 551,985 551,985 137,590 137,590 Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw-Hill Education Ltd.

4-578

Last revised: September 2021.

*Problem 5-12A (Continued) CLASSIFIED MULTIPLE-STEP INCOME STATEMENT: WOODSTOCK STORE Income Statement For Year Ended December 31, 2023 Sales ................................................................................. Less: Sales returns and allowances ............................ Sales discounts ................................................. Net Sales .......................................................................... Cost of goods sold: Merchandise inventory, December 31, 2022 Purchases .................................................................... Less: Purchase returns and allowances ...................... Purchase discounts Net purchases ................................................................ Add: Transportation-in .............................................. Cost of goods purchased ............................................... Goods available for sale................................................. Less: Merchandise inventory, December 31, 2023........ Cost of goods sold ......................................................... Gross profit from sales ...................................................... Operating expenses: Selling expenses: Sales salaries expense ................................................ Rent expense, selling space ........................................ Advertising expense ..................................................... Depreciation expense, store equipment ....................... Store supplies expense ................................................ Total selling expenses.................................................. General and administrative expenses: Office salaries expense ................................................ Rent expense, office space .......................................... Depreciation expense, office equipment ...................... Insurance expense....................................................... Office supplies expense ............................................... Total general and administrative expenses .................. Total operating expenses ........................................... Income from operations .................................................... Other revenues and expenses: Rental revenue .............................................................. Profit .................................................................................

$501,520 $2,915 5,190

8,105 $493,415

$ 31,400 $331,315 $2,140 4,725

6,865 $324,450 3,690 328,140 $359,540 29,000 330,540 $162,875

$34,710 24,000 6,400 4,500 1,535 $71,145 $27,630 13,000 3,275 1,320 590 45,815 116,960 $ 45,915

14,600 $ 60,515

4-579

Last revised: September 2021.

*Problem 5-13A (40 minutes) Aug.

Merchandise Inventory ........................................... GST Receivable ..................................................... Cash .............................................................. To record cash purchase; $2,000 x 5% = $100 GST.

2,000 100

6,800 340

2,100

7,140

Accounts Receivable ............................................. 5,876 PST Payable .................................................. GST Payable .................................................. Sales .............................................................. To record sale; terms 1/10, n/30; $5,200 x 8% = $416 PST; $5,200 x 5% = $260 GST. Cost of Goods Sold ................................................. Merchandise Inventory ................................... To record cost of sale.

3,600

Accounts Payable ................................................... Merchandise Inventory ................................... Cash .............................................................. To record payment within discount period; $6,800* x 2% = $136.

7,140

Cash ....................................................................... Sales Discounts ..................................................... Accounts Receivable ...................................... To record collection within discount period; $5,200* x 1% = $52.

5,824 52

6,000 300

416 260 5,200

3,600

136 7004

5,876

6,300

*Discounts are applied to the before-tax value.

4-580

Last revised: September 2021.

*Problem 5-13A (concluded) Aug.

Cash ...................................................................... PST Payable .................................................. GST Payable .................................................. Sales .............................................................. To record cash sale; $7,000 x 8% = $560 PST; $7,000 x 5% = $350 GST.

7,910

Cost of Goods Sold ................................................. Merchandise Inventory ................................... To record cost of sale.

5,800

560 350 7,000

5,800

4-581

Last revised: September 2021.

*Problem 5-14A Aug.

Purchases .............................................................. GST Receivable ..................................................... Cash .............................................................. To record cash purchase; $2,000 x 5% = $100 GST.

2,000 100

6,800 340

5,824

Accounts Payable ................................................... Purchase Discounts ....................................... Cash .............................................................. To record payment within discount period; $6,800* x 2% = $136.

7,140

5,772 52

6,000 300

7,840

2,100

7,140

364 260 5,200

136 7,004

5,824

6,300

490 350 7,000

*Discounts are applied to the before-tax value.

4-582

Last revised: September 2021.

ALTERNATE PROBLEMS Problem 5-1B (40 minutes) Part 1 Mar. 1 Merchandise Inventory ..................................................... Cash ............................................................................ To record purchase of merchandise for cash.

48,000 48,000

2 Accounts Receivable – Tessier & Welsh ......................... Sales ........................................................................... To record sales; terms 2/15, n/30, FOB destination.

9,450

2 Cost of Goods Sold........................................................... Merchandise Inventory .............................................. To record cost of sales.

6,600

4 Merchandise Inventory ..................................................... Accounts Payable – Janz Company.......................... To record purchase of merchandise; terms 2/15, n/45, FOB shipping point.

11,300

5 Merchandise Inventory ..................................................... Cash ............................................................................ To record payment of shipping costs.

1,540

6 Accounts Receivable – Parker Company ........................ Sales ........................................................................... To record sales; terms 3/5, n/eom, FOB destination.

10,900

6 Cost of Goods Sold........................................................... Merchandise Inventory .............................................. To record cost of sales.

7,650

10 Merchandise Inventory ..................................................... Accounts Payable – Delton Suppliers ...................... To record purchase; terms 2/10, n/45, FOB destination.

18,000

16 Cash ................................................................................... Sales Discounts ................................................................ Accounts Receivable – Tessier & Welsh .................. To record collection within discount period; $9,450 x 2% = $189 discount. Problem 5-1B (concluded)

9,261 189

Mar.

17 Accounts Payable – Janz Company........................... Cash ...................................................................... Merchandise Inventory ........................................ To record payment within discount period; $11,300 x 2% = $226 discount.

9,450

6,600

11,300

1,540

10,900

7,650

18,000

9,450

11,300 11,074 226

4-583

Last revised: September 2021.

30 Accounts Payable – Delton Suppliers ....................... Cash ...................................................................... To record payment.

18,000

31 Cash ............................................................................. Accounts Receivable – Parker Company ........... To record collection.

10,900

18,000

10,900

Part 2 a. Net sales = $20,161 ($9,450 + $10,900 – $189) b. Cost of goods sold = $14,250 ($6,600 + $7,650) c. Gross profit from sales = $5,911 ($20,161 - $14,250)

4-584

Last revised: September 2021.

Problem 5-2B (40 minutes) May

Merchandise Inventory .................................................. Accounts Payable—Mobley Co. ............................ Purchased goods; terms 1/15, n/30, FOB factory.

18,000

Accounts Receivable—Cornerstone Co. ....................... Sales ..................................................................... Sold goods; terms 2/10, n/60, FOB shipping point.

3,400

Cost of Goods Sold. ...................................................... Merchandise Inventory .......................................... To record the cost of the May 4 sale.

2,100

Merchandise Inventory .................................................. Cash ..................................................................... Paid freight on incoming goods.

750

Cash ............................................................................. Sales ..................................................................... Sold goods for cash.

5,200

Cost of Goods Sold. ...................................................... Merchandise Inventory .......................................... To record the cost of the May 9 sale.

3,600

Merchandise Inventory .................................................. Accounts Payable—Richter Co. ............................ Purchased goods; terms 2/15, n/60, FOB destination.

7,300

Accounts Payable—Richter Co. .................................... Merchandise Inventory .......................................... Received credit memo.

600

Cash ............................................................................. Sales Discounts ............................................................ Accounts Receivable—Cornerstone Co. ............... Collected receivable within discount period; 3,400 x 2% = 68.

3,332 68

Cash ............................................................................. Office Equipment .................................................. To record sale of office equipment at cost.

1,200

18,000

3,400

2,100

750

5,200

3,600

7,300

600

3,400

1,200

4-585

Last revised: September 2021.

Problem 5-2B (continued) May

Accounts Payable—Mobley Co. ........................................ 18,000 Merchandise Inventory .............................................. Cash ......................................................................... Paid payable within the discount period; 1% × $18,000 = $180. Cleaning Supplies ............................................................. Accounts Payable–A & Z Suppliers ........................... Purchased supplies; terms n/15.

1,750

Accounts Receivable—Harrill Co. ..................................... Sales ......................................................................... Sold goods; terms 2/15, n/60, FOB shipping point.

3,900

Cost of Goods Sold. .......................................................... Merchandise Inventory .............................................. To record the cost of the May 20 sale.

2,700

Sales Returns and Allowances.......................................... Accounts Receivable—Harrill Co. ............................. Issued credit memo.

500

Sales................................................................................. Accounts Receivable—Harrill Co. ............................. Received debit memo for error.

150

Accounts Payable—Richter Co. ........................................ Merchandise Inventory .............................................. Cash ......................................................................... Paid within the discount period; 7,300 – 600 = 6,700; 2% × 6,700 = 134.

6,700

Cash ................................................................................. Sales Discounts ................................................................ Accounts Receivable—Harrill Co. ............................. Collected receivable within discount period; 3,900 – 500 – 150 = 3,250; 3,250 x 2% = 65.

3,185 65

180 17,820

1,750

3,900

2,700

500

150

134 6,566

3,250

Accounts Receivable—Cornerstone Co. .......................... 15,000 Sales ......................................................................... Sold goods on credit; terms 2/10, n/60, FOB shipping point.

15,000

Cost of Goods Sold. .......................................................... 10,200 Merchandise Inventory .............................................. To record the cost of the May 31 sale.

10,200

4-586

Last revised: September 2021.

Problem 5-2B (concluded) Analysis component: If the Richter Co. invoice is not paid on May 25, the cost of the lost discount would be $85.40*. By itself, the $85.40 does not appear to be a significant amount. However, if you multiply this by the number of lost discounts it could be a large sum that does impact profit. If a net savings results from borrowing to enable paying within the discount period, the company should borrow. Otherwise, payment should be made on the last day of the payment period. *Calculations (rounded to 2 decimal places): Amount borrowed to pay within the discount period ................... Annual rate of interest .................................................................... Interest per year ...............................................................................

$6,566.00 × 6% $ 393.96

Interest per day ($393.96/365) .........................................................

Discount ........................................................................................... Interest that would be paid on the 45-day** loan (45 x $1.08)*** .. Net savings from borrowing to pay within the discount period ..............................................................

$ 134.00 (48.60) $

1.08

85.40

**60 days in credit period – 15 days in discount period = 45 days (assuming the funds are borrowed until the end of the full credit period).

***Alternate calculation: 6,566 × 6% × 45/365 = 48.57 (instead of 48.60) which makes net savings from borrowing to pay within the discount period 85.43 (instead of 85.40).

4-587

Last revised: September 2021.

Problem 5-3B (40 minutes) July

Merchandise Inventory .................................................. Accounts Payable—CMP Corp. ........................... Purchased goods; terms 1/10, n/30, FOB destination.

32,000

Accounts Payable—CMP Corp. ................................... Cash ..................................................................... Paid freight for supplier.

1,500

Accounts Receivable—West Coast Zoo ...................... Sales ..................................................................... Sold goods; terms 2/10, n/60, FOB destination.

21,000

Cost of Goods Sold. ...................................................... Merchandise Inventory .......................................... To record the cost of the July 7 sale.

17,500

32,000

1,500

21,000

17,500

Merchandise Inventory .................................................. 29,300 Accounts Payable—Cimarron Corporation ............ Purchased goods; terms 1/10, n/45, FOB shipping point.

29,300

Delivery Expense or Freight-Out ................................... Cash ..................................................................... Paid shipping charges on July 7 sale.

1,200 1,200

Sales Returns and Allowances...................................... Accounts Receivable—West Coast Zoo ............... Customer returned merchandise.

3,500

Merchandise Inventory .................................................. Cost of Goods Sold ............................................... Returned goods to inventory.

2,500

Accounts Payable—Cimarron Corporation.................... Merchandise Inventory .......................................... Received a credit memo for July 10 purchase.

4,100

Cash ............................................................................. Sales Discounts ............................................................ Accounts Receivable—West Coast Zoo ............... Collected receivable within discount period; 21,000 – 3,500 = 17,500; 17,500 x 2% = 350.

17,150 350

3,500

2,500

4,100

17,500

4-588

Last revised: September 2021.

Problem 5-3B (concluded) July

Cash ....................................................................... Land ................................................................ Sold land at cost.

62,000

Van ........................................................................ Cash ............................................................... Notes Payable ................................................. To record purchase of van.

28,000

Accounts Payable—Cimarron Corporation.............. Merchandise Inventory .................................... Cash ............................................................... Paid payable within the discount period; $29,300 – 4,100 = $25,200; 25,200 x 1% = 252.

25,200

Accounts Receivable—Canadian National Exhibition Sales ............................................................... Sold goods; terms 1/10, n/30, FOB shipping point.

18,000

Cost of Goods Sold. ................................................ Merchandise Inventory .................................... To record the cost of the July 21 sale.

13,100

Sales Returns and Allowances................................ Accounts Receivable—Canadian National Exhibition Issued credit memo.

3,000

Cash ....................................................................... Sales Discounts ...................................................... Accounts Receivable—Canadian National Exhibition Collected receivable within discount period; 18,000 – 3,000 = 15,000; 15,000 x 1% = 150.

14,850 150

Accounts Payable—CMP Corp. .............................. Cash ............................................................... Paid payable; 32,000 – 1,500 = 30,500.

30,500

62,000

10,000 18,000

252 24,948

18,000

13,100

3,000

15,000

30,500

Analysis component: The alternative to granting a credit memo would be to have the customer return the unsatisfactory merchandise and reissue the order. An advantage of having the customer return the merchandise and reissuing the order is that the customer will have the merchandise that meets their original specifications. A disadvantage of the alternative is that the cost and related efforts may be greater than issuing a credit memo.

4-589

Last revised: September 2021.

Problem 5-4B (60 minutes) Part 1 Note: The following work sheet is not required for the question. Work sheet is presented to show the impact of the adjusting entries on the account balances. Date Account Titles and Explanation Debit Credit 2023 a.

Oct. 31

Supplies expense ..................................................

10,100

Supplies .............................................................

10,100

To record supplies used. b.

Oct. 31 Insurance expense ................................................

5,700

Prepaid insurance ..............................................

5,700

To record prepaid insurance expired. c.

Oct. 31 Depreciation expense ............................................

6,000

Accumulated Depreciation, Equipment .............

6,000

To record depreciation expense ($167,600 – 47,400/20 years = $6,000 depreciation per year). d.

Oct. 31 Cost of goods sold ................................................. Merchandise Inventory ......................................

11,700 11,700

To record inventory sold.

4-590

Last revised: September 2021.

Problem 5-4B Part 1 (Continued) JOURNEY‘S END COMPANY-- Work Sheet For Year Ended October 31, 2023 Unadjusted Trial Adjusting Entries Balance Account Debit Credit Debit Credit Cash .............................................................................................. 12,800 Merchandise inventory ................................................................... 41,500 (d) 11,700 Store supplies ................................................................................ 16,700 (a)10,100 Prepaid insurance .......................................................................... 5,700 (b) 5,700 Store equipment ............................................................................ 167,600 Accumulated depreciation, store equipment .................................................................................. 60,000 (c) 6,000 Accounts payable........................................................................... 34,700 Dallas End, capital ......................................................................... 172,100 Dallas End, withdrawals ................................................................. 12,000 Sales .............................................................................................. 391,000 Sales discounts .............................................................................. 3,500 Sales returns and allowances ........................................................ 8,000 Cost of goods sold ......................................................................... 149,600 (d) 11,700 Depreciation expense, store equipment (c) 6,000 Salaries expense ........................................................................... 144,000 Interest expense ............................................................................ 800 Insurance expense......................................................................... (b) 5,700 Rent expense ................................................................................. 56,000 Store supplies expense .................................................................. (a)10,100 Advertising expense ....................................................................... 39,600 Totals ......................................................................................... 657,800 657,800 33,500 33,500 Loss ...............................................................................................

Adjusted Trial Balance Debit Credit 12,800 29,800

Income Statement Debit Credit

6,600 0 167,600

Balance Sheet and Statement of Changes in Equity Debit Credit 12,800 29,800 6,600 0 167,600

66,000 34,700 172,100

12,000

12,000 391,000

391,000

3,500 8,000 161,300

6,000 144,000 800 5,700 56,000 10,100 39,600 663,800 663,800

6,000 144,000 800 5,700 56,000 10,100 39,600 435,000 391,000 228,800 44,000 44,000

272,800

4-591

Last revised: September 2021.

Totals.........................................................................................

435,000 435,000 272,800

272,800

4-592

Last revised: September 2021.

Problem 5-4B (concluded) Part 2 Multiple-step income statement: JOURNEY‘S Income For Year Ended October 31, 2023

END

Net sales* Cost of goods sold Gross profit from sales Operating expenses: Salaries expense Rent expense Advertising expense Store supplies expense Depreciation expense, store equipment Insurance expense Total operating expenses Loss from operations Other revenues and expenses: Interest expense Loss

COMPANY Statement $379,500 161,300 $218,200 $144,000 56,000 39,600 10,100 6,000 5,700 261,400 $ 43,200 800 $ 44,000

* Calculation: 391,000 – 3,500 – 8,000 = 379,500. Analysis component: Interest Expense is shown under Other revenues and expenses because it is not a day-today operating activity for Journey‘s End Company. Revenues and expenses not related to day-to-day operations are listed under Other revenues and expenses.

4593

Last revised: September 2021.

Problem 5-5B (40 minutes) 1. Classified, multiple-step income statement: EXCEL COMPANY Income Statement For Year Ended May 31, 2023 Sales ................................................................................... Less: Sales discounts ................................................... Sales returns and allowances .............................. Net sales ......................................................................... Cost of goods sold .............................................................. Gross profit from sales ........................................................ Operating expenses: Selling expenses: Sales salaries expense ............................................... Advertising expense .................................................... Rent expense, selling space........................................ Store supplies expense ............................................... Total selling expenses ................................................. General and administrative expenses: Office salaries expense ............................................... Rent expense, office space ......................................... Office supplies expense .............................................. Total general and administrative expenses ................. Total operating expenses ................................................ Profit ............................................................................

$636,000 $

9,750 42,000

51,750 $584,250 296,000 $288,250

$87,000 54,000 30,000 7,500 $178,500 $79,500 17,800 2,400 99,700 278,200 $ 10,050

Single-step income statement: EXCEL COMPANY Income Statement For Year Ended May 31, 2023 Net sales .......... $584,250 Expenses: Cost of goods sold $296,000 Selling expenses 178,500 General and administrative expenses 99,700 Total expenses .......... 574,200 Profit...................................................................................

$ 10,050

4594

Last revised: September 2021.

Problem 5-6B (20 minutes) a) The selling price for small handbags will be $70.00 (50 x (1+0.40)) and the selling price for medium handbags will be $84.00 ($60 x (1+0.40)). b) The mark-up on large handbags is 71% ($160 x (1-0.25) = $120.00); (($120.00 $70))/$70 = 0.71) c) Gross profit margin is calculated with the formula: Gross Profit Margin = Net Sales – Cost of Goods Sold Net Sales

Sale price Cost Gross Profit Gross Profit %

Small handbags 70.00 50.00 20.00 28.57% ((70-50)/70)

Medium Handbags 84.00 60.00 24.00 28.57% ((84-60)/84)

Large Handbags 120.00 70.00 50.00 41.67% ((120-70)/120)

d) The selling price for small handbags will be $83.33 ($50 / (1-0.40)), the selling price for medium handbags will be $100.00 ($60 / (1-0.40)) and the selling price for large handbags will be $116.67 ($70 / (1-0.40))

4595

Last revised: September 2021.

Problem 5-7B (50 minutes) 1. Classified, multiple-step income statement: UCORE Income For Year Ended December 31, 2023 Sales................................................................................... Less: Sales returns and allowances .............................. Sales discounts ................................................... Net sales ......................................................................... Cost of goods sold .............................................................. Gross profit from sales........................................................ Operating expenses: Selling expenses: Sales salaries expense ................................................ Rent expense, selling space ........................................ Depreciation expense, store equipment ....................... Store supplies expense................................................ Total selling expenses ................................................. General and administrative expenses: Office salaries expense ............................................... Rent expense, office space.......................................... Office supplies expense ............................................... Insurance expense ...................................................... Depreciation expense, office equipment ...................... Total general and administrative expenses .................. Total operating expenses ................................................ Loss ....................................................................................

SALES Statement $226,500 $ 1,469 278

1,747 $224,753 129,964 $ 94,789

$49,700 2 15,960 3,204 8403 $69,704 4

$21,300 5 3,990 1,5606 1,240 690 28,780 $

98,484 3,695

1. 70% × 71,000 2. 80% × 19,950 3. 35% × 2,400 4. 30% × 71,000 5. 20% × 19,950 6. 65% × 2,400

4596

Last revised: September 2021.

Problem 5-7B (concluded) 2. Single-step income statement: UCORE SALES Income Statement For Year Ended December 31, 2023 Revenues: Net sales ...................................................... Expenses: Cost of goods sold ....................................... Selling expenses .......................................... General and administrative expenses .......... Loss ....................................................................

$224,753 $129,964 69,704 28,780

228,448 $ 3,695

Analysis component: The gross profit ratio for Ucore Sales‘ year ended December 31, 2023 is 42.17% ($94,789/$224,753 × 100 = 42.17%). This represents a favourable change when compared to the 28% gross profit ratio for the prior year.

4597

Last revised: September 2021.

Problem 5-8B (60 minutes) 1. Classified, multiple-step income statement: BRILLIANT Income For Year Ended July 31, 2023 Sales................................................................................... Less: Sales discounts ................................................... Net sales ......................................................................... Cost of goods sold .............................................................. Gross profit from sales........................................................ Operating expenses: Selling expenses: Sales salaries expense ................................................ Advertising expense..................................................... Rent expense, selling space ........................................ Store supplies expense ................................................ Depreciation expense, store equipment ....................... Insurance expense, store............................................. Total selling expenses ................................................. General and administrative expenses: Office salaries expense................................................ Rent expense, office space.......................................... Depreciation expense, office equipment ...................... Office supplies expense ............................................... Insurance expense, office ............................................ Total general and administrative expenses .................. Total operating expenses ................................................ Loss ....................................................................................

SALES Statement $395,400 1,200 $394,200 261,800 $132,400

$39,000 14,900 21,000 1,800 1,500 4,100 $82,300 $ 32,000 13,100 1,250 2,600 2,800 51,750 134,050 $ 1,650

4598

Last revised: September 2021.

Problem 5-8B (concluded) 2. Multiple-step income statement: BRILLIANT Income For Year Ended July 31, 2023

SALES Statement

Net sales Cost of goods sold Gross profit from sales Operating expenses: Salaries expense Rent expense Advertising expense Supplies expense Depreciation expense, equipment Insurance expense Total operating expenses Loss

$394,200 261,800 $132,400 $71,000 34,100 14,900 4,400 2,750 6,900 134,050 $

1,650

3. Single-step income statement: BRILLIANT SALES Income Statement For Year Ended July 31, 2023 Revenues: Net sales Expenses: Cost of goods sold Selling expenses General and administrative expenses Total expenses Loss ...............................................................................

$394,200 $261,800 82,300 51,750 395,850 $

1,650

4599

Last revised: September 2021.

*Problem 5-9B (40 minutes) Mar.

1 Purchases .................................................................... Cash ...................................................................... To record purchase of merchandise for cash.

48,000

2 Accounts Receivable – Tessier & Welsh ................... Sales ..................................................................... To record sales; terms 2/15, n/30, FOB destination.

9,450

4 Purchases .................................................................... Accounts Payable – Janz Company.................... To record purchase of merchandise; terms 2/15, n/45, FOB shipping point.

11,300

5 Transportation-in or Freight-In .................................. Cash ...................................................................... To record payment of shipping costs.

1,540

6 Accounts Receivable – Parker Company .................. Sales ..................................................................... To record sales; terms 3/5, n/eom, FOB destination.

10,900

10 Purchases .................................................................... Accounts Payable – Delton Suppliers ................ To record purchase; terms 2/10, n/45, FOB destination.

18,000

16 Cash ............................................................................. Sales Discounts .......................................................... Accounts Receivable – Tessier & Welsh ............ To record collection within discount period; $9,450 x 2% = $189 discount.

9,261 189

17 Accounts Payable – Janz Company........................... Cash ...................................................................... Purchase Discounts ............................................. To record payment within discount period; $11,300 x 2% = $226 discount.

11,300

48,000

9,450

11,300

1,540

10,900

18,000

9,450

11,074 226

4600

Last revised: September 2021.

*Problem 5-9B (concluded) Mar.

30 Accounts Payable – Delton Suppliers ....................... Cash ...................................................................... To record payment.

18,000

31 Cash ............................................................................. Accounts Receivable – Parker Company ........... To record collection.

10,900

18,000

10,900

*Problem 5-10B (30 minutes) Date Account Mar. 1 Purchases..................................................................... Accounts Payable — Zender Holdings ............... Purchased merchandise terms 1/10, n/15.

Debit 40,000

2 Cash .............................................................................. Sales ..................................................................... Sold merchandise for cash.

5,100

7 Purchases..................................................................... Accounts Payable — Red River Co. .................... Purchased merchandise terms 2/10, n/30.

29,500

8 Transportation-in or Freight-In ................................... Accounts Payable — Dan‘s Shipping ................. Paid freight charges on purchase of March 7.

1,750

12 Accounts Receivable — Bev Dole .............................. Sales ...................................................................... Sold merchandise on credit, terms 2/10, n/45.

26,000

13 Accounts Payable — Red River Co. ........................... Purchase Returns and Allowances ..................... Received credit memo re purchase of March 7.

1,000

14 Office Furniture ............................................................ Accounts Payable — Wilson Supplies ................ Purchased office furniture on credit.

3,200

15 Accounts Receivable — Ted Smith ............................ Sales ...................................................................... Sold merchandise terms 2/10, n/45.

24,000

Credit 40,000

5,100

29,500

1,750

26,000

1,000

3,200

24,000

4601

Last revised: September 2021.

*Problem 5-10B (concluded) Accounts Payable — Red River Co. ........................... Purchase Discounts ............................................. Cash ....................................................................... Paid for merchandise purchased on March 7; 29,500 – 1,000 = 28,500; 28,500 x 2% = 570.

28,500

17 Sales Returns and Allowances ................................... Accounts Receivable — Ted Smith ..................... Issued credit memo to customer of March 15.

2,000

19 Accounts Payable — Wilson Supplies ....................... Office Furniture ..................................................... To record memo regarding damaged furniture purchased on March 14.

1,500

24 Cash .............................................................................. Sales Discounts ........................................................... Accounts Receivable — Ted Smith ..................... To record receipt of payment regarding March 15 sale less return and discount; 24,000 – 2,000 = 22,000; 22,000 x 2% = 440.

21,560 440

27 Cash .............................................................................. Accounts Receivable — Bev Dole ....................... Received payment from customer regarding March 12 sale.

26,000

31 Accounts Payable — Zender Holdings ....................... Cash ....................................................................... Paid for merchandise purchased on March 1.

40,000

Mar. 16

570 27,930

2,000

1,500

22,000

26,000

40,000

4602

Last revised: September 2021.

*Problem 5-11B (40 minutes) 1.

Net sales: Sales ........................................................................................ Less: Sales returns and allowances.......................................... Sales discounts............................................................... Net sales ..................................................................................

$276,000 28,500 2,350 $245,150

Cost of goods purchased: Purchases ................................................................................ Less: Purchase returns and allowances ................................... Purchase discounts ........................................................ Transportation-in ...................................................................... Cost of goods purchased ..........................................................

$120,000 4,050 1,150 4,850 $119,650

5,600 119,650 6,100 $119,150

Multiple-step income statement: MULLEN COMPANY Income Statement For Year Ended November 30, 2023 Net Sales .......................................................................... Cost of goods sold ............................................................ Gross profit from sales ..................................................... Operating expenses: Salaries expense......................................................... Rent expense .............................................................. Advertising expense .................................................... Supplies expense ........................................................ Total operating expenses .......................................... Income from operations .................................................... Other revenues and expenses .......................................... Interest expense ........................................................... Profit .................................................................................

$245,150 119,150 $126,000 $62,000 38,000 3,000 6,700 109,700 $ 16,300 350 $ 15,950

4603

Last revised: September 2021.

*Problem 5-11B (concluded) 5.

Single-step income statement: MULLEN COMPANY Income Statement For Year Ended November 30, 2023

Revenues: Net sales....................................................................... Expenses: ......................................................................... Cost of goods sold ........................................................ Selling expenses ........................................................... General and administrative expenses ........................... Interest expense ........................................................... Total expenses ........................................................... Profit .................................................................................

$245,150 $119,150 74,060 35,640 350 229,200 $ 15,950

Calculations: Selling Expenses: Rent Expense:

75% × 38,000 =

General and Admin. Expenses:

28,500

38,000 – 28,500 = Salaries Expense:

60% × 62,000 =

9,500 37,200

62,000 – 37,200 = Supplies Expense:

80% × 6,700 =

24,800 5,360

6,700 – 5,360 = Advertising Expense:

3,000 × 100% =

1,340 3,000

Total Selling Expenses = 28,500 + 37,200 + 5,360 + 3,000 = 74,060 Total General and Administrative Expenses = 9,500 + 24,800 + 1,340 = 35,640

4604

Last revised: September 2021.

*Problem 5-12B (60 minutes) Part 1 Note: A work sheet is not required to be prepared for this question. The work sheet is shown to illustrate the impact of the adjusting entries on the trial balance numers. THE ONLINE STORE Work Sheet For Year Ended March 31, 2023 Unadjusted Balance Sheet and Trial Income Statement of Balance Adjustments Statement Changes in Equity Debit Credit Debit Credit Debit Credit Debit Credit Cash ................................................ 7,000 7,000 Merchandise inventory ..................... 39,500 39,500 19,200 19,200 Supplies ........................................... 1,600 (a) 680 920 Prepaid rent ..................................... 19,200 (b) 16,000 3,200 Store equipment .............................. 60,000 60,000 Accum depreciation, store equip ...... 14,000 (c) 1,600 15,600 Office equipment.............................. 23,000 23,000 Accum depreciation, office equip ..... 6,500 (d) 3,250 9,750 Accounts payable............................. 16,000 16,000 Lucy Baker, capital........................... 134,600 134,600 Lucy Baker, withdrawals .................. 34,000 34,000 Sales ................................................ 506,750 506,750 Sales returns and allowances .......... 13,800 13,800 Sales discounts ................................ 6,000 6,000 Purchases ........................................ 346,000 346,000 Purchase returns and allowances .... 4,600 4,600 Purchase discounts.......................... 7,150 7,150 Transportation-in .............................. 16,000 16,000 Salaries exp (60% selling; 40% office) . 58,000 58,000 Rent expense (80% selling; 20% office) .. 49,000 (b) 16,000 65,000 Advertising expense ......................... 7,000 7,000 Supplies exp (30% selling; 70% office) ... 9,500 (a) 680 10,180 Depreciation expense, store equip ... 0 (c) 1,600 1,600 Depreciation expense, office equip 0 (d) 3,250 3,250 Totals ............................................ 689,600 689,600 21,530 21,530 566,330 537,700 147,320 175,950 Loss ................................................. 28,630 28,630 Totals ............................................ 566,330 566,330 175,950 175,950

4-605

Last revised: September 2021.

*Problem 5-12B (continued) Classified multiple-step income statement: THE ONLINE STORE Income Statement For Year Ended March 31, 2023 Sales ................................................................................ Less: Sales returns and allowances ............................ Sales discounts ................................................. Net Sales .......................................................................... Cost of goods sold: Merchandise inventory, March 31, 2022 ........................ Purchases ................................................................... Less: Purchase returns and allowances ..................... Purchase discounts Net purchases ............................................................... Add: Transportation-in .............................................. Cost of goods purchased............................................... Goods available for sale ................................................ Less: Merchandise inventory, March 31, 2023.............. Cost of goods sold......................................................... Gross profit from sales ..................................................... Operating expenses: Selling expenses: Rent expense, selling space1....................................... 2 Sales salaries expense .............................................. Advertising expense .................................................... Store supplies expense3 .............................................. Depreciation expense, store equipment ...................... Total selling expenses ................................................. General and administrative expenses: Office salaries expense4 .............................................. Rent expense, office space5 ........................................ 6 Office supplies expense ............................................. Depreciation expense, office equipment ...................... Total general and administrative expenses.................. Total operating expenses .......................................... Loss..................................................................................

$506,750 $ 13,800 6,000

19,800 $486,950

$ 39,500 $346,000 $4,600 7,150

11,750 $334,250 16,000 350,250 $389,750 19,200 370,550 $116,400

$ 52,000 34,800 7,000 3,054 1,600 $98,454 $ 23,200 13,000 7,126 3,250 46,576 145,030 $ 28,630

Calculations: 1. 2. 3.

65,000 x 80% 58,000 x 60% 10,180 x 30%

4. 5. 6.

58,000 x 40% 65,000 x 20% 10,180 x 70%

4-606

Last revised: September 2021.

*Problem 5-13B (40 minutes) Sept.

Cash .................................................................................. PST Payable .............................................................. GST Payable .............................................................. Sales .......................................................................... To record cash sale; $9,000 x 8% = $720 PST; $9,000 x 5% = $450 GST.

10,170

Cost of Goods Sold ............................................................. Merchandise Inventory ............................................... To record cost of sale.

6,200

Merchandise Inventory ....................................................... GST Receivable ................................................................. Cash .......................................................................... To record cash purchase; $11,000 x 5% = $550 GST.

11,000 550

Merchandise Inventory ....................................................... GST Receivable ................................................................. Accounts Payable ...................................................... To record credit purchase; $6,500 x 5% = $325 GST.

6,500 325

Accounts Receivable ......................................................... PST Payable .............................................................. GST Payable .............................................................. Sales .......................................................................... To record credit sale; $16,200 x 8% = $1,296 PST; $16,200 x 5% = $810 GST.

18,306

Cost of Goods Sold ............................................................. Merchandise Inventory ............................................... To record cost of sale.

13,200

Accounts Payable ............................................................... Merchandise Inventory ............................................... Cash .......................................................................... To record payment within discount period; $6,500* x 1% = $65.

6,825

Cash ................................................................................... Sales Discounts ................................................................. Accounts Receivable .................................................. To record collection within discount period; $16,200* x 2% = $324.

17,982 324

720 450 9,000

6,200

11,550

6,825

1,296 810 16,200

13,200

65 6,760

18,306

*The discount applies only to the amount before tax.

4-607

Last revised: September 2021.

*Problem 5-14B (40 minutes) Sept.

10,170

Purchases .......................................................................... GST Receivable ................................................................. Cash .......................................................................... To record cash purchase; $11,000 x 5% = $550 GST.

11,000 550

Purchases .......................................................................... GST Receivable ................................................................. Accounts Payable ...................................................... To record credit purchase; $6,500 x 5% = $325 GST.

6,500 325

18,306

Accounts Payable ............................................................... Purchase Discounts ................................................... Cash .......................................................................... To record payment within discount period; $6,500* x 1% = $65.

6,825

Cash ................................................................................... Sales Discounts ................................................................. Accounts Receivable .................................................. To record collection within discount period; $16,200* x 2% = $324.

17,982 324

720 450 9,000

11,550

6,825

1,296 810 16,200

65 6,760

18,306

*The discount applies only to the amount before tax.

4-608

Last revised: September 2021.

ANALYTICAL AND REVIEW PROBLEMS A&R Problem 5-1 – Perpetual Multiple-step income statement: DEMO SALES Income For Month Ended July 31, 2023

Statement

Net sales Cost of goods sold Gross profit from sales Operating expenses: Advertising expense Rent expense Depreciation expense, equipment Insurance expense Total operating expenses Profit from operations Other revenues and expenses: Interest expense Profit

$559,340* 394,000 $165,340 $14,000 5,000 3,000 2,500 24,500 $140,840 $1,700 $139,140

*$562,140 - $2,800 = $559,34 Ethics Challenge 1. Some students may feel that Claire has devised a clever way to beat the system. She appears to be succeeding in getting something for free. Other students will feel that Claire is definitely abusing the system and that her ethical code needs a major overhaul. The instructor may wish to point out that customer abuses such as Claire‘s usually result in stores adopting stringent return policies that will impact all customers who have legitimate needs to return unused products. At some point Claire will probably suffer discomfort when questioned about items that are returned in less than perfect condition. Also if store managers suspect Claire‘s behaviour over time they may no longer allow her to shop at their store. If Claire is banned from the store she will likely suffer humiliation for herself and her family. Probably Claire‘s parents do not know of her scheme and she may suffer additional consequences once they learn of her practices. 2. The store must account for sales returns using a contra-revenue account called Sales Returns and Allowances. A dress returned with a sales bill of $100 would be accounted for as follows: Sales Returns and Allowances……….. $100 Accounts Receivable………………..

$100

4609

Last revised: September 2021.

Focus on Financial Statements FFS 5-1 Single-step income statement:

COLOMBIA TEXTILES Income Statement For Year Ended December 31, 2023 (000s) Revenues: Net sales ..................................................................... Interest income .......................................................... Total revenues Expenses: Cost of goods sold .................................................... 1 Selling expenses ....................................................... General and administrative expense2....................... Interest expense......................................................... Total expenses ........................................................... Loss .................................................................................

COLOMBIA TEXTILES Statement of Changes in Equity For Year Ended December 31, 2023 (000s) Brandy Colombia, capital, January 1............................. Add: Investments by owner .......................................... Total ............................................................................ Less: Withdrawals for the year .................................... Loss ..................................................................... Brandy Colombia, capital, December 31 .......................

$614 2 $616 $459 193 114 4 770 $154

$5233 0 $523 $ 78 154

232 $291

1. $21 + $46 + $120 + $6 = $193 2. $63 + $17 + $21 + $13 = $114 3.

Calculated as post-closing capital balance of $291 + withdrawals of $78 + loss of $154 = $523 capital at January 1.

4-610

Last revised: September 2021.

FFS 5-1 (continued) COLOMBIA TEXTILES Balance Sheet December 31, 2023 (000s) Assets Current assets: Cash ...................................................................................... Accounts receivable ............................................................ Merchandise inventory ........................................................ Office supplies ..................................................................... Prepaid rent .......................................................................... Current portion of notes receivable .................................... Total current assets ............................................................. Non-current investments: Notes receivable, less current portion Property, plant and equipment: Office furniture ..................................................................... Less: Accumulated depreciation, office furniture ......... Store fixtures ........................................................................ Less: Accumulated depreciation, store fixtures ............ Total property, plant and equipment .................................. Intangible assets: Franchise ............................................................................. Total assets .................................................................................. Liabilities Current liabilities: Accounts payable .................................................................. Unearned revenue ................................................................. Current portion of notes payable ......................................... Total current liabilities ....................................................... Non-current liabilities: Notes payable, less current portion ......................................... Total liabilities ........................................................................... Equity Brandy Colombia, capital ........................................................ Total liabilities and equity ...........................................................

$ 48 106 236 5 32 3 $430 11 $ 52 38 $106 61

$ 14 45 59 62 $562

$ 34 12 45 $ 91 180 $271

291 $562

4611

Last revised: September 2021.

FFS 5-1 (concluded) Analysis component: Although Spin Master has more total liabilities than Colombia Textiles, $499,200,000 vs. $271,000, Spin Master‘s total liabilities represent 37.20% of total assets ($499,200,000/$1,342,100,000 × 100) which is lower than Colombia Textiles. Colombia Textiles‘s total liabilities represent 48.22% of total assets ($271,000/$562,000 × 100). The balance sheet for Spin Master appears stronger based on the fact that for every dollar of assets they have approximately 37 cents of liabilities. It is important to note that Spin Master is in the toy and entertainment industry while Colombia is in the textile industry, which could result in discrepancies, therefore caution needs to be applied when making such a comparison.

FFS 5-2 a. Spin Master sells products because the income statement includes Cost of sales, another term used to describe Cost of goods sold, the expense account that represents the cost of the goods actually sold. b. RECIPE sells products since its expense accounts on the income statement include an account for Cost of inventories sold. This would be synonymous with cost of sales on the Spin Master income statement. c. The gross profit of $727,900 (thousand) for the year ended December 31, 2020 represents the profit earned on the sale of goods before deducting operating expenses. d. Yes, Spin Master had sufficient gross profit to cover operating expenses for the year ended December 31, 2020, since they had net income of $45,500 (thousand). e. Spin Master has prepared its income statement using the multiple-step format. f. According to note 11, inventory for Spin Master represents raw materials and finished goods whereas inventory for RECIPE, according to note 12, represents (largely) food and packing materials.

4612

Last revised: September 2021.

CRITICAL THINKING MINI CASE CT 6-1 Note to instructor: Student responses will vary therefore the answer here is only suggested and not inclusive of all possibilities; it is presented in point form for brevity. Problem(s): — Review and assess the inventory information Goal(s)*: — To review and assess the inventory information so that appropriate questions can be asked and answered to effectively manage the inventory Assumption(s)/Principle(s): — That the information provided is correct; given that the cost of merchandise sold to customers increased by 50% from 2022 to 2023 (480,000 – 320,000 = 160,000/320,000 × 100 = 50%), it can be assumed that there was a corresponding increase in sales from 2022 to 2023 Facts: — The information provided was reorganized into the following T-accounts: 2022: Merchandise Inventory Beg. 84,000 320,000 COGS Purchases 240,000 14,000 Shrinkage TI 12,000 2,400 Purch disc Sales Ret 22,400 1,200 Purch ret End. Inv. 20,800

COGS Shrinkage Adj. Bal.

Cost of Goods Sold 320,000 22,400 Sales Ret 14,000 311,600

2023: Merchandise Inventory Beg 20,800 480,000 COGS Purchases 510,000 2,500 Shrinkage TI 25,500 5,100 Purch disc Sales Ret 115,000 2,550 Purch ret End 181,150

Cost of Goods Sold COGS Shrinkage

480,000 2,500 367,500

Sales 115,000 Ret

*The goal is highly dependent on ―perspective.‖

4613

Last revised: September 2021.

CT 5-1 (concluded) Conclusion(s)/Consequence(s): — Sales returns in 2023 were $115,000 which is 413% greater than in 2022 (115,000 – 22,400 = 92,600/22,400 × 100). This is an unfavourable change and requires immediate attention; questions need to be asked to determine the cause(s) so that the appropriate corrective action can be taken — Shrinkage decreased by $11,500 or 82% from 2022 to 2023 (14,000 – 2,500 = 11,500/14,000 × 100); this is a favourable change and the inventory manager should find out how this occurred and improve on it, if possible

4-614

Last revised: September 2021.

Perpetual Cumulative Problem, Echo Systems (150 minutes) Part 1 Journal entries: General Journal Date 2024 Jan.

Account Titles and Explanations 4

Page G7 PR

Debit

Wages Expense ................................................623 Wages Payable .................................................210 Cash ..........................................................101 Paid employee.

200 800

Cash .................................................................101 Mary Graham, Capital ...............................301 Investment by owner.

48,000

Merchandise Inventory ......................................119 Accounts Payable—Shephard Corp. .........201 Purchased merchandise on credit.

11,200

Cash .................................................................101 Accounts Receivable—Fostek Co. ............106.6 Collected accounts receivable.

3,000

Accounts Receivable—Alamo Eng. Co. ............106.1 Unearned Computer Services Revenue ............236 Computer Services Revenue .....................403 Completed work on project.

9,000 3,000

Accounts Receivable—Elite Corp. ....................106.5 Sales .........................................................413 Sold merchandise on credit.

8,400

Cost of Goods Sold ...........................................502 Merchandise Inventory ..............................119 To record the cost of the January 13 sale.

6,720

Merchandise Inventory ......................................119 Cash ..........................................................101 Paid freight on incoming merchandise.

1,400

Cash .................................................................101 Computer Services Revenue .....................403 Collected cash revenue from customer.

6,000

Accounts Payable—Shephard Corp. .................201 Merchandise Inventory ..............................119 Cash ..........................................................101 Paid account payable within discount . period.

11,200

Credit

1,000

48,000

11,200

3,000

12,000

8,400

6,720

1,400

6,000

112 11,088

4615

Last revised: September 2021.

Perpetual Serial Problem (continued) General Journal Date 2024 Jan.

Account Titles and Explanations 20

Feb.

G8 PR

Debit

Sales Returns and Allowances .......................... 415 Accounts Receivable—Elite Corp. ............. 106.5 Customer returned defective goods.

800

Cash ................................................................. 101 Sales Discounts ................................................ 414 Accounts Receivable—Elite Corp. ............. 106.5 Collected accounts receivable.

7,524 76

Accounts Payable—Shephard Corp. ................. 201 Merchandise Inventory ............................... 119 Returned merchandise for credit.

792

Merchandise Inventory ...................................... 119 Accounts Payable—Shephard Corp. ......... 201 Purchased merchandise for resale.

16,000

Accounts Receivable—Hacienda, Inc. .............. 106.8 Sales ......................................................... 413 Sold merchandise on credit.

11,600

Cost of Goods Sold ........................................... 502 Merchandise Inventory .............................. 119 To record the cost of the January 26 sale.

9,280

800

7,600

792

16,000

11,600

9,280

No entry recorded in the journal.

Wages Expense ............................................... 623 Cash ......................................................... 101 Paid employee.

2,000

Prepaid Rent ..................................................... 131 Cash ......................................................... 101 Paid three months’ rent in advance.

6,750

Accounts Payable—Shephard Corp. ................. 201 Merchandise Inventory .............................. 119 Cash ......................................................... 101 Paid account payable within discount period.

15,208

Advertising Expense ......................................... 655 Cash ......................................................... 101 Purchased ad in local newspaper.

1,600

Credit

2,000

6,750

160 15,048

1,600

4-616

Last revised: September 2021.

Perpetual Cumulative Problem (continued) General Journal Date Account Titles and Explanations PR 2024 Feb. 11 Cash .................................................................101 Accounts Receivable—Alamo Engin. Co. ........................................... 106.1 Collected accounts receivable. 15 Mary Graham, Withdrawals ...............................302 Cash ..........................................................101 Owner withdrew cash. 23 Accounts Receivable—Grandview Co. ..............106.7 Sales .........................................................413 Sold merchandise on credit. 23 Cost of Goods Sold ...........................................502 Merchandise Inventory ..............................119 To record the cost of the February 23 sale. 26 Wages Expense ................................................623 Cash ..........................................................101 Paid employee. 27 Mileage Expense ..............................................676 Cash ..........................................................101 Reimbursed Mary Graham for use of auto. Mar. 8 Computer Supplies ...........................................126 Accounts Payable—Abbot Office Prod. .........................................................201 Purchased supplies on credit. 9 Cash .................................................................101 Accounts Receivable—Grandview Co. .........106.7 Collected accounts receivable. 11 Repairs Expense, Computer .............................684 Cash ..........................................................101 Paid for computer repairs. 16 Cash .................................................................101 Computer Services Revenue .....................403 Collected cash revenue from customer.

Debit

G9 Credit

9,000 9,000 9,600 9,600 6,400 6,400 5,120 5,120 1,600 1,600 600 600 4,800 4,800 6,400 6,400 1,720 1,720 8,520 8,520

4617

Last revised: September 2021.

Perpetual Cumulative Problem (continued) General Journal Date 2024 Mar.

Account Titles and Explanation 19

G10 PR

Debit

Accounts Payable .................................................... 201 Cash ................................................................ 101 Paid accounts payable.

7,110

Accounts Receivable—Capital Leasing .................... 106.3 Computer Services Revenue ............................ 403 Billed customer for services.

11,800

Accounts Receivable—Buckman Services ................ 106.2 Sales ................................................................ 413 Sold merchandise on credit.

3,600

Cost of Goods Sold .................................................. 502 Merchandise Inventory ..................................... 119 To record the cost of the March 25 sale.

2,004

Accounts Receivable—Decker Co. .......................... 106.4 Sales ................................................................ 413 Sold merchandise on credit.

4,440

Cost of Goods Sold .................................................. 502 Merchandise Inventory ..................................... 119 To record the cost of the March 30 sale.

2,200

Mileage Expense ..................................................... 676 Cash ................................................................ 101 Reimbursed Mary Graham for use of auto.

400

Credit

7,110

11,800

3,600

2,004

4,440

2,200

400

4-618

Last revised: September 2021.

Perpetual Cumulative Problem (continued) Part 2 Date 2023 Dec. 2024 Jan.

Feb.

Mar.

Date 2023 Dec. 2024 Jan. Feb.

Date 2023 Dec. 2024 Mar.

Cash Explanation

Debit

Acct. No. 101 Credit Balance

31 Beginning balance 4 5 9 15 16 17 22 31 1 3 5 11 15 26 27 9 11 16 19 31

89,090 G7 G7 G7 G7 G7 G7 G8 G8 G8 G8 G8 G9 G9 G9 G9 G9 G9 G9 G10 G10

1,000 48,000 3,000 1,400 6,000 11,088 7,524 2,000 6,750 15,048 1,600 9,000 9,600 1,600 600 6,400 1,720 8,520 7,110 400

Accounts Receivable—Alamo Engineering Co. Explanation Debit PR

88,090 136,090 139,090 137,690 143,690 132,602 140,126 138,126 131,376 116,328 114,728 123,728 114,128 112,528 111,928 118,328 116,608 125,128 118,018 117,618

Acct. No. 106.1 Credit Balance

31 Beginning balance 11 11

0 G7 G9

Accounts Receivable—Buckman Services PR Explanation

9,000 9,000

Debit

9,000 0

Acct. No. 106.2 Credit Balance

31 Beginning balance 25

0 G10

3,600

4619

Last revised: September 2021.

Perpetual Cumulative Problem (continued) Part 2 Date 2023 Dec. 2024 Mar.

Date 2023 Dec. 2024 Mar.

Date 2023 Dec. 2024 Jan.

Date 2023 Dec. 2024 Feb. Mar.

Date 2023 Dec. 2024 Jan.

Accounts Receivable—Capital Leasing PR Explanation

Debit

Acct. No. 106.3 Credit Balance

31 Beginning balance 24

0 G10

Accounts Receivable—Decker Co. PR Explanation

11,800

Debit

Acct. No. 106.4 Credit Balance

31 Beginning balance 30

2,700 G10

Accounts Receivable—Elite Corporation PR Explanation

4,440

7,140

Debit

Acct. No. 106.5 Credit Balance

31 Beginning balance 13 20 22

0 G7 G8 G8

Accounts Receivable—Fostek Co. PR Explanation

8,400 800 7,600

Debit

Acct. No. 106.6 Credit Balance

31 Beginning balance 9

8,400 7,600 0

3,000 G7

3,000

Accounts Receivable—Grandview Co. PR Debit Explanation

Acct. No. 106.7 Credit Balance

31 Beginning balance 23 9

0 G9 G9

Accounts Receivable—Hacienda, Inc. PR Explanation

6,400 6,400

Debit

6,400 0

Acct. No. 106.8 Credit Balance

31 Beginning balance 26

0 G8

11,600

4-620

Last revised: September 2021.

Perpetual Cumulative Problem (continued) Part 2 Date 2023 Dec.

Date 2024 Jan.

Feb. Mar.

Date 2023 Dec. 2024 Mar.

Date 2023 Dec.

Date 2023 Dec. 2024 Feb.

Date 2023 Dec.

Accounts Receivable—Images, Inc. Explanation PR

Debit

Acct. No. 106.9 Credit Balance

31 Beginning balance Merchandise Inventory Explanation 7 13 15 17 24 26 26 3 23 25 30 Computer Supplies Explanation

Debit

G7 G7 G7 G7 G8 G8 G8 G8 G9 G10 G10

11,200

Debit

6,720 1,400 112 792 16,000 9,280 160 5,120 2,004 2,200

31 Beginning balance 8 Prepaid Insurance Explanation

4,800

6,240

Debit

Acct. No. 128 Credit Balance 3,240

Debit

31 Beginning balance

Acct. No. 131 Credit Balance 2,250

G8 Office Equipment Explanation

Acct. No. 126 Credit Balance

31 Beginning balance 1

11,200 4,480 5,880 5,768 4,976 20,976 11,696 11,536 6,416 4,412 2,212

1,440

31 Beginning balance Prepaid Rent Explanation

Acct. No. 119 Credit Balance

6,750

9,000

Debit

Acct. No. 163 Credit Balance 18,000

4621

Last revised: September 2021.

Perpetual Cumulative Problem (continued) Part 2 Date 2023 Dec.

Date 2023 Dec.

Date 2023 Dec. 2024 Jan.

Feb. Mar.

Date 2023 Dec. 2024 Jan.

Accumulated Depreciation, Office Equipment PR Debit Explanation

Acct. No. 164 Credit Balance

31 Beginning balance Computer Equipment Explanation

1,500

Debit

Acct. No. 167 Credit Balance

31 Beginning balance

36,000

Accumulated Depreciation, Computer Equipment PR Debit Explanation

Acct. No. 168 Credit Balance

31 Beginning balance Accounts Payable Explanation

2,250

Debit

Acct. No. 201 Credit Balance

31 Beginning balance 7 17 24 26 3 8 19

2,310 G7 G7 G8 G8 G8 G9 G10

Wages Payable Explanation

11,200

7,110

13,510 2,310 1,518 17,518 2,310 7,110 0

Debit

Acct. No. 210 Credit Balance

11,200 792 16,000 15,208 4,800

31 Beginning balance 4

800 G7

Unearned Computer Services Revenue PR Explanation

800

Debit

Acct. No. 236 Credit Balance

31 Beginning balance 11

3,000 G7

3,000

4-622

Last revised: September 2021.

Perpetual Cumulative Problem (continued) Part 2 Date 2023 Dec. 2024 Jan.

Date 2024 Feb.

Date 2024 Jan. Mar.

Mary Graham, Capital Explanation

Debit

31 Beginning balance

145,860

48,000

Feb. Mar.

Date 2024 Jan.

Debit

Acct. No. 302 Credit Balance

9,600

Computer Services Revenue PR Explanation

Debit

Acct. No. 403 Credit Balance

11 16 16 24

G7 G7 G9 G10

Date 2024 Jan.

Explanation 13 26 23 25 30

12,000 6,000 8,520 11,800

Debit

12,000 18,000 26,520 38,320

Acct. No. 413 Credit Balance

G7 G8 G9 G10 G10

8,400 11,600 6,400 3,600 4,440

Debit

Acct. No. 414 Credit Balance

Sales Returns and Allowances PR Explanation

Debit

Acct. No. 415 Credit Balance

800

Sales Discounts Explanation 22

193,860

Mary Graham, Withdrawals PR Explanation

Sales Date 2024 Jan.

Acct. No. 301 Credit Balance

8,400 20,000 26,400 30,000 34,440

4-623

Last revised: September 2021.

Perpetual Serial Problem (continued) Part 2 Date 2024 Jan. Feb. Mar.

Cost of Goods Sold Explanation 13 26 23 25 30

Debit

Acct. No. 502 Credit Balance

G7 G8 G9 G10 G10

6,720 9,280 5,120 2,004 2,200

6,720 16,000 21,120 23,124 25,324

Debit

Acct. No. 612 Credit Balance

Debit

Acct. No. 613 Credit Balance

Debit

Acct. No. 623 Credit Balance

G7 G8 G9

200 2,000 1,600

200 2,200 3,800

Debit

Acct. No. 637 Credit Balance

Date

Depreciation Expense, Office Equipment Explanation PR

Date

Depreciation Expense, Computer Equipment PR Explanation

Date 2024 Jan. Feb.

Wages Expense Explanation 4 31 26

Date

Insurance Expense Explanation

Date

Rent Expense Explanation

Debit

Acct. No. 640 Credit Balance

Date

Computer Supplies Expense PR Explanation

Debit

Acct. No. 652 Credit Balance

Debit

Acct. No. 655 Credit Balance

1,600

Debit

Acct. No. 676 Credit Balance

G9 G10

600 400

600 1,000

Date 2024 Feb.

Date 2024 Feb. Mar.

Advertising Expense Explanation 5 Mileage Expense Explanation 27 31

4-624

Last revised: September 2021.

Perpetual Cumulative Problem (continued) Part 2 Date 2024 Mar.

Date

Repairs Expense, Computer PR Explanation

Debit

Acct. No. 684 Credit Balance

1,720

Debit

Acct. No. 699 Credit Balance

Charitable Donations Expense PR Explanation

4-625

Last revised: September 2021.

Perpetual Cumulative Problem (continued) Part 3 ECHO SYSTEMS Partial Work Sheet For Three Months Ended March 31, 2024 Unadjusted Trial Balance 101 106.1 106.2 106.3 106.4 106.5 106.6 106.7 106.8 106.9 119 126 128 131 163 164 167 168 201 210 236 301 302 403 413 414 415 502 612 613 623 637 640 652 655 676 684 699

Account Cash ............................................ Alamo Engineering Co. ........... Buckman Services ................... Capital Leasing ......................... Decker Co. ................................. Elite Corporation....................... Fostek Co. ................................. Grandview Co............................ Hacienda, Inc. ........................... Images, Inc. ............................... Merchandise inventory ............ Computer supplies ................... Prepaid insurance .................... Prepaid rent ............................... Office equipment ...................... Accumulated depreciation, office equipment .................. Computer equipment ............... Accumulated depreciation, computer equipment ........... Accounts payable ..................... Wages payable .......................... Unearned computer services revenue .................................. Mary Graham, capital ............... May Graham, withdrawals ...... Computer services revenue ... Sales............................................ Sales discounts......................... Sales returns and allowances Cost of goods sold ................... Depreciation expense, office equipment .................. Depreciation expense, computer equipment ........... Wages expense......................... Insurance expense ................... Rent expense............................. Computer supplies expense .. Advertising expense ................ Mileage expense ....................... Repairs expense, computer.... Charitable donations expense Totals ......................................

Debit 117,618 0 3,600 11,800 7,140 0 0 0 11,600 0 2,212 6,240 3,240 9,000 18,000

Adjustments

Credit

Debit

Credit

(g) 252 (a) 2,010 (b) 1,080 (d) 6,750 1,500

Adjusted Trial Balance Debit 117,618 0 3,600 11,800 7,140 0 0 0 11,600 0 1,960 4,230 2,160 2,250 18,000

(f) 1,500

36,000

3,000 36,000

2,250 0 0

(e) 2,250

4,500 0 1,400

0 193,860

9,600

9,600 38,320 34,440

76 800 25,324 0

Credit

38,320 34,440 252

76 800 25,576

(f) 1,500

1,500

(g)

0 (e) 2,250 3,800 (c) 1,400 0 (b) 1,080 0 (d) 6,750 0 (a) 2,010 1,600 1,000 1,720 0 270,370 270,370 15,242

2,250 5,200 1,080 6,750 2,010 1,600 1,000 1,720 0 15,242 275,520 275,520

4-626

Last revised: September 2021.

Perpetual Cumulative Problem (continued) Part 4: Single-step income statement ECHO SYSTEMS Income Statement For Three Months Ended March 31, 2024 Revenues: Computer services revenue Net sales1 Total revenues Expenses: Cost of goods sold Rent expense Wages expense Depreciation expense2 Computer supplies expense Repairs expense, computer Advertising expense Insurance expense Mileage expense Total expenses Profit ...............................................................................

$38,320 33,564 $71,884 $25,576 6,750 5,200 3,750 2,010 1,720 1,600 1,080 1,000 48,686 $23,198

1. 34,440 Sales – 76 Sales Discounts – 800 Sales Returns and Allowances = 33,564 Net Sales. 2. Depreciation expense, office equipment of $1,500 + depreciation expense, computer equipment of $2,250 = Total depreciation expense of $3,750.

Part 5 ECHO SYSTEMS Statement of Changes in Equity For Three Months Ended March 31, 2024 Mary Graham, capital, December 31, 2023 Profit Investment by owner Total Less: Withdrawals by owner Mary Graham, capital, March 31, 2024........................

$145,860 $23,198 48,000 $217,058

71,198 9,600 $207,458

4-627

Last revised: September 2021.

Perpetual Cumulative Problem (concluded) Part 6 ECHO SYSTEMS Balance Sheet March 31, 2024 Assets Current assets: Cash.................................................................................... Accounts receivable* ........................................................... Merchandise inventory ....................................................... Computer supplies ............................................................. Prepaid insurance .............................................................. Prepaid rent ....................................................................... Total current assets............................................................. Property, plant and equipment: Office equipment ................................................................ Less: Accumulated depreciation ...................................... Computer equipment ................................................................. Less: Accumulated depreciation ........................................... Total property, plant and equipment.................................... Total assets ................................................................................

$117,618 34,140 1,960 4,230 2,160 2,250 $162,358 $18,000 3,000 $36,000 4,500

$ 15,000 31,500 46,500 $208,858

Liabilities Current liabilities: Wages payable ..................................................................

Equity Mary Graham, capital .............................................................. Total liabilities and equity ............................................................

207,458 $208,858

1,400

*A/R – Buckman Services 3,600 + A/R – Capital Leasing 11,800 + A/R – Decker Co. 7,140 + A/R – Hacienda, Inc. 11,600 = 34,140. *Periodic Cumulative Problem, Echo Systems (150 minutes) Part 1 Journal entries: General Journal Date 2024 Jan.

Account Titles and Explanations 4

G7 PR

Debit

Wages Expense ............................................... 623 Wages Payable ................................................ 210 Cash ......................................................... 101 Paid employee.

200 800

Cash ................................................................. 101 Mary Graham, Capital ............................... 301

48,000

Credit

1,000

48,000

4-628

Last revised: September 2021.

Investment by owner. 7

Purchases ......................................................... 505 Accounts Payable—Shephard Corp. ......... 201 Purchased merchandise on credit.

11,200

Cash ................................................................. 101 Accounts Receivable—Fostek Co. ............ 106.6 Collected accounts receivable.

3,000

Accounts Receivable—Alamo Eng. Co. ............ 106.1 Unearned Computer Services Revenue ............ 236 Computer Services Revenue ..................... 403 Completed work on project.

9,000 3,000

Accounts Receivable—Elite Corp. .................... 106.5 Sales ......................................................... 413 Sold merchandise on credit.

8,400

Transportation-In .............................................. 508 Cash ......................................................... 101 Paid freight on incoming merchandise.

1,400

Cash ................................................................. 101 Computer Services Revenue ..................... 403 Collected cash revenue from customer.

6,000

Accounts Payable—Shephard Corp. ................. 201 Purchase Discounts .................................. 507 Cash ......................................................... 101 Paid account payable within discount . period.

11,200

3,000

12,000

8,400

1,400

6,000

112 11,088

6-629

Last revised: September 2021.

Periodic Cumulative Problem (continued) General Journal Date 2024 Jan.

Account Titles and Explanations 20

Feb.

G8 PR

Debit

Sales Returns and Allowances .......................... 415 Accounts Receivable—Elite Corp. ............. 106.5 Customer returned defective goods.

800

7,524 76

Accounts Payable—Shephard Corp. ................. 201 Purchase Returns and Allowances ............. 506 Returned merchandise for credit.

792

Purchases ......................................................... 505 Accounts Payable—Shephard Corp. ......... 201 Purchased merchandise for resale.

16,000

Accounts Receivable—Hacienda, Inc. .............. 106.8 Sales ......................................................... 413 Sold merchandise on credit.

11,600

800

7,600

792

16,000

11,600

No entry recorded in the journal.

Wages Expense ............................................... 623 Cash ......................................................... 101 Paid employee.

2,000

Prepaid Rent ..................................................... 131 Cash ......................................................... 101 Paid three months’ rent in advance.

6,750

15,208

Advertising Expense ......................................... 655 Cash ......................................................... 101 Purchased ad in local newspaper.

1,600

Credit

2,000

6,750

160 15,048

1,600

6-630

Last revised: September 2021.

Periodic Cumulative Problem (continued) General Journal Date 2024 Feb.

Account Titles and Explanations 11

Mar.

G9 PR

Debit

Cash ................................................................. 101 Accounts Receivable—Alamo Engin. Co. ............................................ 106.1 Collected accounts receivable. Mary Graham, Withdrawals .............................. 302 Cash ......................................................... 101 Owner withdrew cash.

9,000

Accounts Receivable—Grandview Co. .............. 106.7 Sales ......................................................... 413 Sold merchandise on credit.

6,400

Wages Expense ............................................... 623 Cash ......................................................... 101 Paid employee.

1,600

Mileage Expense .............................................. 676 Cash ......................................................... 101 Reimbursed Mary Graham for use of auto.

600

Computer Supplies ........................................... 126 Accounts Payable—Abbot Office Prod. ......................................................... 201 Purchased supplies on credit.

4,800

Cash ................................................................. 101 Accounts Receivable—Grandview Co. ......... 106.7 Collected accounts receivable.

6,400

Repairs Expense, Computer ............................. 684 Cash ......................................................... 101 Paid for computer repairs.

1,720

Cash ................................................................. 101 Computer Services Revenue ..................... 403 Collected cash revenue from customer.

8,520

Credit

9,000 9,600 9,600

6,400

1,600

600

4,800

6,400

1,720

8,520

6-631

Last revised: September 2021.

Periodic Cumulative Problem (continued) General Journal G10 Date 2024

Account Titles and Explanations 19

Debit

Accounts Payable ............................................. 201 Cash ......................................................... 101 Paid accounts payable.

7,110

Accounts Receivable—Capital Leasing ............. 106.3 Computer Services Revenue ..................... 403 Billed customer for services.

11,800

Accounts Receivable—Buckman Services ......... 106.2 Sales ......................................................... 413 Sold merchandise on credit.

3,600

Accounts Receivable—Decker Co. ................... 106.4 Sales .......................................................... 413 Sold merchandise on credit.

4,440

Mileage Expense ..............................................676 Cash .........................................................101 Reimbursed Mary Graham for use of auto.

400

Credit

7,110

11,800

3,600

4,440

400

6-632

Last revised: September 2021.

Periodic Cumulative Problem (continued) Part 2 Date 2023 Dec. 2024 Jan.

Feb.

Mar.

Date 2023 Dec. 2024 Jan. Feb.

Date 2023 Dec. 2024 Mar.

Cash Explanation

Debit

Acct. No. 101 Credit Balance

31 Beginning balance 4 5 9 15 16 17 22 31 1 3 5 11 15 26 27 9 11 16 19 31

89,090 G7 G7 G7 G7 G7 G7 G8 G8 G8 G8 G8 G9 G9 G9 G9 G9 G9 G9 G10 G10

1,000 48,000 3,000 1,400 6,000 11,088 7,524 2,000 6,750 15,048 1,600 9,000 9,600 1,600 600 6,400 1,720 8,520 7,110 400

Accounts Receivable—Alamo Engineering Co. Explanation Debit PR

88,090 136,090 139,090 137,690 143,690 132,602 140,126 138,126 131,376 116,328 114,728 123,728 114,128 112,528 111,928 118,328 116,608 125,128 118,018 117,618

Acct. No. 106.1 Credit Balance

31 Beginning balance 11 11

0 G7 G9

Accounts Receivable—Buckman Services PR Explanation

9,000 9,000

Debit

9,000 0

Acct. No. 106.2 Credit Balance

31 Beginning balance 25

0 G10

3,600

6-633

Last revised: September 2021.

Periodic Cumulative Problem (continued) Part 2 Date 2023 Dec. 2024 Mar.

Date 2023 Dec. 2024 Mar.

Date 2023 Dec. 2024 Jan.

Date 2023 Dec. 2024 Feb. Mar.

Accounts Receivable—Capital Leasing PR Explanation

Debit

Acct. No. 106.3 Credit Balance

31 Beginning balance 24

0 G10

Accounts Receivable—Decker Co. PR Explanation

11,800

Debit

Acct. No. 106.4 Credit Balance

31 Beginning balance 30

2,700 G10

Accounts Receivable—Elite Corporation PR Explanation

4,440

7,140

Debit

Acct. No. 106.5 Credit Balance

31 Beginning balance 13 20 22

0 G7 G8 G8

Accounts Receivable—Fostek Co. PR Explanation

8,400 800 7,600

Debit

Acct. No. 106.6 Credit Balance

31 Beginning balance 9

8,400 7,600 0

3,000 G7

3,000

Accounts Receivable—Grandview Co. PR Debit Explanation

Acct. No. 106.7 Credit Balance

31 Beginning balance 23 9

0 G9 G9

Accounts Receivable—Hacienda, Inc. PR Explanation

Date 2023 Dec. 31 Beginning balance 2024 Jan. 26 Periodic Cumulative Problem (continued) Part 2

6,400 6,400

Debit

6,400 0

Acct. No. 106.8 Credit Balance 0

11,600

6-634

Last revised: September 2021.

Date 2023 Dec.

Date 2023 Dec. 2024 Mar.

Date 2023 Dec.

Date 2023 Dec. 2024 Feb.

Date 2023 Dec.

Accounts Receivable—Images, Inc. Explanation PR

Debit

Acct. No. 106.9 Credit Balance

31 Beginning balance Merchandise Inventory Explanation

Debit

Acct. No. 119 Credit Balance

31 Beginning balance Computer Supplies Explanation

Debit

Acct. No. 126 Credit Balance

31 Beginning balance 8

1,440 G9

Prepaid Insurance Explanation

4,800

6,240

Debit

Acct. No. 128 Credit Balance

31 Beginning balance Prepaid Rent Explanation

3,240

Debit

Acct. No. 131 Credit Balance

31 Beginning balance 1 Office Equipment Explanation

2,250 G8

6,750

9,000

Debit

Acct. No. 163 Credit Balance

31 Beginning balance Accumulated Depreciation, Office Equipment PR Debit Explanation

18,000 Acct. No. 164 Credit Balance

31 Beginning balance

1,500

6-635

Last revised: September 2021.

Periodic Cumulative Problem (continued) Part 2 Date 2023 Dec.

Date 2023 Dec.

Date 2023 Dec. 2024 Jan.

Feb. Mar.

Date 2023 Dec. 2024 Jan.

Computer Equipment Explanation

Debit

Acct. No. 167 Credit Balance

31 Beginning balance

36,000

Accumulated Depreciation, Computer Equipment PR Debit Explanation

Acct. No. 168 Credit Balance

31 Beginning balance Accounts Payable Explanation

2,250

Debit

Acct. No. 201 Credit Balance

31 Beginning balance 7 17 24 26 3 8 19

2,310 G7 G7 G8 G8 G8 G9 G10

Wages Payable Explanation

11,200

7,110

13,510 2,310 1,518 17,518 2,310 7,110 0

Debit

Acct. No. 210 Credit Balance

11,200 792 16,000 15,208 4,800

31 Beginning balance 4

800 G7

Unearned Computer Services Revenue PR Explanation

800

Debit

Acct. No. 236 Credit Balance

31 Beginning balance 11

3,000 G7

Mary Graham, Capital Explanation

3,000

Debit

Acct. No. 301 Credit Balance

31 Beginning balance 5

145,860 G7

48,000

193,860

Periodic Cumulative Problem (continued) Part 2

6-636

Last revised: September 2021.

Date 2023 Feb.

Date 2024 Jan. Mar.

Mary Graham, Withdrawals PR Explanation

Debit

Acct. No. 302 Credit Balance

9,600

Debit

Acct. No. 403 Credit Balance

Computer Services Revenue PR Explanation 11 16 16 24

G7 G7 G9 G10

12,000 6,000 8,520 11,800

Acct. No. 413 Credit Balance

Sales Date 2023 Jan. Feb. Mar.

Date 2024 Jan.

Explanation 13 26 23 25 30

Debit

G7 G8 G9 G10 G10

8,400 11,600 6,400 3,600 4,440

12,000 18,000 26,520 38,320

8,400 20,000 26,400 30,000 34,440

Debit

Acct. No. 414 Credit Balance

Sales Returns and Allowances PR Explanation

Debit

Acct. No. 415 Credit Balance

800

Debit

Acct. No. 505 Credit Balance

G7 G8

11,200 16,000

11,200 27,200

Debit

Acct. No. 506 Credit Balance

Sales Discounts Explanation 22

20 Purchases Explanation 7 26

Purchase Returns and Allowance Explanation PR 24

792

Periodic Cumulative Problem (continued) Part 2 Date

Purchase Discounts Explanation

Debit

Acct. No. 507 Credit Balance

6-637

Last revised: September 2021.

2024 Jan. Feb.

Date 2024 Jan.

17 3

G7 G8 Transportation-In Explanation

Debit

1,400

Debit

Acct. No. 612 Credit Balance

Debit

Acct. No. 613 Credit Balance

Debit

Acct. No. 623 Credit Balance

G7 G8 G9

200 2,000 1,600

200 2,200 3,800

Debit

Acct. No. 637 Credit Balance

Debit

Acct. No. 640 Credit Balance

Debit

Acct. No. 652 Credit Balance

Debit

Acct. No. 655 Credit Balance

1,600

Debit

Acct. No. 676 Credit Balance

G9 G10

600 400

600 1,000

Repairs Expense, Computer PR Explanation

Debit

Acct. No. 684 Credit Balance

1,720

Date

Depreciation Expense, Computer Equipment PR Explanation

Feb.

Wages Expense Explanation 4 31 26

Date

Insurance Expense Explanation

Date

Rent Expense Explanation

Date

Computer Supplies Expense PR Explanation

Date 2024 Feb.

Advertising Expense Explanation 5

Mileage Expense Date Explanation 2024 Feb. 27 Mar. 31 Periodic Cumulative Problem (continued) Part 2 Date 2024 Mar.

112 272

Acct. No. 508 Credit Balance

Depreciation Expense, Office Equipment Explanation PR

Date 2024 Jan.

112 160

6-638

Last revised: September 2021.

Date

Charitable Donations Expense PR Explanation

Debit

Acct. No. 699 Credit Balance

6-639

Last revised: September 2021.

Periodic Cumulative Problem (continued) Part 3 ECHO SYSTEMS Partial Work Sheet For Three Months Ended March 31, 2024 Unadjusted Trial Balance

Adjustments

Account Debit Credit Debit Cash ............................................ 117,618 Alamo Engineering Co. ........... 0 Buckman Services ................... 3,600 Capital Leasing ......................... 11,800 Decker Co. ................................. 7,140 Elite Corporation....................... 0 Fostek Co. ................................. 0 Grandview Co............................ 0 Hacienda, Inc. ........................... 11,600 Images, Inc. ............................... 0 Merchandise inventory ............ 0 Computer supplies ................... 6,240 Prepaid insurance .................... 3,240 Prepaid rent ............................... 9,000 Office equipment ...................... 18,000 Accumulated depreciation, office equipment .................. 1,500 167 Computer equipment ............... 36,000 168 Accumulated depreciation, computer equipment ........... 2,250 201 Accounts payable ..................... 0 210 Wages payable .......................... 0 236 Unearned computer services revenue .................................. 0 301 Mary Graham, capital ............... 193,860 302 May Graham, withdrawals ...... 9,600 403 Computer services revenue ... 38,320 413 Sales............................................ 34,440 414 Sales discounts......................... 76 415 Sales returns and allowances 800 505 Purchases .................................. 27,200 506 Purchase returns and allowances 792 507 Purchase discounts ................. 272 508 Transportation-In ...................... 1,400 612 Depreciation expense, office equipment .................. 0 (f) 1,500 613 Depreciation expense, computer equipment ........... 0 (e) 2,250 623 Wages expense......................... 3,800 (c) 1,400 637 Insurance expense ................... 0 (b) 1,080 640 Rent expense............................. 0 (d) 6,750 652 Computer supplies expense .. 0 (a) 2,010 655 Advertising expense ................ 1,600 676 Mileage expense ....................... 1,000 684 Repairs expense, computer.... 1,720 699 Charitable donations expense 0 Totals ...................................... 271,434 271,434 14,990 Periodic Cumulative Problem (continued) Part 4 101 106.1 106.2 106.3 106.4 106.5 106.6 106.7 106.8 106.9 119 126 128 131 163 164

Credit

(a) 2,010 (b) 1,080 (d) 6,750

Adjusted Trial Balance Debit 117,618 0 3,600 11,800 7,140 0 0 0 11,600 0 0 4,230 2,160 2,250 18,000

(f) 1,500

Credit

3,000 36,000

(e) 2,250

4,500 0 1,400

0 193,860 9,600 38,320 34,440 76 800 27,200 792 272 1,400 1,500 2,250 5,200 1,080 6,750 2,010 1,600 1,000 1,720 0 14,990 276,584 276,584

6-640

Last revised: September 2021.

ECHO SYSTEMS Income Statement For Three Months Ended March 31, 2024 Revenues: Computer services revenue Net sales1 Total revenues Expenses: Cost of goods sold2 Rent expense Wages expense Depreciation expense3 Computer supplies expense Repairs expense, computer Advertising expense Insurance expense Mileage expense Total expenses Profit ...............................................................................

$38,320 33,564 $71,884 $25,576 6,750 5,200 3,750 2,010 1,720 1,600 1,080 1,000 48,686 $23,198

1. Net sales = Sales ....................................................................... Less: Sales discounts ............................................. Less: Sales returns and allowances........................

$34,440 76 800 $33,564

2. COGS =

Beginning Merchandise Inventory ............................ Add: Purchases .................................................... Less: Purchase Returns and Allowances ........... Purchase Discounts ................................... Add: Transportation-In ....................................... Less: Ending Inventory ........................................

0 27,200 792 272 1,400 1,960 $25,576

3. Depreciation expense, office equipment of $1,500 + depreciation expense, computer equipment of $2,250 = Total depreciation expense of $3,750.

6-641

Last revised: September 2021.

Periodic Cumulative Problem (concluded) Part 5 ECHO SYSTEMS Statement of Changes in Equity For Three Months Ended March 31, 2024 Mary Graham, capital, December 31, 2023 Profit Investment by owner Total Less: Withdrawals by owner Mary Graham, capital, March 31, 2024........................

$145,860 $23,198 48,000 $217,058

71,198 9,600 $207,458

Part 6 ECHO SYSTEMS Balance Sheet March 31, 2024 Assets Current assets: Cash.................................................................................... Accounts receivable* ........................................................... Merchandise inventory ....................................................... Computer supplies ............................................................. Prepaid insurance .............................................................. Prepaid rent ....................................................................... Total current assets............................................................. Property, plant and equipment: Office equipment ................................................................ Less: Accumulated depreciation ...................................... Computer equipment .............................................................. Less: Accumulated depreciation ........................................... Total property, plant and equipment............................................ Total assets ................................................................................

$117,618 34,140 1,960 4,230 2,160 2,250 $162,358 $18,000 3,000 $36,000 4,500

$ 15,000 31,500

Liabilities Current liabilities: Wages payable ..................................................................

46,500 $208,858

1,400

Equity Mary Graham, capital .............................................................. 207,458 Total liabilities and equity ............................................................ $208,858 *A/R – Buckman Services 3,600 + A/R – Capital Leasing 11,800 + A/R – Decker Co. 7,140 + A/R – Hacienda, Inc. 11,600 = 34,140.

6-642

Last revised: September 2021.

SOLUTIONS MANUAL to accompany

Fundamental Accounting Principles th

17 Canadian Edition by Larson/Dieckmann/Harris

Revised for the 17th Edition by: John Harris, Seneca College

Technical checks by: Rhonda Heninger, SAIT

6-643

Last revised: September 2021.

Chapter 6

Merchandise Inventories and Cost of Sales

Chapter Opening Critical Thinking Challenge Questions* 1. Would Amazon have a merchandise turnover similar to Lululemon Athletica‘s? Explain why or why not. - Amazon may or may not have a merchandise turnover similar to Lululemon‘s because it depends on the type of merchandise being sold. Amazon sells different product than Lululemon so the expectation is that its merchandise turnover would be different. Additionally, Amazon has a wider range of products than Lululemon so it could be expected that different types of products carried by Amazon (or Lululemon) would have different turnovers. Overall, Amazon has a strong focus on efficient delivery such as same day delivery, which would result in a higher inventory turnover compared to Lululemon. 2. What does ―inventory demand planning‖ refer to? - Inventory demand planning refers to anticipating demand by consumers for particular types of inventory based on historical data, economic trends, and other factors. By planning what the demand for particular products will be, purchasing strategies can be developed to not only meet customer demand but to minimize inventory on hand and obsolete stock. 3. What would the effect of cost saving strategies be on the weighted average cost of inventory? - Cost saving strategies would have the anticipated effect of reducing the weighted average cost per unit of inventory.

*The Chapter 6 Critical Thinking Challenge questions are asked at the beginning of this chapter. Students are reminded at the conclusion of the chapter to refer to the Critical Thinking Challenge questions at the beginning of the chapter. The solutions to the Critical Thinking Challenge questions are available here in the Solutions Manual and accessible to students in the print and ebooks.

6-644

Last revised: September 2021.

Knowledge Check-Up Questions 2. d) 6. c)

2. d) 7. d)

3. d) 8. b)

4. a) 9. a)

5. b) 10. d)

Concept Review Questions 1. The inventory cost should be $1,540 (2,000 – 800 (2,000 x 40%) + $200 +$140). Inventory cost should include the invoice price minus any discounts plus any added or incidental costs necessary to put it in a place and condition for sale. 2. a. First items into the inventory are assumed to be the first items sold. b. The invoice price, less trade discounts, less returns, less discounts and allowances, plus any additional incidental costs to put goods into place and condition for sale. 3. Moving weighted average will result in the lower cost of goods sold when inventory prices are falling because average cost per unit will be less than using FIFO. FIFO will result in the more costly units assigned to cost of goods sold. 4. Merchandise inventory is disclosed on the balance sheet as a current asset. It also may appear in the income statement as part of the calculation of cost of goods sold. 5. No, changing the inventory pricing method each period would violate the accounting principle of consistency. 6. A change from one acceptable method to another is allowed if the company justifies the change as an improvement in financial reporting. 7. The full-disclosure principle requires that the nature of the change, justification for the change and the effect of the change on profit be disclosed in the notes to the company‘s financial statements. 8. The faithful representation principle requires that information be complete, neutral, and free from error so that assets and income are not overstated and liabilities and expenses are not understated. In terms of inventory, this means that it is imperative to value inventory at the end of each accounting period to ensure it is not overstated on the balance sheet and COGS is not understated on the income statement. 9. NRV or net realizable value refers to the sales price of inventory less the cost of making the sale. 10. An inventory error that causes an understatement (or overstatement) of profit one accounting period, if not corrected, will cause an overstatement (or understatement) the next. Therefore, since the understatement (overstatement) of one period offsets the overstatement (understatement) of the next, such errors are said to correct themselves. 11. Many people make important decisions based on a company‘s profit from period to period. Therefore, inventory errors should not be permitted to cause fluctuations which could cause erroneous decisions to be made.

6-645

Last revised: September 2021.

12. Recipe‘s inventory would be equivalent to 2.1% (44,921,000/2,109,071,000) of total assets. This is largely food products and packaging (some of which would be merchandise inventory). Recipe Unlimited Corporation is Canada's largest full-service restaurant company. The Company franchises and/or operates some of the most recognized brands in the country including Swiss Chalet, Harvey's, St-Hubert, The Keg, Milestones, Montana's, Kelseys, East Side Mario's, New York Fries, Prime Pubs, Bier Markt, Landing, Original Joe's, State & Main, Elephant & Castle, The Burger's Priest, The Pickle Barrel, Marigolds & Onions, and 1909 Taverne Moderne (a nationally recognized franchisor of choice). 13. Spin Master‘s inventories are stated at the lower of cost and net realizable value. Cost is determined on a standard cost basis, and includes the purchase price and other costs, such as import duties, taxes and transportation costs. Trade discounts and rebates are deducted from the purchase price. This is found in Note 2, Significant Accounting Policies, Section O, Inventories.

6-646

Last revised: September 2021.

QUICK STUDY Quick Study 6-1 Beginning inventory

10 units @ $60

$ 600

1st week purchase ................................................... 10 units @ $61

610

2nd week purchase .................................................. 10 units @ $62

620

3rd week purchase................................................... 10 units @ $65

650

4th week purchase ................................................... 10 units @ $70

700

Plus

Units Available for sale ........................................... 50 units Cost of Goods Available for Sale ............................

$3,180

Quick Study 6-2 FIFO—Perpetual Date 1/1 1/9

1/25

Goods Purchased

Cost of Goods Sold

80 @ $3.20

}

100 @ $3.34

1/26

320 @ $3.00 80 @ $3.20 100 @ $3.34 320 @ $3.00 =$ 960.00 30 @ $3.20 = 96.00 $1,056.00

Alternate solution format FIFO: 100 @ $3.34 = 50 @ $3.20 = 150

Inventory Balance 320 @ $3.00 = $ 960.00 320 @ $3.00 80 @ $3.20 = $1,216.00

50 @ $3.20 100 @ $3.34

}

= $1,550.00

} =$ 494.00

$ 334.00 160.00 $ 494.00 Ending inventory cost

6-647

Last revised: September 2021.

*Quick Study 6-3 Weighted Average—Periodic Date 1/1 1/9

Goods Purchased

Cost of Goods Sold

80 @ $3.20

1/25

}

100 @ $3.34

1/26

350 @ $3.10 = $1,085.00

Alternate solution format Weighted average: 320 @ $3.00 = 80 @ $3.20 = 100 @ $3.34 = 500

Inventory Balance 320 @ $3.00 = $ 960.00 320 @ $3.00 80 @ $3.20 = $1,216.00 (avg. cost is $3.04) 320 @ $3.00 80 @ $3.20 = $1,550.00 100 @ $3.34 (avg. cost is $3.10) 150 @ $3.10

= $ 465.00

$ 960.00 256.00 334.00 $1,550.00 Cost of goods available for sale

$1,550.00/500 = $3.10 weighted average cost per unit 150 units @ $3.10 =

$ 465.00 Ending inventory cost

*Quick Study 6-4 Ending Inventory

Cost of Goods Sold

FIFO (100 x $3.34) + (50 x $3.20) ............................................... $494.00 (320 x $3.00) + (30 x $3.20) ...............................................

$1,056.00

FIFO—Periodic

*Quick Study 6-5 Ending Inventory

Cost of Goods Sold

Weighted Average ($1,550/ 500 = $3.10 cost per unit) (150 x $3.10) ..................................................................... $465.00 (350 x $3.10) .....................................................................

$1,085.00

Weighted Average—Periodic

*Quick Study 6-6

6-648

Last revised: September 2021.

FIFO—Perpetual Date Goods Purchased

Cost of Goods Sold

Inventory Balance

12/ 7

10 @ $ 6 = $ 60

10 @ $ 6

= $ 60.00

12/14

20 @ $12 = $240

10 @ $ 6 20 @ $12

= $300.00

15 @ $12

= $180.00

15 @ $12 15 @ $14

= $390.00

12/15

12/21

10 @ $ 6 5 @ $12 = $120.00 15 @ $14 = $210 ______ $120.00

Quick Study 6-7 Weighted Average—Perpetual Date

Goods Purchased

Cost of Goods Sold

12/7

10 @ $6 = $60

10 @ $6

= $ 60

12/14

20 @ $12 = $240

10 @ $6 20 @ $12 (avg cost is $10)

= $300

12/15 12/21

Inventory Balance

15 @ $10 = $150

15 @ $10

____ $150

15 @ $10 15 @ $14 (avg cost is $12)

15 @ $14 = $210

}

= $150

}

= $360

Quick Study 6-8 Specific Identification—Perpetual Ending inventory under specific identification: (2 units x $6) + (13 units x $12) + (15 units x $14) = $378. *Quick Study 6-9 FIFO—Periodic FIFO (15 x $12) + (15 x $14) ................................................. (10 x $6) + (5 x $12) .....................................................

Ending Inventory

Cost of Goods Sold

$390 $120

*Quick Study 6-10

6-649

Last revised: September 2021.

Ending Inventory

Weighted Average—Periodic Weighted Average ($510/ 45 = $11.33 cost per unit)* (30 x $11.33 [rounded to dollars and cents]) ........... (15 x $11.33 [rounded to dollars and cents]) ...........

Cost of Goods Sold

$339.90 $169.95

*If unit cost is not rounded, then ending inventory is $340 and cost of goods sold is $170. *Quick Study 6-11 Ending Inventory

Specific Identification—Periodic Specific Identification (2 x $6) + (13 x $12) + (15 x $14) ................................. (8 x $6) + (7 x $12) .......................................................

Cost of Goods Sold

$378 $132

Quick Study 6-12

Inventory Items Mountain bikes Skateboards Gliders

Units 11 13 26

Per Unit Cost NRV $600 $550 350 425 800 700

Total Cost $ 6,600 4,550 20,800 $31,950

Total NRV $ 6,050 5,525 18,200 $29,775

LCM Items $ 6,050 4,550 18,200 $28,800

LCM applied to each product ........................................................................

$28,800

Quick Study 6-13 Inventory turnover

= Cost of goods sold/Average merchandise inventory = $1,200,000 / [($140,000 + $180,000)/2] = 7.50 times

Days‘ sales in inventory = Ending Inventory/Costs of goods sold x 365 = ($180,000 / $1,200,000) x 365 = 54.75 days

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Last revised: September 2021.

Quick Study 6-14 Goods available for sale Inventory, January 1 ....................................................................................... $190,000 Cost of goods purchased (net) ...................................................................... 352,000 Goods available for sale (at cost) .................................................................. 542,000 Net sales at retail ..............................................................................................

$685,000

Estimated cost of goods sold [$685,000 x (1 - 44%)] ..................................... (383,600) Estimated September 5 inventory destroyed .................................................. $158,400

Quick Study 6-15 1.

The title will pass at the destination, which is Stark Company‘s receiving dock. Carefree should show the $500 in its inventory at year-end as Carefree retains title until the goods reach Stark Company. The consignor is Carefree Company. The consignee is Stark Company. The consignor, Carefree Company, should include the unsold goods as a part of its inventory.

Quick Study 6-16 1,500 – 30 + 250 + 70 = 1,790 units in ending inventory

Quick Study 6-17 Cost ........... $3,000 Add: Transportation-In ................ Import duties ................ 200 Insurance ........... 50 Inventory Cost .....................

$ 150

$3,400

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Last revised: September 2021.

Quick Study 6-18 Cost ......... $37,500 Add: Transportation-In ................ Cleaning Expenses ............. Insurance ......... 150 Inventory Cost .....................

$ 1,200 490 $39,340

Quick Study 6-19 Beginning Inventory ..........................

10 units @ $50

$ 500

Add: 1st week purchase ............................. 2nd week purchase ............................ 3rd week purchase............................. 4th week purchase ............................. Units Available ............ Cost of Goods Available for Sale ......

10 units @ $51 10 units @ $52 10 units @ $55 10 units @ $60 50 units $2,680

$ 510 520 550 600

6-652

Last revised: September 2021.

Quick Study 6-20 (a) FIFO - perpetual Date

Jan. 1

Purchases

Sales (at cost)

Unit Total Units Cost Cost Units Beginning inventory 310 @ $3.00 = $ 930.00

75 @ $3.20 =

$ 240.00

100 @ $3.35 =

$ 335.00

28 Total

485 $1,505.00 Cost of goods available for sale =

Unit Cost

Cost of Goods Sold

310 @ $3.00 = $ 930.00 35 @ 3.20 = 112.00 345 $1,042.00 Cost of goods sold +

Inventory Balance Units

Unit Cost

Total Cost

310 @ $3.00 = 310 @ $3.00 = 75 @ 3.20 = 310 @ $3.00 = 75 @ 3.20 = 100 @ 3.35 = 40 @ $3.20 = 100 @ 3.35 = 140 Ending inventory

6-653

$930.00 $930.00 240.00 $930.00 240.00 335.00 $128.00 335.00 $463.00

Last revised: September 2021.

Quick Study 6-20 (continued) (b) Moving weighted average - perpetual Inventory Balance Date

Purchases

Unit Units Cost Beginning inventory Jan. 1 310 @ $3.00 = 9

75 @ $3.20 =

100 @ $3.35 =

Sales (at cost) Total Cost

Units

Cost of Goods Sold

$ 930.00

(b)

Total Average Units Cost/Unit

Total Cost

310

$3.00

385

$3.04

$1,170.00

485

$3.10

$1,505.00

$ 335.00

345 @ $3.10 = 485 $1,505.00 Cost of goods available for sale

345 =

$1,069.50

$1,069.50 Cost of goods sold

140 140

Inventory Balance Calculations

$ 930.00

$ 240.00

28 Total

Unit Cost

(b)  (a)

(a)

$3.11* $ 435.50 $ 435.50 + Ending inventory

310 $ 930.00 75 @ $3.20 = 240.00 385 $1,170.00 385 $1,170.00 100 @ $3.35 = 335.00 485 $1,505.00 485 $1,505.00 –345 @ $3.10 = –1,069.50 140 $ 435.50

* cost/unit changed due to rounding Note: These amounts may vary if the cost/unit was not rounded to two decimal places.

6-654

Last revised: September 2021.

Quick Study 6-21 Date

Purchases

Sales (at cost)

Unit Total Units Cost Cost Jan. 1 Beginning inventory 310 @ $3.00 = $ 930.00 9

75 @ $3.20 =

$ 240.00

100 @ $3.35 =

$ 335.00

Units

Total

485 $1,505.00 Cost of goods available for sale

Unit Cost

Inventory Balance Cost of Goods Sold

250 @ $3.00 = $ 750.00 50 @ 3.20 = 160.00 45 @ 3.35 = 150.75 345 $1,060.75 = Cost of goods sold

Units

Unit Cost

Total Cost

310 @ $3.00 = $930.00 310 @ $3.00 = $930.00 75 @ 3.20 = 240.00 310 @ $3.00 = $930.00 75 @ 3.20 = 240.00 100 @ 3.35 = 335.00 60 @ $3.00 = $180.00 25 @ 3.20 = 80.00 55 @ 3.35 = 184.25 140 $444.25 Ending inventory

Quick Study 6-22 Purchases/TransportationIn/ (Purchase Cost of Goods Sold/ Returns/Discounts) (Returns to Inventory) Balance in Inventory Date Units Cost/Unit Total $ Units Cost/Unit Total $ Units Avg Cost/Unit Total $ Brought Jan 1 Fwd. 10 $15.00 $150.00 3 6 $15.00 $ 90.00 4 15.00 60.00 7 25 $18.50 $462.50 29 18.02 522.50 8 50.00 29 19.74 572.50 17 (46.25) 29 18.15 526.25 18 14 18.15 254.10 15 18.14 272.15

Quick Study 6-23 a.

FIFO

Specific identification

6-655

Last revised: September 2021.

Quick Study 6-24 a. and b. NOTE: If it is assumed that aprons, bottles, and candles are one group of related items (i.e., kitchen items), then NRV can be applied to the three items as a group in response to part (a) of the question. If, instead, it is assumed that the three items are not related, then part (a) is not applicable. Per Unit Inventory Items Aprons Bottles Candles

Units on Hand 9 12 25

Cost $6.00 3.50 8.00

NRV $5.50 4.25 7.00

Total Cost $ 54.00 42.00 200.00 $296.00

Total NRV $ 49.50 51.00 175.00 $275.50

LCNRV applied to: a. b. Inventory Each as a Group Product $ 49.50 42.00 175.00 $275.50 $266.50

c. 2023 Dec. 31

Cost of Goods Sold ................................................. 29.50 Merchandise Inventory ....................................... To write inventory down to LCNRV; $296 – $266.50 = $29.50.

29.50

6-656

Last revised: September 2021.

Quick Study 6-25 a. b. c. d. e. f.

Understates cost of goods sold. Overstates 2023 gross profit. Overstates 2023 profit. Understates 2024 profit. The overstated profit for 2023 and the understated profit for 2024 combine to a correct total income for the two year period. The error in 2023 will not affect years subsequent to 2024.

Quick Study 6-26 Goods available for sale: Inventory, January 1........................................................ Purchases (net)............................................................... Goods available for sale .................................................. Less: Estimated cost of goods sold [$675,000 × (1 – 42%)] ............................................ Estimated September 10 inventory destroyed in the fire ........................................................

$180,000 342,000 $522,000 391,500 $130,500

Quick Study 6-27 a. Since gross profit for prior periods has been 30%, then Cost of Goods Sold must be 70%. So, 70% x $565,000 net sales for July = $395,500 estimated cost of goods sold for July. July‘s beginning inventory (June‘s ending inventory) ........................ Plus: July purchases ....................................................................... Equals: Cost of goods available for sale ......................................... Less: Estimated cost of goods sold for July .................................... Equals: Estimated ending inventory for July ....................................

$ 65,000 385,500 $ 450,500 395,500 $ 55,000

b. Therefore, the estimated shrinkage is $7,000 ($55,000 - $48,000). Quick Study 6-28 Goods available for sale ................................................................ Deduct: Net sales at retail ............................................................ Ending inventory at retail .............................................................. Cost to retail ratio: ($67,600  $104,000) × 100 = 65% Estimated ending inventory at cost: $22,000 × 65% =

At Cost $67,600

At Retail $104,000 82,000 $ 22,000 × 65% $ 14,300

6-657

Last revised: September 2021.

Quick Study 6-29

Beginning inventory ......................................... Cost of goods purchased................................. Goods available for sale .................................. Less: Net sales at retail ................................... Ending inventory at retail ................................. Cost to retail ratio ............................................. Estimated ending inventory ............................. 1. 469,950/723,000 = .65 or 65% 2. 532,440/783,000 = .68 or 68%

September Cost Retail $ 74,950 $112,000 395,000 611,000 $469,950 $723,000 614,000 $109,000 x 65%1 $ 70,850

October Cost Retail $ 70,850 $109,000 461,590 674,000 $532,440 $783,000 700,000 $ 83,000 x 68%2 $ 56,440

Quick Study 6-30 Both companies are improving their turnover rates for merchandise. However, Huff Company has a higher turnover which suggests lower levels of inventory selling more rapidly than Puff Company. It appears that Huff Company is managing inventory more efficiently provided they have enough merchandise to satisfy the needs of their customers (not turning them away because of lack of adequate inventory).

6-658

Last revised: September 2021.

Quick Study 6-31 a) Days‘ sales in inventory 2023: $56,195 $410,225 2022: $82,500 $344,500

× 365

= 50.00 days

× 365

= 87.41 days

The change from 2022 to 2023 is generally considered to be favourable. b) Inventory turnover 2023: $410,225 ($56,195 + $82,500)/2

= 5.92 times

2022: $344,500 ($82,500 + $111,500)/2

= 3.55 times

The change from 2022 to 2023 is generally considered to be favourable. *Quick Study 6-32 a) FIFO periodic Ending Inventory = 100 @ $3.35 = $335 40 @ $3.20 = $128

= $463 Cost of Ending Inventory

b) Weighted average cost - periodic $1,505/485 units = $3.10* average cost per unit 140 units in ending inventory @ $3.10/unit = $434* Cost of Ending Inventory *These amounts may vary if the cost/unit was not rounded to two decimal places. EXERCISES Exercise 6-1 (15 minutes) a) Include – The inventory should be included in OMG Luggage‘s inventory as of December 31, 2023. As the shipping terms on this order are FOB shipping, OMG Luggage took ownership of the inventory once Baggage Co. shipped the goods on December 27, 2023. The inventory cost is $3,333 (2,500+$400+$300+$133) b) Include – The inventory should be included in OMG Luggage‘s inventory as at December 31, 2023. With shipping terms of FOB destination, OMG Luggage still owns the inventory until the goods reach the customer. As the goods were shipped on December 31, 2023, it is reasonable to assume that the goods have not yet been received by the customer as at December 31, 2023.

6-659

Last revised: September 2021.

Inventory cost is $500. Shipping charges of $55 to the customer would be recorded as a freight-out expense. c) Include – Goods held on consignment belong to the consignor. Inventory should be included at a cost of $2,000, which is the unsold portion of the consignment inventory. d) Exclude – The inventory should be excluded because the customer has already purchased and paid for the goods. Thus, the customer owns the inventory.

Exercise 6-2 (45 minutes) (a) FIFO - perpetual Date

Purchases

Unit Units Cost Jan. 1 Beginning inventory 75 @ $12.00 = 10 Mar. 14

250 @ $13.00 =

Sales (at cost) Total Cost $

Units

Oct. 5 Total

500 @ $14.00 =

Cost of Goods Sold

Unit Cost

900 70 @ $12.00

$ 840

5 @ $12.00 175 @ 13.00

= =

$ 3,250

15 Jul.

Inventory Balance

60 2,275

$ 7,000

825 $11,150 Cost of goods available for sale = Gross profit calculation under FIFO: Sales (700 units × $35)............. Cost of goods sold ................. Gross profit .............................

75 @ $13.00 = $ 975 375 @ 14.00 = 5,250 700 $9,400 Cost of goods sold +

Units

Unit Cost

Total Cost

75 @ $12.00 = 5 @ $12.00 = 5 @ $12.00 = 250 @ 13.00 =

$ 900 $ 60 $ 60 $3,250

75 @ $13.00 = 75 @ $13.00 = 500 @ 14.00 =

$ 975 $ 975 $7,000

125 @ $14.00 = $1,750 125 $1,750 Ending inventory

$24,500 9,400 $15,100

6-660

Last revised: September 2021.

Exercise 6-2 (continued) (b) Moving weighted-average - perpetual Inventory Balance Date

Jan.

Purchases

Sales (at cost)

Unit Total Units Cost Cost Units Beginning inventory 1 75 @ $12 = $ 900

Unit Cost

$12.00 =

Mar. 14

70 @

250 @ $13 =

Oct. Total

180 @

500 @ $14 =

(b)

Total Average Units Cost/Unit

Total Cost

$12.00

$ 840.00 5

$12.00

60.00

250

$12.98

$3,310.00

$12.98

$ 973.60

575

$13.87

$7,973.60

125 125

$13.861

$12.98 = $2,336.40

$ 7,000

450 @

$13.87 = $6,241.50

825 $11,150 700 $9,417.90 Cost of goods = Cost of goods sold + available for sale

Gross profit calculation under Weighted-

Inventory Balance Calculations

$ 900.00

$ 3,250

July

Cost of Goods Sold

(b)  (a)

(a)

$1,732.10 $1,732.10 Ending inventory

Sales (700 units × $35) ...........

$24,500.00

Cost of goods sold ............... Gross profit ...........................

9,417.90 $15,082.10

75 $ 900.00 –70 @ $12.00 = –840.00 5 $ 60.00 5 $ 60.00 250 @ $13.00 = 3,250.00 255 $ 3,310.00 255 $ 3,310.00 –180 @ $12.98 = –2,336.40 75 $ 973.60 75 $ 973.60 500 @ $14.00 = 7,000.00 575 $ 7,973.60 575 $ 7,973.60 –450 @ $13.87 = –6,241.50 125 $ 1,732.10

average:

1 $1,732.10/125 units = $13.8568 which is rounded to $13.86.

6-661

Last revised: September 2021.

Exercise 6-3 (20 minutes) Specific identification Date

Purchases

Unit Units Cost Jan. 1 Beginning inventory 75 @ $12.00 = 10

Total Cost

Mar. 14

$ 3,250

250 @ $13.00 =

Oct. 5 Total

500 @ $14.00 =

Cost of Goods Sold

Unit Cost

Units

900

Jul.

Inventory Balance

Sales (at cost)

70 @ $12.00

$ 840

3 @ $12.00 177 @ 13.00

= =

36 2,301

$ 7,000

825 $11,150 Cost of goods available for sale

50 @ $13.00 = $ 650 400 @ 14.00 = 5,600 700 $9,427 Cost of goods sold

Unit Cost

Total Cost

75 @ $12.00 = $ 900 5 @ $12.00 = $ 60 5 @ $12.00 = $ 60 250 @ 13.00 = 3,250 2 @ $12.00 = $ 24 73 @ 13.00 = 949 2 @ $12.00 = $ 24 73 @ 13.00 = 949 500 @ 14.00 = 7,000 2 @ $12.00 = $ 24 23 @ 13.00 = 299 100 @ 14.00 = 1,400 125 $1,723 Ending inventory

Gross profit calculation under Specific Identification: Sales (700 units × $35)........... Cost of goods sold ............... Gross profit ...........................

$24,500 9,427 $15,073

6-662

Last revised: September 2021.

Exercise 6-4 (30 minutes) 1. FIFO Purchases Date

Units

Unit Cost

Total Cost

Mar. 1

15 @

$40

Mar. 3

60 @

$45

Mar. 6

110 @

$50

50 @

$50

Cost

Total Cost

$600

15 @

$40

$600

$2,700

15 @

$40

$600

60 @

$45

$2,700

235

Unit Cost

Cost of Goods Sold

15 @

$40

$600

60 @

$45

$2,700

110 @

$45

$5,500

15 @

$40

$600

20 @

$45

$900

40 @

$45

$1,800

110 @

$50

$5,500

20 @

$45

$900

110 @

$50

$5,500

50 @

$50

$2,500

40 @

$50

$2,000

$2,500

Mar. 31

Total

Units

Inventory Balance Units

Mar. 17 Mar. 23

Sales (at cost)

$11,300

Cost of goods available for sale =

20 @

$45

$900

110 @

$50

$5,500

10 @

$50

$500

195 Cost of goods sold

$9,300

40 +

$2,000 Ending inventory

6-663

Last revised: September 2021.

Exercise 6-4 (Continued) 2. Moving weighted average Date

Purchases Units

Unit Cost

Total Cost

Mar. 1

15 @

$40

Mar. 3

60 @

Mar. 6

110 @

Cost

Total Cost

$600

15 @

$40

$600

$45

$2,700

75 @

$44.00

$3,300

$50

$5,500

185 @

$47.5676

$8,800

130 @

$47.5676

$6,184

180 @

$48.2444

$8,684

$6,754

40 @

$48.2444

$1,930

$9,370

55 @

50 @

$50

140 @

235

Unit Cost

$47.5676

Cost of Goods Sold

$2,616

$2,500

Mar. 31

Total

Units

Inventory Balance Units

Mar. 17 Mar. 23

Sales (at cost)

$11,300

Cost of goods available for sale =

$48.2444

195 Cost of goods sold

$1,930 Ending inventory

Exercise 6-5 (40 minutes)

6-664

Last revised: September 2021.

1. Jan. 1 Mar. 7 July 28 Oct. 3 Totals

110 units 300 units 550 units 500 units 1,460 units available for sale

@ $7.00 = @ 6.30 = @ 6.10 = @ 6.00 =

$ 770 1,890 3,355 3,000 $9,015 cost of goods available for sale

2. Units sold: Jan. 10 80 units Mar. 15 130 units Oct. 5 670 units Totals 880 units Therefore, units remaining in ending inventory: 1,460 units available for sale – 880 units sold = 580 units remaining in ending inventory 3.(a) FIFO - perpetual Date

Purchases

Sales (at cost)

Unit Total Units Cost Cost Jan. 1 Beginning inventory 110 @ $7.00 = $ 770 10 Mar.

300 @ $6.30 =

Jul.

550 @ $6.10 =

$3,355

Oct.

500 @ $6.00 =

$3,000

Total

Unit Cost

Cost of Goods Sold

80 @ $7.00 =

$ 560

30 @ $7.00 = 100 @ 6.30 =

$ 210 630

Units

200 @ $6.30 = $1,260 470 @ 6.10 = 2,867 1,460 $9,015 880 $5,527 Cost of goods available for sale = Cost of goods sold

Unit Cost 110 @ $7.00 30 @ $7.00 30 @ $7.00 300 @ 6.30

$1,890

Units

Inventory Balance

Total Cost = = = =

$ 770 $ 210 $ 210 1,890

200 @ $6.30 = $1,260 200 @ $6.30 = 1,260 550 @ 6.10 = 3,355 200 @ $6.30 = $1,260 550 @ 6.10 = 3,355 500 @ 6.00 = 3,000 80 @ $6.10 = $ 488 500 @ 6.00 = 3,000 580 $3,488 Ending inventory

6-665

Last revised: September 2021.

Exercise 6-5 (continued) 3.(b) Moving weighted average - perpetual Inventory Balance Purchases

Sales (at cost)

(a)

(b)  (a)

(b)

Unit Total Units Cost Cost Beginning inventory 1 110 @ $7.00 = $ 770.00

Unit Cost

Total Units

Average Cost/ Unit

Total Cost

Date

Jan.

Units

110

Mar.

80 @ $7.00 =

300 @ $6.30 =

Oct.

130 @ $6.36 =

550 @ $6.10 =

500 @ $6.00 =

$ 560 30

$7.00

$ 210

330

$6.36

$2,100

200

$6.37

$1,273

750

$6.17

$4,628

1,250

$6.10

$7,628

$ 827

$3,000.00

670 1,460 $9,015.00 Cost of goods available for sale

880 =

1 Average cost/unit changed because of rounding:

@ $6.10 =

$4,088.

$5,476 Cost of goods sold

Inventory Balance Calculations

$ 770

$3,355.00

5 Total

$7.00

$1,890.00

July

Cost of Goods Sold

580 $6.10 $3,539 580 $3,539. + Ending inventory

110 $ 770.00 –80 @ $7.00 = –560.00 30 $ 210.00 30 $ 210.00 300 @ $6.30 = 1,890.00 330 $2,100.00 330 $2,100.00 –130 @ $6.36 = –827.00 200 $1,273.00 200 $1,273.00 550 @ $6.10 = 3,355.00 750 $4,628.00 750 $4,628.00 500 @ $6.00 = 3,000.00 1,250 $7,628.00 1,250 $7,628.00 –670 @ $6.10 = –4,088.00 580 $3,539.00

$1,272.73/200 units = $6.3650/unit which is rounded to $6.37.

6-666

Last revised: September 2021.

Exercise 6-6 (20 minutes) Specific identification Date

Purchases

Unit Total Units Cost Cost Jan. 1 Beginning inventory 110 @ $7.00 = $ 770 10 Mar.

300 @ $6.30 =

Jul.

550 @ $6.10 =

$3,355

Oct.

500 @ $6.00 =

$3,000

Total

Units

Cost of Goods Sold

Unit Cost

80 @ $7.00

$ 560.00

10 @ $7.00 120 @ 6.30

= =

$ 70.00 756.00

Units

$1,890

Inventory Balance

Sales (at cost)

200 @ $6.10 = $1,220.00 470 @ 6.00 = 2,820.00 1,460 $9,015 880 $5,426.00 Cost of goods available for sale = Cost of goods sold

Unit Cost

Total Cost

110 @ $7.00 = $ 770.00 30 @ $7.00 = $ 210.00 30 @ $7.00 = $ 210.00 300 @ 6.30 = 1,890.00 20 @ $7.00 = $ 140.00 180 @ 6.30 = 1,134.00 20 @ $7.00 = $ 140.00 180 @ 6.30 = 1,134.00 550 @ 6.10 = $3,355.00 20 @ $7.00 = $ 140.00 180 @ 6.30 = 1,134.00 550 @ 6.10 = $3,355.00 500 @ 6.00 = 3,000.00 20 @ $7.00 = $ 140.00 180 @ 6.30 = 1,134.00 350 @ 6.10 = 2,135.00 30 @ 6.00 = 180.00 580 $3,589.00 Ending inventory

6-667

Last revised: September 2021.

Exercise 6-7 (30 minutes) CAR ARMOUR Income Statement For year ended December 31, 2023

FIFO Sales ..................................... (880 units × $15.50 selling price) Cost of goods sold ....................... Gross profit .................................. Operating expenses ..................... Profit .....................................

Moving Weighted Average $13,640.00

Specific Identification $ 13,640.00 $13,640.00

5,527.00 $ 8,113.00 1,250.00 $ 6,863.00

5,476.00 $ 8,164.00 1,250.00 $ 6,914.00

5,426.00 $ 8,214.00 1,250.00 $ 6,964.00

The Specific Identification method results in the highest profit with $6,964.00. However, it should be noted that Specific Identification may be higher or lower depending on which units were sold.

If costs were rising instead of falling then the FIFO method would probably result in the highest profit.

6-668

Last revised: September 2021.

Exercise 6-8 (30 minutes) 1. July 1 July 3 July 6 July 23 Totals

21 units 66 units 116 units 62 units 265 units available for sale

@ $46 = @ 51 = @ 56 = @ 56 =

$ 966 3,366 6,496 3,472 $14,300 cost of goods available for sale

2. Units sold: July 17 61 units July 31 152 units Totals 213 units Therefore, units remaining in ending inventory: 265 units available for sale – 213 units sold = 52 units remaining in ending inventory

6-669

Last revised: September 2021.

Exercise 6-8 (continued) 3a FIFO Purchases

Sales (at cost)

Date

Units

Unit Cost

Total Cost

July 1

21 @

$46

July 3

66 @

$51

July 6

116 @

$56

Units

Cost

$966

21 @

$46

$966

$3,366

21 @

$46

$966

66 @

$51

$3,366

62 @

$56

21 @

$46

$966

66 @

$51

$3,366

116 @

$56

$6,496

265

Cost of Goods Sold

$14,300

Cost of goods available for sale =

Total Cost

21 @

$46

$966

26 @

$51

$1,326

40 @

$51

$2,040

116 @

$56

$6,496

26 @

$51

$1,326

116 @

$56

$6,496

62 @

$56

$3,472

52 @

$56

$2,912

$3,472

July 31

Total

Unit Cost

$6,496

July 17

July 23

Units

Inventory Balance

26 @

$51

$1,326

116 @

$56

$6,496

10 @

$56

$560

213 Cost of goods sold

$11,388 +

$2,912 Ending inventory

6-670

Last revised: September 2021.

Exercise 6-8 (Continued) 3b

Moving weighted average

Date

Purchases Units

Unit Cost

Total Cost

July 1

21 @

$46

July 3

66 @

July 6

116 @

Cost

Total Cost

$966

21 @

$46

$966

$51

$3,366

87 @

$49.7931 $4,332

$56

$6,496

203 @

$53.3399 $10,828

142 @

$53.3399 $7,574

204 @

$54.1471 $11,046

$8,230

52 @

$54.1471 $2,816

$11,484

61 @

62 @

$56

152 @

265

Unit Cost

$53.3399

Cost of Goods Sold

$3,254

$3,472

July 31

Total

Units

Inventory Balance Units

July 17

July 23

Sales (at cost)

$14,300

Cost of goods available for sale =

$54.1471

213 Cost of goods sold

$2,816 Ending inventory

6-671

Last revised: September 2021.

Purchases/TransportationIn/ (Purchase Returns/Discounts) Date

Cost of Goods Sold/ (Returns to Inventory) Cost/ Units Unit Total $

Units Cost/Unit Total $ Brought Mar. 1 60 Forward $ 5,640 2 35 $96.00 3,360 3 22 4 (2) 7 65 17 40 97.00 3,880 28 43 Goods Available Totals 135 for Sale $12,880 128 *Average changed because of rounding

94.74 94.74 94.74

$ 2,084.28 (189.48) 6,158.10

96.54

4,151.22

Goods Sold

$12,204.12

Balance in Inventory Avg Units Cost/Unit Total $ 60 95 73 75 10 50 7

$94.00 94.74 94.74 94.74 94.74 96.54 96.55*

$5,640.00 9,000.00 6,915.72 7,105.20 947.10 4,827.10 675.88

Ending Inventory

$ 675.88

Analysis component: The gross profit ratio for Product W506 for March 2023 is 35.58% calculated as net March sales of $18,944 (128 units × $148) less March cost of goods sold of $12,204.12 = $6,739.88 gross profit ÷ $18,944 sales = .3558 × 100 = 35.58%. This is unfavourable as gross profit decreased from February to March 2020. The most probable cause is the higher price paid which increase the average cost. Maintaining the same selling price will then create a lower gross profit.

6-672

Last revised: September 2021.

Exercise 6-10 (15 minutes) a. LCNRV applied to inventory as a group of similar/related items: $16,171 b. LCNRV applied separately to each product: $15,527 Calculations: Per Unit

Inven tory Items

Unit s on Han d

BB FM MB SL

27 10 41 45

C o s t $115 150 191 83

N R V $120 143 177 97

Tota l Cost

Tota l NRV

$ 3,105 1,500 7,831 3,735 $16,171

$ 3,240 1,430 7,257 4,365 $16,292

LCNRV applied to: a. b. Invent Eac ory h as a Prod Group uct

$16,171

2023 Dec. 31 Cost of Goods Sold ..................................................... Merchandise Inventory ..................................... To write inventory down to NRV; 16,171 – 15,527 = 644

$ 3,105 1,430 7,257 3,735 $15,527

644 644

Exercise 6-11 (20 minutes) 1. $900,000 – $500,000 = $400,000 2. For years ended Income statement information actually reported for December 31, 2023, 2024, and years ended December 31, 2025 income statement information should have been reported 2023 2024 2025 as: Sales $900,000 $900,000 $900,000 $900,000 Cost of goods sold: Beginning $200,000 $200,000 $180,000 $200,000 inventory Add: Purchases 500,000 500,000 500,000 500,000 Less: Ending 200,000 200,000 inventory 180,000 200,000

6-673

Last revised: September 2021.

Cost of goods sold Gross profit

500,000 $400,000

520,000 $380,000

480,000 $420,000

500,000 $400,000

6-674

Last revised: September 2021.

Exercise 6-12 (20 minutes) Goods available for sale: Inventory, January 1 Purchases Purchase returns Transportation-in Goods available for sale Less: Estimated cost of goods sold: Sales Estimated cost of goods sold [$1,920,000 × (1 – 30%)]

..... $ 370,000 $1,510,000 (19,100) 33,600 1,524,500 ..... $1,894,500 $1,920,000 .....

(1,344,000)

Estimated March 31 inventory

$ 550,500

Exercise 6-13 (20 minutes) At Cost Goods available for sale: Beginning inventory $256,800.00 Net purchases Goods available for sale $650,400.00 Deduct net sales at retail Ending inventory at retail Cost ratio: ($358,840/$650,400) × 100 = 55.17% Ending inventory at cost ($130,400 × 55.17%)

At Retail $127,600.00 231,240.00 $358,840.00

393,600.00

520,000.00 $130,400.00 $ 71,941.68

Exercise 6-14 (15 minutes) a.

$109,200 × 55.17% = $60,245.64

b. At Cost Estimated inventory that should have been on hand ........................................ Physical inventory ........................................................ Inventory shrinkage ......................................................

At Retail $ 71,941.68 60,245.64 $ 11,696.04

$130,400.00 109,200.00 $ 21,200.00

6-675

Last revised: September 2021.

Inventory turnover 2024: $643,825 ($96,400 + $86,750)/2

= 7.0 times

$426,650 ($86,750 + $91,500)/2

= 4.8 times

2023:

Days‘ sales in inventory 2024: $ 96,400 $643,825

× 365

= 54.7 days

$ 86,750 $426,650

× 365

= 74.2 days

2023:

It appears that Russo has lower levels of inventory on hand because it is turning it over more quickly. Inventory is staying in the store 54.7 days in 2024 before it was sold as compared to 74.2 days in 2023. This is generally favourable provided customers are not being turned away because of out-of-stock items. Exercise 6-16 (15 minutes) Inventory Items Units Helmets 24 Bats ..................... 17 Shoes .................. 38 Uniforms ............. 42

Per Unit Cost NRV $50 $54 78 72 95 91 36 36

Total Cost $1,200 1,326 3,610 1,512 $7,648

Total NRV $1,296 1,224 3,458 1,512 $7,490

LCNRV Applied to Each Product $1,200 1,224 3,458 1,512 $7,394

Lower of cost or NRV of inventory by product = $7,394

6-676

Last revised: September 2021.

Exercise 6-17 (20 minutes) Year 2 Inventory turnover

Year 2 Days' Sales in Inventory

$426,650/[($92,500 + $87,750)/2] = 4.7 times

$87,750/$426,650 x 365 days = 75.1 days

Year 3 Inventory turnover

Year 3 Days' Sales in Inventory

$643,825/[($87,750 + $97,400)/2] = 7.0 times

$97,400/$643,825

x 365 days = 55.2 days

Analysis comment: It appears that during a period of increasing sales, Palmer has been efficient in controlling its amount of inventory. Specifically, inventory turnover increased by 2.3 times (7.0 - 4.7) from Year 2 to Year 3. Also, days' sales in inventory decreased by 19.9 days (75.1 - 55.2). Exercise 6-18 (20 minutes) At Cost

At Retail

Beginning inventory .............................................................

$ 63,800

$128,400

Cost of goods purchased ......................................................... Goods available for sale ........................................................... Deduct net sales at retail ............................................................. Ending inventory at retail ............................................................

115,060 $178,860

196,800 325,200 260,000 $ 65,200

Goods available for sale

Cost ratio: ($178,860/$325,200) = 0.55 ........................................ Ending inventory at cost ($65,200 x 55%) ..................................

$ 35,860

6-677

Last revised: September 2021.

Exercise 6-19 (20 minutes) Goods available for sale

Beginning inventory, January 1 .............................................. $ 225,000 Net cost of goods purchased* .....................................................

802,250

Goods available for sale .............................................................. 1,027,250 Less estimated cost of goods sold Net sales .......................................................................................

$1,000,000

Estimated cost of goods sold [$1,000,000 x (1 – 30%)] ..........................................................

(700,000)

Estimated March 31 inventory ....................................................... $ 327,250 *

$795,000 - $11,550 + $18,800 = $802,250

*Exercise 6-20 (20 minutes) Ending Cost of Inventory Goods Sold a.

FIFO: 120 × $4.40 .................................................................. $13,200 – $528 ............................................................

$528

Weighted-average cost ($13,200/2,640 = $5.00): $5.00 × 120 ................................................................ $13,200 – $600 ............................................................

$600

$12,672

$12,600

FIFO provides the lower profit because it has the higher cost of goods sold due to decreasing unit costs.

6-678

Last revised: September 2021.

*Exercise 6-21 (20 minutes) Ending Cost of Inventory Goods Sold a.

FIFO: (60 × $2.45) + (95 × $2.30) .......................................... (120 × $2.10) + (250 × $2.20) + (405 × $2.30) ..............

$365.50

Weighted-average cost ($2,099/930 = $2.26): $2.26 × 155 .................................................................. $2.26 × 775 ..................................................................

$350.30

$1,733.50

$1,748.70*

*$2.26 x 775 = 1,751.50. Cost of goods sold has been adjusted to $1,748.70 because ending inventory plus cost of goods sold must equal cost of goods available for sale of $2,099.00. Weighted average provides the lowest profit because it has the highest cost of goods sold due to rising unit costs. *Exercise 6-22 (15 minutes) Ending inventory: Units Beginning inventory March 7 purchase July 28 purchase

80 @ 27 @ 48 @ 155

Cost/Unit $2.10 = 2.20 = 2.30 =

Total Cost $168.00 59.40 110.40 $337.80

Cost of goods sold: Cost of goods available for sale less Ending inventory = Cost of goods sold $2,099.00 – $337.80 = $1,761.20 PROBLEMS Problem 6-1A (30 minutes)Part 1 a. Exclude – With shipping terms of FOB destination, J&M does not take ownership of the inventory until January 3, 2024. Therefore, J&M does not own the inventory (blue jackets, Item #7649) as at December 31, 2023. J&M has incorrectly included the blue jackets (Item #7649) in their inventory listing. b. Exclude – With FOB shipping terms, J&M no longer owns the inventory on December 31, 2023 when the goods are shipped. The company has correctly excluded these goods as scarves (Item #5566) is not included in the inventory listing. c. Include –With shipping terms of FOB shipping, J&M takes ownership of the inventory as at December 30, 2023. Thus, the inventory should be included in inventory as at December 31, 2023. The inventory should be included at a cost of $3,900 ($3,300+$320+$220+$60). J&M has made an error by not including the red blazers in the inventory listing. d. Exclude – The inventory held on consignment for Duke Co. should be excluded from J&M‘s inventory. J&M does not own the consigned goods.

6-679

Last revised: September 2021.

e. Include – With shipping terms of FOB destination, J&M still owns the inventory until the goods reach the customer on January 3, 2024. Thus, J&M owns the inventory as at December 31, 2023 and should include the goods in the final inventory listing. The inventory should be included at a cost of $1,000.

Part 2 Merchandise Inventory Unadjusted Balance. 75,500 2,000 (a) (c) 3,900 5,000 (d) (e)1,000 Adjusted Bal. 73,400

Note: There is no error in (b) as J&M has correctly excluded the inventory.

6-680

Last revised: September 2021.

Problem 6-2A (40 minutes ) 1) (a) FIFO - perpetual Date

Jan.

Purchases Units Unit Cost 1 Beginning inventory 640 @ $75.00 =

Feb. 10 Mar. 15

350 @

Aug. 21 Sept 10

230 @

Total

$72.00 =

Sales (at cost) Total Cost

Units

Cost of Goods Sold

Units

$48,000 $25,200 430 @

$85.00 =

Unit Cost

Inventory Balan

$75.00 =

$32,250

$19,550

1,220 $92,750 Cost of goods available for sale

210 @ $75.00 = $15,750 125 @ 72.00 = 9,000 765 $57,000 = Cost of goods sold +

640 @ 640 @ 350 @ 210 @ 350 @ 210 @ 350 @ 230 @ 225 @ 230 @ 455

Unit Cost $75.00 = $75.00 = 72.00 = $75.00 = 72.00 = $75.00 = 72.00 = 85.00 = $72.00 = 85.00 =

Ending invent

6-681

Last revised: September 2021.

Problem 6-2A (continued) 1) (b) Moving weighted-average - perpetual Inventory Balance Date

Jan.

Purchases Unit Units Cost Beginning inventory 1 640 @ $75.00 =

Feb. 10

350 @

$72.00 =

Sales (at cost) Total Cost

$85.00 =

Total Units

Average Cost/ Unit

Total Cost

$75.00

$48,000.00

$25,200.00 990

$73.94

$73,200.00

560

$73.94

$41,405.80

790

$77.16

$60,955.80

455 455

$77.16

$31,794.20

$19,550.00

Sept 10 Total

(b)

640

430 @ $73.94 =

230 @

Cost of Goods Sold

(b)  (a)

$48,000.00

Mar. 15

Aug 21

Units

Unit Cost

(a)

335 @ $77.16 = 1,220 $92,750.00 Cost of goods available for sale

$25,848.60

765 $57,642.80 = Cost of goods sold

$35,107.80 $35,107.80 Ending inventory Difference .60 due to rounding

Inventory Balance Calculations

640 $48,000.00 350 @ $72.00 = 25,200.00 990 $73,200.00 990 $73,200.00 –430 @ $73.94 = –31,794.20 560 $41,405.80 560 $41,405.80 230 @ $85.00 = 19,550.00 790 $60,955.80 790 $60,955.80 –335 @ $77.16 = –25,848.60 455 $35,107.20

6-682

Last revised: September 2021.

Problem 6-2A (continued) 2) Specific Identification Date

Jan.

Purchases Units Unit Cost 1 Beginning inventory 640 @ $75.00 =

Feb. 10 Mar. 15

350 @

Aug. 21 Sept. 10

230 @

Total

$72.00 =

Sales (at cost) Total Cost

Units

Cost of Goods Sold Units

$48,000 $25,200 230 @ 200 @

$85.00 =

Unit Cost

Inventory Balance

$75.00 = 72.00 =

$17,250 14,400

$19,550

1,220 $92,750 Cost of goods available for sale

225 @ $75.00 = 40 @ 72.00 = 70 @ 85.00 = 765 = Cost of goods sold

$16,875 2,880 5,950 $57,355 +

640 @ 640 @ 350 @ 410 @ 150 @ 410 @ 150 @ 230 @ 185 @ 110 @ 160 @ 455

Unit Cost $75.00 = $75.00 = 72.00 = $75.00 = 72.00 = $75.00 = 72.00 = 85.00 = $75.00 = 72.00 = 85.00 =

Total Cost $48,000 $48,000 25,200 $30,750 10,800 $30,750 10, 800 19,550 $13,875 7,920 13,600 $35,395

Ending inventory

6-683

Last revised: September 2021.

Problem 6-2A (concluded) 3) a. FIFO

b. Moving Weighted Average 25,200 25,200

c. Specific Identificat ion 25,200 25,200

45,225

Feb.

10 Merchandise Inventory ................................................ 25,200 Accounts Payable ................................................. 25,200 To record the purchase of inventory on credit.

Sept.

10 Accounts Receivable ................................................... 45,225 Sales ...................................................................... 45,225 To record a credit sale; $135/unit x 335 units = $45,225.00.

45,225

10 Cost of Goods Sold ..................................................... 24,750 Merchandise Inventory ......................................... 24,750 To record the sale of merchandise.

25,849

45,225

25,705 25,849

25,705

*Problem 6-3A (25 minutes) a)

FIFO basis: Total cost of the 1220 units for sale ................. Less: Ending inventory on a FIFO basis: 230 units @ $85 .............................................. 225 units @ $72 .............................................. Cost of units sold ...............................................

$92,750 $19,550 16,200

35,750 $57,000

Weighted average cost basis: Total cost of the 1220 units for sale ................. Less: Ending inventory at weighted-average cost: ($92,750/1220 = $76.02) × 455 ........................ Cost of units sold ...............................................

$92,750.00 34,589.10* $58,160.90*

*These amounts may vary if the unit cost/unit was not rounded to two decimal places.

6-684

Last revised: September 2021.

Problem 6-4A (40 minutes) (a) FIFO - perpetual Date

Jan.

Purchases

Sales (at cost)

Unit Total Units Cost Cost 1 Beginning inventory 280 @ $80.00 = $22,400

Feb. 10 20

195 @ $84.00 =

Cost of Goods Sold

280 @ $80.00 = 80 @ 84.00 = 290 @ $78.00 =

$22,620

Sept 5 Oct. 10

255 @ $64.00 =

$16,320

1,020 $77,720 Cost of goods available for sale

$22,400 6,720

115 @ $84.00 = $ 9,660 290 @ 78.00 = 22,620 105 @ 64.00 = 6,720 870 $68,120 = Cost of goods sold

Unit Cost

Units

$16,380

Mar. 13

Total

Units

Unit Cost

Inventory Balance

Total Cost

280 @ $80.00 = 280 @ $80.00 = 195 @ 84.00 =

$22,400 $22,400 16,380

115 @ $84.00 = 115 @ $84.00 = 290 @ 78.00 = 115 @ $84.00 = 290 @ 78.00 = 255 @ 64.00 =

$ 9,660 $ 9,660 22,620 $ 9,660 22,620 16,320

150 @ $64.00 = $ 9,600 150 $ 9,600 Ending inventory

6-685

Last revised: September 2021.

Problem 6-4A (continued) (b) Moving weighted-average - perpetual Inventory Balance Date

Purchases

Sales (at cost)

Jan.

Unit Units Cost Beginning inventory 1 280 @ $80.00 =

$22,400.00

Feb.

10 195 @ $84.00 =

$16,380.00

Feb

Mar.

Total Cost

5 255 @ $64.00 =

@ $81.64

Total Cost

$80.00

$77,720.00

$73.23 =

870

475

$81.64

$38,780.00

115

$81.651

$ 9,389.60

405

$79.042

$32,009.60

660

$73.233

$48,329.60

150 150

$73.224

$10,982.30 $10,982.30

$29,390.40

Cost of goods available for sale

$37,347.30 $66,737.70

Cost of goods sold

Inventory Balance Calculations

$22,400.00

$16,320.00

510 @ 1,020

Total Average Units Cost/Unit

$22,620.00

Oct. 10 Total

(b)

280

360

13 290 @ $78.00 =

Sep.

Units

Cost of Goods Sold

Unit Cost

(b)  (a)

(a)

280 @ $80.00 = 195 @ 84.00 = 475 475 360 115 115 290 @ $78.00 = 405 405 255 @ $64.00 = 660 660 510 150

Ending inventory

*Changed due to rounding;

1 $9,389.60/115 units = $81.6487 which is rounded to $81.65. 2 $32,009.60/405 units = $79.0360 which is rounded to $79.04. 3 $48,329.60/660 units = $73.2267 which is rounded to $73.23. 4 $10,982.30/150 units = $73.2153 which is rounded to $73.22.

6-686

$22,400.00 16,380.00 $38,780.00 $38,780.00 29,390.40 $ 9,389.60 $ 9,389.60 22,620.00 $32,009.60 $32,009.60 16,320.00 $48,329.60 $48,329.60 37,347.30 $10,982.30

Last revised: September 2021.

Problem 6-4A (concluded) 2)

Sales (870 x $160) ........... Cost of goods sold ......... Gross profit.....................

FIFO $139,200 68,120 $ 71,080

Moving Weighted Average $139,200.00 66,737.70 $ 72,462.30

Analysis Component If Gale Company had been experiencing increasing prices in the acquisition of additional inventory, gross profit would have been highest using a FIFO inventory costing method and lowest under a Moving Weighted Average inventory costing method. *Problem 6-5A (25 minutes) a)

FIFO basis: Total cost of the 1,020 units for sale ................ Less: Ending inventory on a FIFO basis: 150 units @ $64 .............................................. Cost of units sold ...............................................

$77,720 9,600 $68,120

Weighted average cost basis: Total cost of the 1,020 units for sale ................ Less: Ending inventory at weighted-average cost: ($77,720/1,020 = $76.20) × 150 ....................... Cost of units sold ...............................................

$77,720 11,430* $66,290*

*These amounts may vary if the unit cost/unit was not rounded to two decimal places.

6-687

Last revised: September 2021.

*Problem 6-5A 1-a. Date

Purchases

Unit Total Units Cost Cost Jan. 1Beginning inventory 280 @ $ 80.00 = $22,400 Feb. 10 195 @ $ 84.00 = $16,380 Mar. 13 290 @ $ 78.00 = $22,620 Sept. 5 255 @ $ 64.00 = $16,320 Total 1,020 $77,720

FIFO basis: Total cost of the 1020 units for sale $77,720 Less: Ending inventory on a FIFO basis: 150 units @ $64 9,600 Cost of units sold $68,120

1-b. Weighted average cost basis: Total cost of the 1,020 units for sale $ 77,720 Less: Ending inventory at weighted-average cost: * ($77,720/1,020 = $76.20) × 150 11,430 * Cost of units sold $ 66,290

*These amounts may vary if the unit cost/unit was not rounded to two decimal places.

6-688

Last revised: September 2021.

Problem 6-6A (50 minutes) 1. a) FIFO Purchases Date

Units

Unit Cost

Total Cost

Oct. 1

28 @

$22

Oct. 3

18 @

$23

Total Cost

$616

28 @

$22

$616

$414

28 @

$22

$616

18 @

$23

$414

$22

$110

18 @

$23

$414

$22

$110

18 @

$23

$414

28 @

$25

$700

23 @

$25

$575

23 @

$25

$575

38 @

$27

$1,026

28 @

$27

$756

28 @

$27

$756

23 @

$28

$644

23 @

28 @

$25

38 @

$27

Total

23 @

135

$28

$22

Cost of Goods Sold

$506

$22

$110

18 @

$23

$414

$25

$125

$1,026

Oct. 30 Oct. 31

Unit Cost

$700

Oct. 19

Oct. 23

Units

Inventory Balance Units Cost

Oct. 6 Oct. 12

Sales (at cost)

23 @

$25

$575

10 @

$27

$270

$644

$3,400

$2,000

Cost of goods available for Cost of goods sold + sale = Problem 6-6A (Continued) Part 1 b) Moving weighted average

$1,400 Ending inventory

6-689

Last revised: September 2021.

Problem 6-6A (concluded) 2.

Purchases

Sales (at cost)

Total Cost

Date

Units

Unit Cost

Oct. 1

28 @

$22

$616

28 @

$22.00

$616

Oct. 3

18 @

$23

$414

46 @

$22.39

$1,030

$515 23 @

$22.39

$515

51 @

$23.82

$1,215

$667 23 @

$23.82

$548

61 @

$25.80

$1,574

$851 28 @

$25.80

$722

51 @

$26.78

$1,366

Oct. 6

Oct. 12

Units Unit Cost

Inventory Balance

23 @

28 @

$25

28 @

38 @

$27

33 @

23 @

$28

Total 135

Cost of goods sold

$25.80

$644

$3,400 84

Cost of goods available for sale = Sales

$23.82

$1,026

Oct. 30 Oct. 31

$22.39

$700

Oct. 19 Oct. 23

Cost of Goods Sold

Units Cost

Total Cost

$2,033 51

Cost of goods sold +

$1,366 Ending inventory

FIFO

Weighted moving average

$4,872 (84 x $58)

2,000

2,033

6-690

Last revised: September 2021.

Gross Profit

$2,872

$2,839

3. a. FIFO produces the higher gross profit b. FIFO produces the higher ending inventory balance. 4. FIFO

Weighted moving average

$4,872 (84 x $58)

Cost of goods sold

2,000

2,033

Gross Profit

$2,872

$2,839

Gross Profit percentage

59%

58%

Sales

6-691

Last revised: September 2021.

Problem 6-7A (40 minutes) (a) FIFO - perpetual Date

Jan.

Purchases

Sales (at cost)

Unit Total Units Cost Cost 1 Beginning inventory 295 @ $83.00 = $24,485

Mar. 10 20

210 @ $87.00 =

Cost of Goods Sold

295 @ $83.00 = 295 @ $83.00 = 210 @ 87.00 = 295 @ $83.00 = 80 @ 87.00 =

277 @ $81.00 =

$22,437

Aug. 5 Sept 10

260 @ $67.00 =

$17,420

1,042 $82,612 Cost of goods available for sale

Unit Cost

Units

$18,270

May 13

Total

Units

Unit Cost

Inventory Balance

$24,485 6,960

130 @ $87.00 = $ 11,310 277 @ 81.00 = 22,437 108 @ 67.00 = 7,236 890 $72,428 = Cost of goods sold

Total Cost $24,485 $24,485 18,270

130 @ $87.00 = $ 11,310 130 @ $87.00 = $ 11,310 277 @ 81.00 = 22,437 130 @ $87.00 = $ 11,310 277 @ 81.00 = 22,437 260 @ 67.00 = 17,420

152 @ $67.00 = $ 10,184 152 $ 10,184 Ending inventory

6-692

Last revised: September 2021.

Problem 6-7A (continued) (b) Moving weighted-average - perpetual Inventory Balance Date

Purchases

Sales (at cost)

Jan.

Unit Units Cost Beginning inventory 1 295 @ $83.00 =

$24,485.00

Mar.

10 210 @ $87.00 =

$18,270.00

Mar

May

Total Cost

5 260 @ $67.00 =

@ $84.66

Total Cost

$83.00

$82,612.00

$76.26 =

890

505

$84.66

$42,755.00

130

$84.671

$ 11,007.50

407

$82.172

$33,444.50

667

$76.263

$50,864.50

152 152

$76.254

$11,590.60 $11,590.60

$31,747.50

Cost of goods available for sale

$39,273.90 $71,021.40

Cost of goods sold

Inventory Balance Calculations

$24,485.00

$17,420.00

515 @ 1,042

Total Average Units Cost/Unit

$22,437.00

Sep. 10 Total

(b)

295

375

13 277 @ $81.00 =

Aug.

Units

Cost of Goods Sold

Unit Cost

(b)  (a)

(a)

295 @ $83.00 = $24,485.00 210 @ 87.00 = 18,270.00 505 $42,755.00 505 $42,755.00 375 31,747.50 130 $ 11,007.50 130 $ 11,007.50 277 @ $81.00 = 22,437.00 407 $33,444.50 407 $33,444.50 260 @ $67.00 = 17,420.00 667 $50,864.50 667 $50,864.50 515 39,273.90 152 $11,590.60

Ending inventory

*Changed due to rounding;

1 $11,007.50/130 units = $84.6731 which is rounded to $84.67. 2 $33,444.50/407 units = $82.1732 which is rounded to $82.17. 3 $50,864.50/667 units = $76.2586 which is rounded to $76.26. 4 $11,590.60/152 units = $76.2539 which is rounded to $76.25.

6-693

Last revised: September 2021.

Problem 6-7A (concluded) 2)

Sales (890 x $163) ........... Cost of goods sold ......... Gross profit.....................

FIFO $145,070 72,428 $ 72,642

Moving Weighted Average $145,070.00 71,021.40 $ 74,048.60

Analysis Component If Ontario Skateboard had been experiencing increasing prices in the acquisition of additional inventory, gross profit would have been highest using a FIFO inventory costing method and lowest under a Moving Weighted Average inventory costing method. Problem 6-8A (50 minutes) FRESH EXPRESS COMPANY Income Statement Comparing FIFO and Moving Weighted-Average Inventory Costing Methods For Year Ended December 31, 2023

FIFO Sales (4,960 units sold x $81/unit) .................................. Cost of goods sold .......................................................... Gross profit ..................................................................... Operating expenses (4,960 units sold x $11/unit) ........... Profit ...............................................................................

$401,760 152,450 $249,310 54,560 $194,750

Moving WeightedAverage Cost $401,760.00 152,571.60 $249,188.40 54,560.00 $194,628.40

NOTE: The COGS calculations for each of FIFO and Moving Weighted Average are on the following pages.

6-694

Last revised: September 2021.

Problem 6-8A (continued) (a) FIFO - perpetual Date

Purchases

Sales (at cost)

Unit Units Cost 1 Beginning inventory 510 @ $26.00 =

$ 13,260

1,410 @ $28.00 =

$ 39,480

May 16 Sept. 20

610 @ $32.00 =

$ 19,520

Jan.

Feb.

Dec.

11 22

Total

Total Cost

Units

Unit Cost

510 @ $26.00 = 1,410 @ 28.00 = 490 @ 32.00 = 3,210 @ $33.00 =

Inventory Balance

Cost of Goods Sold

Units

$ 13,260 39,480 15,680

$105,930

120 @ $32.00 = $ 3,840 2,430 @ 33.00 = 80,190 5,740 $178,190 4,960 $152,450 Cost of goods available for sale = Cost of goods sold

Unit Cost

Total Cost

510 @ 510 @ 1,410 @ 510 @ 1,410 @ 610 @

$26.00 = $26.00 = 28.00 = $26.00 = 28.00 = 32.00 =

$ 13,260 $ 13,260 39,480 $ 13,260 39,480 19,520

120 @ 120 @ 3,210 @

$32.00 = $32.00 = 33.00 =

$ 3,840 $ 3,840 105,930

780 @ $33.00 = $ 25,740 780 $ 25,740 Ending inventory

6-695

Last revised: September 2021.

Problem 6-8A (continued) (b) Moving weighted-average - perpetual Inventory Balance Date

Jan.

Feb.

May

Purchases

Sales (at cost)

Unit Total Units Cost Cost Beginning inventory 1 510 @ $26.00 = $ 13,260

20 1,410 @ $28.00 =

16 610 @ $32.00 =

11 3,210 @ $33.00 =

Unit Cost

(b)  (a)

(b)

Total Units

Average Cost/Un it

Total Cost

510

1,920

$27.47 $ 52,740

2,530

$28.56

$72,260

120

$28.59

$ 3,430.40

$ 19,520

2,410 @ $28.56 = $ 68,829.60

$105,930 3,330

22 1

Inventory Balance Calculations

$26.00 $ 13,260

$ 39,480

Sept. 20

Dec.

Units

Cost of Goods Sold

(a)

$32.84 $109,360. 4

2,550 @ $32.84 = $83,742.0

510 @ $26.0 = $ 13,260 0 1,410 @ 28.00 = 39,480 1,920 $ 52,740 1,920 $ 52,740 610 @ $32.0 = 19,520 0 2,530 $72,260 2,530 $72,260 –@ $28.56 = – 2,410 68,892.6 120 $ 3,430.40 120 $ 3,430.40 3,210 @ $33.0 = 105,930 0 3,330 $109,360. 4 3,330 $109,360. 4 – @ $32.8 = –83,742

Cost per unit changed due to rounding; $3,430.40/120 units = $25.5867 which is rounded to $28.59.

6-696

Last revised: September 2021.

Total

5,740

$178,190 4,96 0 Cost of goods available for sale = Analysis Component

$152,571.6 0 Cost of goods sold +

780 $32.841 $ 25,618.40 780 $ 25,618.40 Ending inventory

2,550 780

4 $ 25,618.40

If the manager of Fresh Express earns a bonus based on a percentage of gross profit, she will prefer the FIFO inventory costing method since it has produced the higher gross profit. FIFO will always produce a higher gross profit than Moving weighted average when the unit costs of merchandise inventory are increasing.

1 Cost per unit changed due to rounding; $25,618.40/780 units = $32.8441 which is rounded to $32.84.

6-697

Last revised: September 2021.

*Problem 6-9A (45 minutes) FRESH EXPRESS COMPANY Income Statement Comparing FIFO and Weighted Average Inventory Costing Methods For Year Ended December 31, 2023 Weighted Average Sales .............................. COGS ............................. Gross Profit ................... Operating Expenses ..... Profit ..............................

FIFO $401,760 152,450 $249,310 54,560 $194,750

Supporting calculations: Cost of goods available for sale: 510 units in beginning inventory @ $26 1,410 @ $28 610 @ $32 3,210 @ $33 5,740 units available for sale a)

$ 13,260 39,480 19,520 105,930 $178,190

FIFO basis: Total cost of the 5,740 units ......................................... Less: Ending inventory on a FIFO basis: 780 @ $33 .................................................................. Cost of units sold .........................................................

$401,760 153,979 $247,781 54,560 $193,221

$178,190 25,740 $152,450

Weighted average: Total cost of the 5,740 units ......................................... Less: Ending inventory at weighted-average cost: ($178,190/5,740) = $31.04 × 780 ............................... Cost of units sold .........................................................

$178,190 24,211* $153,979*

*These amounts may vary if the unit cost/unit was not rounded to two decimal places. Analysis Component If the manager of Fresh Express earns a bonus based on a percentage of gross profit, she will prefer the FIFO inventory costing method since it has produced the higher gross profit. FIFO will always produce a higher gross profit than weighted average when the unit costs of merchandise inventory are increasing. *Problem 6-10A (35 minutes)

6-698

Last revised: September 2021.

Cost of goods sold: Reported .............................................................. Adjustments: Dec. 31, 2023 error ................. Dec. 31, 2024 error ................. Corrected .............................................................

2023 $ 715,000 – 70,000

Profit: Reported .............................................................. Adjustments: Dec. 31, 2023 error ................. Dec. 31, 2024 error .................. Corrected .............................................................

2023 $ 220,000 + 70,000

Total current assets: Reported .............................................................. Adjustments: Dec. 31, 2023 error .................. Dec. 31, 2024 error ................. Corrected .............................................................

2023 $1,155,000 + 70,000

Equity: 2023 Reported .............................................................. Adjustments: Dec. 31, 2023 error ................. Dec. 31, 2024 error ................. Corrected .............................................................

2024 $1,287,000 + 70,000

$ 645,000

$ 290,000

$1,225,000

$1,357,000

2024 $ 847,000 + 70,000 + 32,000 $ 949,000

2025 $ 770,000 – 32,000 $ 738,000

2024 $ 275,000 – 70,000 – 32,000 $ 173,000

2025 $ 231,000 + 32,000 $ 263,000

2024 $1,265,000

2025 $1,100,000

– 32,000 $1,233,000

$1,100,000

2025 $1,430,000

$1,232,000

– 32,000 $1,398,000

$1,232,000

Analysis component: These errors are ―self-correcting‖ in the year following the error. Each overstatement (or understatement) of profit is offset by a matching understatement (or overstatement) in the following year. Thus, aggregate profit for the three-year period is not affected by the errors. The understatement of inventory by $70,000 results in an overstatement of cost of goods sold by that same amount. The $70,000 overstatement of cost of goods sold results in an understatement of gross profit by the same amount. This understatement of gross profit carries through to an understatement of profit. Since the understated profit is closed to capital, the final equity figure is understated by the amount of the inventory understatement.

6-699

Last revised: September 2021.

Problem 6-11A (30 minutes) 2023 $ 345,000 + $ 52,000 $ 397,000 $1,300,000 – $ 52,000 $1,248,000

Corrected Ending Inventory

Corrected Cost of Goods Sold

Corrected Profit

$ 340,000 +$ 52,000 $ 392,000

2024 $ 420,000 – $ 14,000 $ 406,000 $1,750,000 + $ 52,000 + $ 14,000 $1,816,000 $ 516,000 - $ 52,000 - $ 14,000 $ 450,000

2025 $ 392,000 (no change) $2,100,000 – $ 14,000 $2,086,000 $ 652,000 +$ 14,000 $ 666,000

Problem 6-12A (50 minutes) Per Unit

Inventory Items Audio equipment: Wireless audio receivers Touchscreen MP3 players Audio mixers Audio stands Subtotal Video: Televisions 5GB video cards Satellite video recorders Subtotal Car Equipment: GPS navigators Double-DIN Car Deck with iPod/iPhone Control and Aux Input Subtotal Totals

Units on Hand Cost

NRV

332 $199 247 203 313 193 191 85

467 278 199

172 157

253 171 613

171 213

LCNRV applied to: b. a. Separately Major to Each Group Product

Total Cost

Total NRV

$188 223 177 103

$ 66,068 50,141 60,409 16,235 $192,853

$ 62,416 55,081 55,401 19,673 $192,571 $192,571

$ 62,416 50,141 55,401 16,235

298 183 618

$118,151 47,538 121,987 $287,676

$139,166 50,874 122,982 $313,022

118,151 47,538 121,987

$ 29,412 33,441

$ 24,940 31,086

$ 62,853

$ 56,026

$543,382

$561,619 $536,273

145 198

287,676

24,940 31,086

56,026

$527,895

6-700

Last revised: September 2021.

Problem 6-12A (concluded) 2(a).

2(b).

Dec. 31 Cost of Goods Sold ..................................................... Merchandise Inventory...................................... To write inventory down to LCNRV; 543,382 – 536,273 = 7,109

7,109

Dec. 31 Cost of Goods Sold ..................................................... Merchandise Inventory ..................................... To write inventory down to LCNRV; 543,382 – 527,895 = 15,487

15,487

7,109

15,487

Problem 6-13A (50 minutes) Per Unit Cost NRV

Total Cost

Total NRV

345 260 326 204

$ 90 111 86 52

$ 98 100 95 41

$ 31,050 28,860 28,036 10,608

$ 33,810 26,000 30,970 8,364

$ 31,050 26,000 28,036 8,364

Security equipment Alarms ............................ 480 Locks .............................. 291 Cameras......................... 212

150 93 310

125 84 322

72,000 27,063 65,720

60,000 24,444 68,264

60,000 24,444 65,720

70 97

84 105

12,950 16,490 $292,777

15,540 17,850 $285,242

12,950 16,490 $273,054

Inventory Items Car audio equipment Speakers ........................ Stereos ........................... Amplifiers....................... Subwoofers ...................

Units

LCM Applied to Items

Binocular equipment

Tripods ......................... 185 Stabilizers ...................... 170 Total ..................................

1. Lower of cost or NRV for inventory applied separately = $273,054 2. Dec 31 Cost of Goods Sold.............................................................. 19,723 Merchandise Inventory ....................................................... Adjust inventory cost to NRV. $19,723 = $292,777 - $273,054

19,723

6-701

Last revised: September 2021.

Problem 6-14A (20 minutes) 2022 Gross profit ratio: Sales....................................................... Cost of sales ........................................... Gross margin ..........................................

$3,300,000 1,782,000 $1,518,000

Gross profit ratio .....................................

46%*

Estimated inventory: Goods available for sale: Inventory, December 31, 2022 ................ Net purchases, 2023 .............................. Goods available for sale ......................... Less: estimated cost of goods sold: Sales....................................................... Estimated cost of goods sold .................. [$355,600 × (1 – 46%)] ........................ Estimated March 10, 2023 inventory .............. Less: inventory salvaged......................... Estimated inventory lost in fire .......................

$299,100 187,400 $ 486,500 $355,600 192,024 $ 294,476 106,300 $ 188,176

*rounded to nearest whole percentage

6-702

Last revised: September 2021.

Problem 6-15A (25 minutes) Sporting Pro Estimated Inventory March 31, 2023 Goods available for sale: Inventory, January 1, 2023 ....................... Purchases .................................................. Less: ............................. Purchase returns Add: .............................. Transportation-in Net cost of goods purchased ................... Goods available for sale ........................... Less: Estimated cost of goods sold: Sales .......................................................... Less: Sales returns ................................... Net sales .................................................... Estimated cost of goods sold [$ 1,281,200 × (1 – 47%)] ........................... Estimated March 31, 2023 inventory .......................

$ 350,260 $ 995,200 14,050 7,900 989,050 $1,339,310 $1,291,150 9,950 $1,281,200 679,036 $ 660,274

Problem 6-16A (25 minutes) Part 1 EARTHLY GOODS Estimated Inventory December 31, 2023

6-703

Last revised: September 2021.

At Cost At Retail Goods available for sale: Beginning inventory $ 521,350 $ 977,150 Purchases 4,138,245 6,448,700 Purchase returns (62,800) (129,350) Goods available for sale $4,596,795 $7,296,500 Net sales ($5,595,700 – $49,600) ... 5,546,100 Ending inventory at retail ... $1,750,400 Cost to retail ratio ($4,596,795  $7,296,500) x 100 ... × 63% Ending inventory at cost ... $ 1,102,752 Part 2 Estimated loss at retail: $1,750,400 - $1,685,800 = $64,600; $64,600 × 63% = $40,698

EARTHLY GOODS Inventory Shortage December 31, 2023 At Cost Estimated inventory, December 31 Physical inventory Inventory shortage

At Retail $1,102,752 1,062,054 $ 40,698 $

$1,750,400 1,685,800 64,600

Problem 6-17A (20 minutes) Part 1 Goods available for sale: Beginning inventory ................................................ Purchases ................................................................. Less: Purchase returns and allowances ............... Add: Transportation-in ...........................................

At Cost $

75,000 1,275,000 15,000 18,750

At Retail $

93,750 1,731,250 20,000

6-704

Last revised: September 2021.

Goods available for sale ..........................................

$1,353,750

$1,805,000

Deduct net sales at retail ($1,642,500 – $18,000) ........ Ending inventory at retail .............................................

1,624,500 $ 180,500

Cost to retail ratio ($1,353,750  $1,805,000) x 100.....

x 75%

Estimated ending inventory at cost ($180,500 × 75%):

$ 135,375

Part 2 The estimated cost of the stolen inventory is $135,375 – $58,500 = $76,875

6-705

Last revised: September 2021.

Problem 6-18A (10 minutes) 2020

2019

553,627,000 = 2.24

619,878,000 = 2.40

(241,812,000 + 252,541,000)/2

(252,541,000 + 264,586,000)/2

(241,812,000 /553,627,000) x 365

(252,541,000 /619,878,000) x 365

= 159 days

= 149 days

a. Inventory turnover ratio

b. Days‘ sales in inventory

Indigo‘s inventory turnover has decreased slightly meaning that inventory is selling slightly slower in 2020 compared to 2019. The days sales in inventory shows that the company is holding inventory for more days in 2020 compared to 2019. This change from 2019 to 2020 is unfavourable.

Problem 6-19A (25 minutes) Part 1 Cost of units available for sale: 19,000 units in beginning inventory @ $7.50 26,000 units purchased @ $9.00 31,000 units purchased @ $11.00 21,500 units purchased @ $12.00 31,000 units purchased @ $13.50 128,500 units for sale

$ 142,500 234,000 341,000 258,000 418,500 $1,394,000

Part 2 a)

FIFO basis: Total cost of the 128,500 units for sale ............. Less: Ending inventory on a FIFO basis:

$1,394,000

6-706

Last revised: September 2021.

15,000 units @ $13.50 .................................. Cost of units sold ............................................... b)

202,500 $1,191,500

Weighted average cost basis: Total cost of the 128,500 units for sale ............. Less: Ending inventory at weighted-average cost: ($1,394,000/128,500 = $10.85) × 15,000 ......... Cost of units sold ...............................................

$1,394,000 162,750* $1,231,250*

*These amounts may vary if the unit cost/unit was not rounded to two decimal places.

6-707

Last revised: September 2021.

ALTERNATE PROBLEMS Problem 6-1B (30 minutes)Part 1 a) Exclude – With FOB shipping terms, Y+R no longer owns the inventory on November 30, 2023 when the goods are shipped. The company has correctly excluded these goods. b) Exclude – With the shipping terms of FOB destination, Y+R does not take ownership of the inventory until December 3, 2023. Therefore, Y+R does not own the inventory (women‘s black boots item # B30) as at November 30, 2023. c) Include –With shipping terms of FOB shipping, Y+R takes ownership of the inventory as at November 30, 2023, when the inventory was shipped. The inventory should be included at a cost of $2,777 ($2,300+$230+$161+$86) d) Include – With shipping terms of FOB destination, Y+R still owns the inventory until the goods reach the customer on December 3, 2023. Thus, Y+R owns the inventory as at November 30, 2023 and should include the goods in the final inventory listing. The inventory should be included at a cost of $1,800. e) Exclude – The inventory held on consignment for Blue Co. should be excluded from Y+R‘s inventory. Y+R does not own the consigned goods. Part 2

Merchandise Inventory Unadjusted Balance 49,222 1,500 (b) (c) 2,777 3,700 (e) (d)1,800 Bal $48,599 Note: Y+R has corrected excluded the inventory in (a). No correction required.

6-708

Last revised: September 2021.

Problem 6-2B (40 minutes) 1) (a) FIFO - perpetual

Date

Purchases Units Unit Cost 1 Beginning inventory 619 @ $78.00 =

Jan.

Feb. 13 15

335 @

Aug.

215 @

5 10

Total

$75.00 =

$88.00 =

Sales (at cost) Total Cost

Units

Unit Cost

Inventory Balance

Cost of Goods Sold

$ 48,282 $ 25,125 415 @ $78.00 =

$32,370

204 @ $78.00 = 116 @ 75.00 = 735 Cost of goods sold

$15,912 8,700 $56,982 +

$ 18,920

1,169 $92,327 Cost of goods available for sale =

Units

Unit Cost

Total Cost

619 @ $78.00 = $48,282 619 @ $78.00 = $48,282 335 @ 75.00 = 25,125 204 @ $78.00 = $15,912 335 @ 75.00 = 25,125 204 @ $78.00 = $15,912 335 @ 75.00 = 25,125 215 @ 88.00 = 18,920 219 @ $75.00 = $16,425 215 @ 88.00 = 18,920 434 $35,345 Ending inventory

6-709

Last revised: September 2021.

Problem 6-2B (continued) 1) (b) Moving weighted-average - perpetual Inventory Balance Date

Purchases Unit Cost

Total Cost

Jan.

Units Beginning inventory 1 619 @ $78.00

$ 48,282.00

Feb.

$ 25,125.00

335 @ $75.00

15 Aug.

5 10

Total

Units

(b)

Unit Cost

Cost of Average Goods Total Cost/ Sold Units Unit

Total Cost

(a)

619

415 @ 215 @ $88.00

(b)  (a)

Sales (at cost)

$78.00 $48,282.00

954

$76.95 $73,407.00

539

$76.94 $41,472.75

754

$80.10 $60,392.75

$76.95 = $31,934.25

$ 18,920.00 320 @

$80.10 = $25,632.00

1,169 $92,327.00 735 $57,566.25 Cost of goods available for sale Cost of goods sold =

Inventory Balance Calculations

434 $80.09 $34,760.75 434 $34,760.75 + Ending inventory

619 335 @ 954 954 –415 @ 539 539 215 @ 754 754 –320 @ 434

$48,282.00 25,125.00 $73,407.00 $73,407.00 $76.95 = -31,934.25 $41,472.75 $41,472.75 $88.00 = 18,920.00 $60,392.75 $60,392.75 $80.10 = -25,632.00 $34,760.75 $75.00 =

6-710

Last revised: September 2021.

Problem 6-2B (concluded) 2) Specific identification Date

Purchases

Units Unit Cost Jan. 1 Beginning inventory 619 @ $78.00 = Feb. 13 15

335 @

Aug. 5 10

215 @

Total

$75.00 =

$88.00 =

Sales (at cost) Total Cost

Units

Unit Cost

Inventory Balance Cost of Goods Sold

$ 48,282 $ 25,125 221 @ 194 @

$78.00 = 75.00 =

216 @ 37 @ 67 @ 735

$78.00 = 75.00 = 88.00 =

$17,238 14,550

$ 18,920

1,169 $92,327 Cost of goods available for sale =

$ 16,848 2,775 5,896 $57,307 Cost of goods sold +

Units

Unit Cost

Total Cost

619 @ $78.00 = 619 @ $78.00 = 335 @ 75.00 = 398 @ $78.00 = 141 @ 75.00 = 398 @ $78.00 = 141 @ 75.00 = 215 @ 88.00 = 182 @ $78.00 = 104 @ 75.00 = 148 @ 88.00 = 434 Ending inventory

$48,282 $48,282 25,125 $31,044 10,575 $31,044 10,575 18,920 $14,196 7,800 13,024 $35,020

6-711

Last revised: September 2021.

3) a. FIFO Feb.

Aug.

15 Accounts Receivable ................... Sales ...................................... To record a credit sale; $138/unit x 415 units = $57,270.

57,270

15 Cost of Goods Sold ..................... Merchandise Inventory ......... To record the sale of merchandise.

32,370

5 Merchandise Inventory ................ Accounts Payable ................. To record the purchase of inventory on credit.

18,920

b. Moving Weighted Average 57,270

57,270

57,270 57,270

31,934.25 32,370

57,270

31,788 31,934.25

18,920 18,920

c. Specific Identification

31,788

18,920 18,920

18,920

6-712

Last revised: September 2021.

*Problem 6-3B (25 minutes) a)

FIFO basis: Total cost of the 1,169 units for sale ................ Less: Ending inventory on a FIFO basis: 215 units @ $88 .............................................. 219 units @ $75 .............................................. Cost of units sold ...............................................

$92,327 $18,920 16,425

35,345 $ 56,982

Weighted-average cost basis: Total cost of the 1,169 units for sale ................ Less: Ending inventory at weighted-average cost: ($92,327/1,169 = $78.98) × 434 ....................... Cost of units sold ...............................................

$92,327.00 34,277.32* $ 58,049.68*

*These amounts may vary if the unit cost/unit was not rounded to two decimal places.

Problem 6-4B (40 minutes) 1) (a) FIFO - perpetual Date

Purchases

Sales (at cost)

Unit Units Cost Jan. 1 Beginning inventory 180 @ $30.00 = Feb. 20

Total Cost

Apr. 30

315 @ $29.00 =

$ 9,135

Oct.

225 @ $25.00 =

$ 5,625

5 10

Units

Unit Cost

Inventory Balance

Cost of Goods Sold Units

$ 5,400 145 @ $30.00 =

Total 720 $20,160 Cost of goods available for sale =

$ 4,350

35 @ $30.00 = $ 1,050 315 @ 29.00 = 9,135 190 @ 25.00 = 4,750 685 $19,285 Cost of goods sold +

Unit Cost

180 @ $30.00 = 35 @ $30.00 = 35 @ $30.00 = 315 @ 29.00 = 35 @ $30.00 = 315 @ 29.00 = 225 @ 25.00 =

Total Cost $5,400 $1,050 $1,050 9,135 $1,050 9,135 5,625

35 @ $25.00 = $ 875 35 $ 875 Ending inventory

6-713

Last revised: September 2021.

Problem 6-4B (continued) 1) b) Moving weighted-average - perpetual Inventory Balance Date

Purchases Total Cost

Jan.

Units Unit Cost Units Beginning inventory 1 180 @ $30.00 = $ 5,400.00

Feb. 20

Apr. 30 315 @

Oct.

5 225 @

(b)  (a)

(b)

Total Average Units Cost/Unit

Total Cost

Sales (at cost) Unit Cost

Cost of Goods Sold

(a)

180

$30.00

$ 5,400.00

145 @ $30.00 = $ 4,350.00

$29.00

$25.00

$30.00

$ 1,050.00

350

$29.10

$10,185.00

575

$27.50

$15,810.00

35 35

$27.431

= $ 9,135.00

= $ 5,625.00

540 @ $27.50 = $14,850.00

Total 720 $20,160.00 685 $19,200.00 Cost of goods available for sale = Cost of goods sold +

Inventory Balance Calculations

$ 960.00 $ 960.00 Ending inventory

180 $ 5,400.00 -145 @ $30.00 = - 4,350.00 35 $ 1,050.00 35 $ 1,050.00 315 @ $29.00 = 9,135.00 350 $10,185.00 350 $10,185.00 225 @ $25.00 = 5,625.00 575 $15,810.00 575 $15,810.00 –540 @ $27.50 = -14,850.00 35 $ 960.00

1 Changed due to rounding; $960.00/35 units = $27.4286 which is rounded to $27.43.

6-714

Last revised: September 2021.

Problem 6-4B (concluded) 2)

Sales (685 × $40) ..................... Less: Cost of goods sold .......... Gross profit ..............................

FIFO $27,400 19,285 $ 8,115

Moving Weighted Average $27,400 19,200 $ 8,200

Analysis component: Gross profits calculated in Part 2 would increase under FIFO and decrease under Moving Weighted Average if Manson Company had been experiencing increasing prices in the purchase of additional inventory.

*Problem 6-5B (25 minutes) a)

FIFO basis: Total cost of the 720 units for sale ................... Less: Ending inventory on a FIFO basis: 35 units @ $25 ................................................ Cost of units sold ...............................................

$20,160 875 $19,285

Moving weighted average cost basis: Total cost of the 720 units for sale ................... Less: Ending inventory at weighted average cost: ($20,160/720 = $28) × 35 ................................. Cost of units sold ...............................................

$20,160 980 $19,180

6-715

Last revised: September 2021.

Problem 6-6B (50 minutes)

a) FIFO Purchases Date

Units

Unit Cost

Total Cost

Nov. 1

150 @

$49

$7,350

Nov. 4

Nov. 6

Nov. 16

200 @

350 @

$47

$45

150 @

$40

$49

Cost of Goods Sold

Cost Total Cost

150 @

$49

$7,350

50 @

$49

$2,450

50 @

$49

$2,450

200 @

$47

$9,400

50 @

$49

$2,450

200 @

$47

$9,400

350 @

$45

$15,750

325 @

$45

$14,625

325 @

$45

$14,625

150 @

$6,000

$11,250 75 @

$45

$3,375

150 @

$6,000

125 @

$40

$5,000

$4,900

50 @

$49

$2,450

200 @

$47

$9,400

25 @

$45

$1,125

$6,000

Nov. 30

$38,500

Cost of goods available for sale =

$45

75 @

$45

$3,375

25 @

$40

$1,000

725

Inventory Balance Units

$15,750

250 @

850

Unit Cost

$9,400

Nov. 28

Total

Units

100 @

Nov. 20

Nov. 24

Sales (at cost)

$33,500 125

Cost of goods sold +

$5,000

Ending inventory

6-716

Last revised: September 2021.

Problem 6-6B (continued) 2. b) Moving weighted average Purchases Date

Units

Unit Total Cost Cost

Nov. 1

150 @

$49

Sales (at cost) Units

Unit Cost

Cost of Goods Sold

$7,350

Nov. 4

100 @

$49

$4,900

Inventory Balance Units

Cost

Total Cost

150 @

$49.00

$7,350

50 @

$49.00

$2,450

Nov. 6

200 @

$47

$9,400

250 @

$47.40

$11,850

Nov. 16

350 @

$45

$15,750

600 @

$46.00

$27,600

325 @

$46.00

$14,950

475 @

$44.11

$20,950

Nov. 20

Nov. 24

275 @

150 @

$40

$46

$12,650

$6,000

Nov. 28

250 @

$44.11

$11,028

225 @

$44.10

$9,922

Nov. 30

100 @

$44.10

$4,410

125 @

$44.10

$5,512

$32,989

125

Total

850

$38,500 725

Cost of goods Cost of goods sold + available for sale = Problem 6-6B (concluded)

$5,512 Ending inventory

Sales

FIFO

Moving weighted average

$76,000*

6-717

Last revised: September 2021.

Cost of goods sold

33,500

32,989

Gross Profit

$42,500

$43,011

*Sales Calculation 100 x $100 =

$10,000

275 x $100 =

$27,500

250 x $110 =

$27,500

100 x $110 =

$11,000 $76,000

a) Moving weighted average produces the higher gross profit b) Moving weighted average produces the higher ending inventory balance.

4. FIFO

Weighted moving average

Sales

$76,000

Cost of goods sold

33,500

32,989

Gross Profit

$42,500

$43,011

56%

57%

Gross Profit percentage

6-718

Last revised: September 2021.

Problem 6-7B (40 minutes) (a) FIFO - perpetual Date

Jan.

Purchases

Sales (at cost)

Unit Total Units Cost Cost 1 Beginning inventory 290 @ $82.00 = $23,780

Mar. 10 20

205 @ $86.00 =

Cost of Goods Sold

290 @ $82.00 = 290 @ $82.00 = 205 @ 86.00 = 290 @ $82.00 = 80 @ 86.00 =

281 @ $80.00 =

$22,480

July 5 Sep. 15

255 @ $66.00 =

$16,830

1,031 $80,720 Cost of goods available for sale

Unit Cost

Units

$17,630

Apr. 30

Total

Units

Unit Cost

Inventory Balance

$23,780 6,880

125 @ $86.00 = $ 10,750 281 @ 80.00 = 22,480 104 @ 66.00 = 6,864 880 $70,754 = Cost of goods sold

Total Cost $23,780 $23,780 17,630

125 @ $86.00 = $ 10,750 125 @ $86.00 = $ 10,750 281 @ 80.00 = 22,480 125 @ $86.00 = $ 10,750 281 @ 80.00 = 22,480 255 @ 66.00 = 16,830

151 @ $66.00 = $ 9,966 151 $ 9,966 Ending inventory

6-719

Last revised: September 2021.

Problem 6-7B (continued) (b) Moving weighted-average - perpetual Inventory Balance Date

Purchases

Sales (at cost)

Jan.

Unit Units Cost Beginning inventory 1 290 @ $82.00 =

$23,780.00

Mar.

10 205 @ $86.00 =

$17,630.00

Mar.

Apr.

Total Cost

5 255 @ $66.00 =

(b)

Total Average Units Cost/Unit

Total Cost

290

370

30 281 @ $80.00 =

July

Units

Cost of Goods Sold

Unit Cost

(b)  (a)

(a)

@ $83.66

$82.00

$23,780.00

495

$83.66

$41,410.00

125

$83.651

$ 10,455.80

406

$81.122

$32,935.80

661

$75.293

$49,765.80

151 151

$75.284

$11,367.90 $11,367.90

$30,954.20

$22,480.00

$16,830.00

510 @

$75.29 =

Inventory Balance Calculations

$38,397.90

290 @ $82.00 = $23,780.00 205 @ 86.00 = 17,630.00 495 $41,410.00 495 $41,410.00 370 83.66 30,954.20 125 $ 10,455.80 125 $ 10,455.80 281 @ $80.00 = 22,480.00 406 $32,935.80 406 $32,935.80 255 @ $66.00 = 16,830.00 661 $49,765.80 661 $49,765.80 510 38,397.90

Sept. Total

1,031

$80,720.00

880

Cost of goods available for sale

$69,352.10 =

Cost of goods sold

151

$11,367.90

Ending inventory

*Changed due to rounding;

1 $10,455.80/125 units = $83.6464 which is rounded to $83.65. 2 $32,935.80/406 units = $81.1227 which is rounded to $81.12. 3 $49,765.80/661 units = $75.2887 which is rounded to $75.29. 4 $11,367.90/151 units = $75.2841 which is rounded to $75.28.

6-720

Last revised: September 2021.

Problem 6-7B (concluded) 2)

Sales (890 x $163) ........... Cost of goods sold ......... Gross profit.....................

FIFO $142,560 70,754 $ 71,806

Moving Weighted Average $142,560.00 69,352.10 $ 73,207.90

Analysis Component If Singh Bamboo had been experiencing increasing prices in the acquisition of additional inventory, gross profit would have been highest using a FIFO inventory costing method and lowest under a Moving Weighted Average inventory costing method. Problem 6-8B (40 minutes) THE BLIZZARD COMPANY Income Statement Comparing FIFO and Moving Weighted Average Inventory Costing Methods For Year Ended December 31, 2023

Sales ($51 x 3,050 units) .............................. Cost of goods sold ......................................... Gross profit .................................................... Operating expenses ($7 x 3,050 units) ........... Profit...............................................................

FIFO $155,550 83,070 $ 72,480 21,350 $ 51,130

Moving Weighted Average $155,550.00 83,056.50 $ 72,493.50 21,350.00 $ 51,143.50

NOTE: The COGS calculations for each of FIFO and Moving Weighted Average are on the following pages.

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Last revised: September 2021.

Problem 6-8B (continued) (a) FIFO - perpetual Date

Purchases

Unit Units Cost Jan. 1 Beginning inventory 610 @ $29.00 = Apr. 2

810 @ $28.00 =

Sales (at cost)

Total Cost

$22,680 610 @ $29.00 = 740 @ 28.00 =

320 @ $27.00 =

$ 8,640

Aug. 29 1,340 @ $26.00 = Oct. 25

$34,840

Total

Unit Cost

Cost of Goods Sold

$17,690

May 20 Jun. 14

Units

Inventory Balance

3,080 $83,850 Cost of goods available for sale =

70 @ $28.00 = 320 @ 27.00 = 1,310 @ 26.00 = 3,050 Cost of goods sold

$17,690 20,720

$ 1,960 8,640 34,060 $83,070 +

Units

Unit Cost

Total Cost

610 @ $29.00 = 610 @ $29.00 = 810 @ 28.00 = 70 @ $28.00 =

$17,690 $17,690 22,680 $ 1,960

70 @ $28.00 = 320 @ 27.00 = 70 @ $28.00 = 320 @ 27.00 = 1,340 @ 26.00 = 30 @ $26.00 =

$ 1,960 8,640 $ 1,960 8,640 34,840 $ 780

$ Ending inventory

6-722

780

Last revised: September 2021.

Problem 6-8B (concluded) (b) Moving weighted-average - perpetual Inventory Balance Date

Purchases

Unit Total Units Cost Cost Beginning inventory Jan. 1 610 @ $29.00 = $17,690.00 Apr. 2

810

Sales (at cost)

Units

Unit Cost

Cost of Goods Sold

(a)

(b)  (a)

(b)

Total Units

Average Cost/ Unit

Total Cost

610

$29.00 $17,690.00

@ $28.00 = $22,680.00 1,420

May 20

1,350 @ $28.43 =

$28.43 $40,370.00

$38,380.50 1

70 $28.42 Jun. 14

Aug. 29

320

Total

$ 1,989.50

@ $27.00 = $ 8,640.00 390

$27.26 $10,629.50

1,730

$26.28 $45,469.50

1,340 @ $26.00 = $34,840.00

Oct. 25 3,080 $83,850.00 Cost of goods available for

1,700 @ $26.28 =

$44,676.00

3,050 Cost of goods sold

$83,056.50 +

Inventory Balance Calculations

30 $26.45 $ 793.50 30 $ 793.50 Ending inventory

610 $17,690.00 810 @ $28.00 = 22,680.00 1,420 $40,370.00 1,420 $40,370.00 –1,350 @ $28.43 = –38,380.50 70 $ 1,989.50 70 $ 1,989.50 320 @ $27.00 = 8,640.00 390 $10,629.50 390 $10,629.50 1,340 @ $26.00 = 34,840.00 1,730 $45,469.50 1,730 $45,469.50 –1,700 @ $26.28 = -44,676.00 30 $ 793.50

sale = Analysis component: If The Blizzard Company manager earns a bonus based on a percentage of gross profit, she will prefer the Moving Weighted Average inventory costing method since it has produced the highest gross profit. Moving Weighted Average will always produce a higher gross profit than FIFO when the unit costs of merchandise inventory are decreasing.

1 Changed due to rounding; $1,985.50/70 units = $28.4214 which is rounded to $28.42.

6-723

Last revised: September 2021.

*Problem 6-9B THE BLIZZARD COMPANY Income Statement Comparing FIFO and WeightedAverage Inventory Costing Methods For Year Ended December 31, 2023

Sales (3,050 x $51/unit) ............................... COGS ........................................................... Gross Profit ................................................. Operating Expenses (3,050 x $7/unit) ........ Profit ............................................................

Weighted Average $155,550.00 83,033.40 $ 72,516.60 21,350.00 $ 51,166.60

FIFO $155,550.00 83,070.00 $ 72,480.00 21,350.00 $ 51,130.00

Supporting calculations: Cost of units available for sale: 610 units in beginning inventory 810 units purchased April 2 320 units purchased June 14 1,340 units purchased August 29 3,080 a)

b )

@ @ @ @

FIFO periodic Total cost of the 3,080 units for sale ............................ Less: Ending inventory on a FIFO basis: 30 units @ $26 = ............................................. Cost of units sold .........................................................

$29 $28 $27 $26

= = = =

$17,690.00 22,680.00 8,640.00 34,840.00 $83,850.00

$83,850.00 780.00 $83,070.00

Weighted average cost basis: Total cost of the 3,080 units for sale ........................... Less: Ending inventory at weighted average cost: ($83,850/3,080) = $27.22 × 30 units = ..................... Cost of units sold .........................................................

$83,850.00 816.60* $83,033.40*

*These amounts may vary if the unit cost/unit was not rounded to two decimal places.

6-724

Last revised: September 2021.

Problem 6-10B (25 minutes) Cost of goods sold Reported .............................................................. Adjustments: Dec. 31, 2023 error ...................... Dec. 31, 2024 error ...................... Corrected .............................................................

2023 $102,600 + 8,100

Profit: Reported .............................................................. Adjustments: Dec. 31, 2023 error ..................... Dec. 31, 2024 error ...................... Corrected .............................................................

2023 $ 87,400 – 8,100

Total current assets: Reported .............................................................. Adjustments: Dec. 31, 2023 error ...................... Dec. 31, 2024 error ...................... Corrected .............................................................

2023 $133,000 – 8,100

Equity: 2023 Reported .............................................................. Adjustments: Dec. 31, 2023 error ...................... Dec. 31, 2024 error ...................... Corrected .............................................................

2024 $152,000 – 8,100

$110,700

$ 79,300

$124,900

$143,900

2024 $106,400 – 8,100 – 10,800 $ 87,500

2025 $ 98,015 + 10,800 $108,815

2024 $105,635 + 8,100 + 10,800 $124,535

2025 $ 91,955

2024 $138,250

2025 $131,475

+ 10,800 $149,050

$131,475

2025 $158,000

$168,000

+ 10,800 $168,800

$168,000

– 10,800 $ 81,155

Analysis Component These errors are ―self-correcting‖ in the year following the error. Each overstatement (or understatement) of profit is offset by a matching understatement (or overstatement) in the following year. Thus, aggregate profit for the three-year period is not affected by the errors.

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Last revised: September 2021.

Problem 6-11B (30 minutes) 1)

Sales .................... Cost of goods sold Gross profit .........

Incorrect Income Statement Information For Years Ended December 31 2023 % 2024 % $671,000 100 $835,000 100 402,600 60 417,500 50 $268,400 40 $417,500 50

Corrected Income Statement Information For Years Ended December 31 2023 % 2024 % $671,000 100 $835,000 100 365,100* 54 463,500** 56 $305,900 46 $371,500 44

* $402,600 – $37,500 = $365,100 ** $417,500 + $37,500 – $16,000 + $24,500 = $463,500 2)

The gross profit information now reflects the increased cost of goods sold of which the owner was aware.

*Problem 6-12B (50 minutes) Part 1 Per Unit

Inventory Items Office furniture: Desks Credenzas Chairs Bookshelves Subtotals

Units on Hand

Cost

NRV

Total Cost

Total NRV

NRV applied to: b. a. Separately Major to Each Category Product

430 $261 290 227 585 49 320 93

$305 256 43 82

$112,230 65,830 28,665 29,760 $236,485

$131,150 74,240 25,155 26,240 $256,785 $236,485

Filing cabinets: Two-drawer Four-drawer Lateral Subtotals

215 400 178

70 122 118

$ 17,415 54,000 18,512 $ 89,927

$ 15,050 48,800 21,004 $ 84,854

Office Equip.: Fax machines Copiers Typewriters Subtotals

415 544 355

$ 69,720 172,448 44,375 $286,543

$ 83,000 156,672 41,535 $281,207

$612,955

$622,846 $602,546

Totals

81 135 104

168 317 125

200 288 117

$112,230 65,830 25,155 26,240

15,050 48,800 18,512 84,854 69,720 156,672 41,535 281,207 $579,744

6-726

Last revised: September 2021.

Problem 6-12B (concluded) 2a.

2b.

10,409

33,211

10,409

33,211

6-727

Last revised: September 2021.

Problem 6-13B (50 minutes)

Units

Per Unit Cost Market

Total Cost

Total Market

LCM Applied to Items

Desks ..........................

536

$261

$305

$139,896

$163,480

$139,896

Chairs ..........................

395

227

256

89,665

101,120

89,665

Mats .............................

687

33,663

29,541

Bookshelves................

421

39,153

34,522

Two-drawer .................

114

9,234

7,980

Four-drawer ................

298

135

122

40,230

36,356

Lateral..........................

104

118

7,800

8,850

7,800

Projectors ....................

370

168

200

62,160

74,000

62,160

Copiers ........................

475

317

288

150,575

136,800

Phones ........................

302

125

117

37,750

35,334

$610,126

$627,983

$580,054

Inventory Items Office furniture

Filing cabinets

Office equipment

Total...............................

1. Lower of cost or market for inventory applied separately = $580,054 2. Dec 31 Cost of Goods Sold 30,072 Merchandise Inventory .......................................................... Adjust inventory cost to market. $30,072 = $610,126 - $580,054

30,072

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Last revised: September 2021.

Problem 6-14B (20 minutes)

2022 Gross profit ratio: Sales............................................... Cost of sales ................................... Gross margin ..................................

$2,122,550.00 1,337,175.00 $ 785,375.00

Gross profit ratio .............................

37.0%

Estimated inventory: Goods available for sale: Inventory, December 31, 2022 ........ Net purchases, 2023 ....................... Goods available for sale ................. Less: Estimated cost of goods sold: Sales............................................... Estimated cost of goods sold [$737,650 × (1 – 37%)] ................ Estimated July 5, 2023 inventory lost in the flood ......................................

$131,200.00 414,900.00 $ 546,100.00 $737,650.00 464,719.50 $

81,380.50

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Last revised: September 2021.

Problem 6-15B (25 minutes) BELLE EQUIPMENT CO. Estimated Inventory March 31, 2023 Goods available for sale: Inventory, January 1, 2023 ........................ 376,440.00 Purchases .................................................. Less: Purchase returns ............................ Add: Transportation-in ............................. Net cost of goods purchased ................... 1,079,815.00 Goods available for sale ........................... $1,456,255.00

$ $1,066,050.00 19,185.00 32,950.00

Less: Estimated cost of goods sold: Sales .......................................................... Less: Sales returns ................................... Net sales .................................................... Estimated cost of goods sold [$1,818,025 × (1 – 30%)] ............................ 1,272,617.50 Estimated March 31, 2023 inventory ....................... 183,637.50

$1,855,125.00 37,100.00 $1,818,025.00

Problem 6-16B (25 minutes) Part 1 THE WILKE CO. Estimated Inventory December 31, 2023 At Cost Goods available for sale: Beginning inventory ............................. 57,305.00 Purchases............................................... 383,530.00 Purchase returns .................................. (7,665.00) Goods available for sale .................................

At Retail

Sales Sales returns Net sales $390,820.00

$393,060.00

$ 40,835.00

251,945.00 (5,370.00) $287,410.00

$ 433,170.00

(2,240.00)

6-730

Last revised: September 2021.

Ending inventory at retail ($433,170 – $390,820) 42,350.00 Cost ratio: ($287,410  $433,170) x 100 ................... Ending inventory at cost ($42,350 × 66.35%) .............

66.35% $ 28,099.23

6-731

Last revised: September 2021.

Problem 6-16B (25 minutes)

Part 2 Estimated physical inventory at cost: $39,275 × 66.35% = $26,058.96 THE WILKE CO. Inventory Shortage December 31, 2023 At Cost Estimated inventory, December 31, 2023 ........... $42,350.00 Physical inventory ($39,275 × 66.35%) ................ 39,275.00 Inventory shortage ............................................... 3,075.00

At Retail $28,099.23 26,058.96 $ 2,040.27

Problem 6-17B (20 minutes) Goods available for sale: Beginning inventory .................................................... Purchases..................................................................... Less: Purchase returns and allowances ................... Add: Transportation-in ............................................... Goods available for sale ............................................. .

At Cost

At Retail

$ 125,000 1,750,000 200,000 $1,675,000

75,000 1,050,000 125,000 5,000 $1,005,000

Deduct net sales at retail ($1,357,500 – $17,500) ............ Ending inventory at retail ................................................. Cost to retail ratio ($1,005,000  $1,675,000) x 100 ...... Estimated ending inventory at cost ($335,000 × 60%):

1,340,000 $ 335,000 ×

60%

$ 201,000

Inventory loss = $201,000 × 20%* = $40,200 *Because the insurance company covers 80% of the loss, Poundmaker Company’s estimated loss is 20% (100% – 80%).

6-732

Last revised: September 2021.

Problem 6-18B (10 minutes)

Inventory turnover ratio

Days‘ sales in inventory

2020

2019

842,700,000 = 5.87

796,600,000 = 5.39

(102,000,000 + 185,300,000)/2

(185,300,000 + 110,100,000)/2

(102,000,000 /842,700,000) x 365

(185,300,000 /796,600,000) x 365

= 44 days

= 85 days

Spin Master‘s inventory turnover ratio has increased meaning that inventory is selling faster in 2020 compared to 2019. The days sales in inventory shows that the company is holding inventory for fewer days in 2020 compared to 2019. The change in the inventory turnover ratio and days‘ sales in inventory is favourable. Problem 6-19B (25 minutes) Part 1 Cost of units available for sale: 6,300 units in beginning inventory @ $68 ........ 10,500 units purchased @ $65 ............................ 13,000 units purchased @ $62 ............................ 12,000 units purchased @ $59 ............................ 15,500 units purchased @ $56 ............................ 57,300 units for sale .............................................

428,400 682,500 806,000 708,000 868,000 $3,492,900

Part 2 a)

FIFO basis: Total cost of the 57,300 units for sale ................. Less: Ending inventory on a FIFO basis: 15,500 units @ $56 ........................................... 1,000 units @ $59 ............................................. Cost of units sold ................................................. Weighted average cost basis: Total cost of the 57,300 units for sale ......................... Less: Ending inventory at weighted average cost: ($3,492,900/57,300) = $60.96 × 16,500 units ............. Cost of units sold .........................................................

$3,492,900 $868,000 59,000

927,000 $2,565,900 $3,492,900 1,005,840* $2,487,060*

*These amounts may vary if the unit cost/unit was not rounded to two decimal places.

6-733

Last revised: September 2021.

ANALYTICAL AND REVIEW PROBLEMS A&R Problem 6-1 Net Purchases Balance per company‘s books (a) (b) (c) (d) (e) Correct Balances

Net Income $325,000 0 0 + 3,900 – 2,700 0 $326,200

Accounts Payable Inventory $25,000 $31,000 + 4,500 0 – 4,100 0 0* + 3,900 + 2,700 – 2,700 – 1,800** 0 $26,300 $32,200

$18,400 + 4,500 – 4,100 + 3,900 0 + 2,400 $25,100

*This has no effect on profit because both net purchases and ending merchandise inventory are increased by $3,900; the net effect on profit is zero. **The sale price of the goods was $4,200 and the cost of goods sold was $2,400 resulting in a gross profit of $1,800 that caused profit to be overstated by the same amount. Therefore, to correct the error, $1,800 must be subtracted from profit.

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Last revised: September 2021.

Ethics Challenge 1. In an environment of rising prices the use of FIFO results in a lower cost of goods sold than Moving Weighted Average. If cost of goods sold is lower, profit will be higher. A higher profit will improve the profit margin ratio which is calculated as profit/net sales. With rising prices FIFO also results in the most recent, higher prices becoming part of ending inventory. This means that the balance sheet inventory figure will be larger than under Moving Weighted Average. In the numerator of the current ratio, inventory is included as part of the current asset total. A larger inventory, therefore, results in a bigger numerator and therefore a larger current ratio than under Moving Weighted Average. 2. It is true that managers have discretion in choosing an inventory costing method. It appears, however, that Diversion‘s owner does not understand that changing methods can only be done very selectively over time. Furthermore a change in method must be justified by management as ―improving the financial reporting for the company.‖ The consistency principle does not allow frequent changes in inventory costing methods by management. If Diversion‘s owner can justify the method change as improving the financial reporting for the company her action is not unethical. However, she must realize that changing methods can only be an infrequent occurrence given that consistency in financial reporting is required. Also, the full disclosure principle requires that the owner disclose to the bank that she has implemented a change in inventory costing method from Moving Weighted Average to FIFO.

Focus on Financial Statements FFS 6-1

1. FIFO Merchandise inventory, December 31, 2022 Purchases Merchandise inventory, December 31, 2023 Cost of goods sold

12,000 159,000 19,000 152,000

Moving Weighted Average 12,000 159,000 23,000 148,000

2. (a) FIFO

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Last revised: September 2021

Fardan Stereo Sales Income Statement For Year Ended December 31, 2023 Revenues Net sales (449,000 – 6,000) ................................................................ Expenses: Cost of goods sold ............................................................................ $152,000 Operating expenses (5,000 + 92,000 + 109,000 + 8,000) .................. 214,000 Interest expense................................................................................. 2,000 Total expenses ................................................................................. Profit ......................................................................................................

$443,000

368,000 $ 75,000

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Last revised: September 2021

FFS 6-1 (continued) 2. (a) FIFO Fardan Stereo Sales Balance Sheet December 31, 2023 Assets Current assets: .......................................................... Cash ....................................................................... Accounts receivable ............................................. Merchandise inventory ......................................... Prepaid rent ........................................................... Total current assets .............................................. Property, plant and equipment: Store fixtures......................................................... Less: Accumulated depreciation ................... Intangible assets: Trademark ............................................................ Total assets ..................................................................... Liabilities Current liabilities: Accounts payable ................................................. Unearned sales revenue ....................................... Total current liabilities.......................................... Long-term liabilities: Notes payable, due in 2026 ...................................... Total liabilities ..............................................................

$ 16,000 27,000 19,000 36,000 $ 98,000 $117,000 82,000

$ 35,000 3,000 $136,000

$18,000 4,000 $ 22,000 22,000 $ 44,000

Equity Mikel Fardan, capital* ................................................. Total liabilities and equity .............................................. *61,000 + 75,000 – 44,000

92,000 $136,000

2. (b) Moving weighted average Fardan Stereo Sales Income Statement For Year Ended December 31, 2023 Revenues Net sales ....................................................................... Expenses: Cost of goods sold ...................................................... Operating expenses ..................................................... Interest expense........................................................... Total expenses ........................................................... Profit ................................................................................

$443,000 $148,000 214,000 2,000 364,000 $ 79,000

FFS 6-1 (concluded)

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Last revised: September 2021

2. (b) Moving weighted average Fardan Stereo Sales Balance Sheet December 31, 2023 Assets Current assets: ........................................................... Cash ....................................................................... Accounts receivable ............................................. Merchandise inventory ......................................... Prepaid rent ........................................................... Total current assets .............................................. Property, plant and equipment: Store fixtures ......................................................... Less: Accumulated depreciation ................... Intangible assets: Trademark............................................................. Total assets ..................................................................... Liabilities Current liabilities: Accounts payable.................................................. Unearned sales revenue ....................................... Total current liabilities .......................................... Long-term liabilities: Notes payable, due in 2026 ...................................... Total liabilities .............................................................. Equity Mikel Fardan, capital* ................................................. Total liabilities and equity .............................................. *61,000 + 79,000 – 44,000

$ 16,000 27,000 23,000 36,000 $102,000 $117,000 82,000

35,000 3,000 $140,000

$18,000 4,000 $ 22,000 22,000 $ 44,000

96,000 $140,000

Analysis component: 3. The schedule reflects falling costs because when unit costs are decreasing, FIFO will produce the higher cost of goods sold and Moving Weighted Average the lower. 4. a. To maximize profit, Moving Weighted Average should be used. b. To maximize assets, Moving Weighted Average should be used.

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Last revised: September 2021

FFS 6-2 a. According to note 11, inventory for Spin Master represents raw materials and finished goods b. Inventory for Recipe, according to note 12, represents food and packaging materials and other. c. Spin Master‘s inventory is for sale, while Recipe does not sell their inventory, but uses it themselves. d. In Note 2 (O), Cost is determined on a standard cost basis, and includes the purchase price and other costs, such as import duties, taxes and transportation costs. Trade discounts and rebates are deducted from the purchase price. e. The balance in inventory for Spin Master decreased by $83,300,000 from 2019 to 2020 (calculated as $102,000,000 at 2020 – $185,300,000 at 2019 = $83,300,000).

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Last revised: September 2021

Critical Thinking Mini Case CT 6-1 Note to instructor: Student responses will vary therefore the answer here is only suggested and not inclusive of all possibilities; it is presented in point form for brevity. Problem(s): — Benton Beverages‘ cost of goods sold is decreasing yet industry information shows that this should not be the case Goal(s)*: — To investigate cost of goods sold and its components to ensure that it is being accurately reported Assumption(s)/Principle(s): — It appears that inventory levels were inflated given how the pallets of beverages were stacked Facts: — as presented — the year-end adjusting entry is adding progressively larger amounts to merchandise inventory (and correspondingly crediting/decreasing cost of goods sold expense) which is not typical (normally this adjustment records the opposite) — the year-end adjustment increased from 5.7% of cost of goods sold in 2020 to 13.7% in 2023 (calculated as: 20,000/352,000 × 100 = 5.7%; 63,000/459,000 × 100 = 13.7%). Conclusion(s)/Consequence(s): — without additional information this cannot be confirmed but it appears that inventory was subject to fraudulent activities — given that the CEO instructed staff to stack pallets in a suspicious manner implicates her in the potential fraud — a thorough investigation is required to determine exactly why the adjusting entry to merchandise inventory is so high and increasing *The goal is highly dependent on ―perspective.‖

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Last revised: September 2021

SOLUTIONS MANUAL to accompany

Fundamental Accounting Principles th

17 Canadian Edition by Larson/Dieckmann/Harris

Revised for the 17th Edition by: John Harris, Seneca College

Technical checks by: Rhonda Heninger, SAIT

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Last revised: September 2021

Chapter 7

Internal Control and Cash

Chapter Opening Critical Thinking Challenge Questions* If a customer uses a debit card, the payment for the purchase is electronically transferred from the customer‘s bank account to the vendor‘s bank account immediately at the point of sale. Although there is a fee for this service, there is a benefit for retailers who accept payment by debit card because it means they are exposed to fewer of the risks associated with accepting cash such as counterfeit and theft. From the buyer‘s perspective, the journal entry would not change. Assuming a $10 item were purchased, the buyer would make the following journal entry whether the payment is made using cash or a debit card: Expense ....................................................................... Cash ................................................................... To record purchase of services.

10.00 10.00

If cash were used to pay for the services, the seller would make the following journal entry: Cash ............................................................................. Service revenue................................................. To record a cash sale.

10.00 10.00

However, if a debit card were used to pay for the services, the seller‘s journal entry would change to reflect the bank fees associated with the debit card transaction. Assuming the bank charges $0.40 per debit card transaction, the seller would make the following journal entry: Cash ............................................................................. Debit card expense ..................................................... Service revenue................................................. To record a sale using a debit card.

9.60 .40 10.00

*The Chapter 7 Critical Thinking Challenge questions are asked at the beginning of this chapter. Students are reminded at the conclusion of the chapter to refer to the Critical Thinking Challenge questions at the beginning of the chapter. The solutions to the Critical Thinking Challenge questions are available here in the Solutions Manual and accessible to students in the print and ebooks.

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Last revised: September 2021

Knowledge Check-Up Questions 1. b)

2. d) 3. c)

4. a)

5. b)

6. c)

7. d)

8. a)

9. c)

10. a)

Concept Review Questions 1. Cash, accounts receivable, merchandise inventory and building. 2. Internal controls are important to a business to protect assets, ensure reliable accounting, promote efficient operations and encourage adherence to company policies. The fundamental principles of internal control are (1) ensure transactions and activities are authorized, (2) maintain records, (3) insure assets and bond key employees, (4) separate recordkeeping and custody of assets, (5) establish separation of duties, (6) apply technological controls, and (7) perform internal and external audits. 3. While Eddie may be trying to be helpful, his proposed plan increases the risk of theft due to the lack of separation of duties. It is possible for Eddie to pocket some of the cash that he is counting and update the accounting records to cover up the theft. This situation illustrates why it is important to separate the person who has custody of assets with the person who is recordkeeping. 4. Internal control procedures become critical when the manager of a business can no longer control the business through personal supervision and direct participation in its affairs. 5. Weakness #1 Lack of separation of duties: There is a lack of separation of duties as the bartender has custody of the inventory and performs recordkeeping. Implication : There is risk that the bartender could steal alcohol and update the accounting records to cover up this theft. Recommendation: The responsibility of counting alcohol and recordkeeping should be performed by separate people. Weakness #2 Lack of review: There is a lack of review over the bartender‘s inventory count and no investigation of the differences between the inventory records and the inventory count. Implication : There could be errors either in the inventory records or the inventory count, leading to errors in the financial statements.

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Recommendation: A manager should review the bartender‘s inventory count and investigate the reason for differences between the inventory records and the physical inventory count. Any changes to the recordkeeping should be performed by an authorized individual. 6.The three components of the fraud triangle are motivation, opportunity and rationale. A student may be motivated to cheat on an exam in order to pass an exam or a course. If the student is at high risk of not passing, they may be more motivated to cheat. The student may have an opportunity to copy off a neighbor or to use notes when the professor is not watching. For rationalization, the student may justify that they have put a lot of effort into the course and deserve to pass. The student may also rationalize that they have no choice as they had a bad professor, textbook or blame some other external factor. 7. If department managers were permitted to deal directly with the suppliers, the amount of merchandise purchased and the resulting liabilities would not be well controlled. Having department managers place orders through a purchasing department helps control the amounts purchased and the resulting liabilities. 8. A petty cash receipt is a document stating that a payment has been made from petty cash. The person who receives payment signs the receipt. 9. $320,600,000 for 2020 and $115,300,000 for 2019. 10. ( $40,539,000  $2,109,071,000) × 100 = 1.92 %.

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QUICK STUDY Quick Study 7-1 a. The main objective of internal control is to safeguard the assets of the business. This objective is best accomplished by designing an operational system with managerial policies that protect the assets from waste, fraud, and theft. The system should be designed in compliance with the seven broad principles of internal control so that it can adher to the company policies. b. The separation of recordkeeping from the custody over assets is intended to reduce fraud. If this fundamental principle is followed, there has to be collusion between two or more employees for assets to be stolen and the theft to be concealed in the records. c. Your supervisor‘s lack of concern is suspicious. The supervisor had control over both the custody and recording of bus passes; this lack of separation of duties represents poor internal controls. You have identified 1,251 (9,820 – 9,750 = 71; 11,750 – 11,012 = 739; 22,440 – 22,000 = 441) missing bus passes at $50 each for a total value of $62,550. You have an obligation to report this irregularity to both your work experience advisor at the college and your supervisor‘s superior since your supervisor is not willing to deal appropriately with the issue. Quick Study 7-2 White Eagle Company Partial Balance Sheet March 31, 2023 Assets Current Assets Cash ................................................................. Accounts receivable ....................................... Prepaid rent ..................................................... Total current assets ........................................

$15,600 4,500 3,200 $23,300

NOTE: The Petty cash account is combined with the Cash account since Petty cash is a form of cash.

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Quick Study 7-3 Weakness #1

There is a lack of separation of duties because the treasurer was responsible for the cheques, had authority over the bank accounts and prepared the bank reconciliations.

Implication

As a result, the bookkeeper was able to pocket cash for over twoyears and conceal the theft.

Recommendation

The organization may be small and the separation of duties may be difficult. However, I recommend that wherever possible, tasks should be segregated between having custody of the assets, authorization and recordkeeping. This control will limit the ability for one person to commit fraud and conceal it.

Weakness #2

There is a lack of timely review over the treasurer‘s work.

Implication

Theft of the not-for-profit organization‘s cash was undetected as the treasurer‘s work was not reviewed.

Recommendation

I recommend that periodic reviews be performed by an independent and authorized individual to ensure procedures are being followed. This control will help identify fraud or errors on a timely basis.

Weakness #3

There are lack of controls over the access of the bank account.

Implication

Unauthorized withdrawals have been made from the bank account.

Recommendation

I recommend that restrictions be placed on the bank account such that withdrawals can be made only via cheque requiring two signatures to ensure cheques are being written for authorized expenditures only. Also, members could deposit their collections directly (no withdrawal privileges) and report the details to the recordkeeper.

Weakness #4 The raffle tickets are not sequentially numbered. Implication

It is more difficult to track and reconcile the sale of raffle tickets with the total cash collected.

Recommendation

I recommend that the raffle tickets be prenumbered and a check is performed to ensure that all the raffle tickets are complete by ensuring that no numbers in the sequence are missing. The raffle tickets can then be reconciled back to the cash collected.

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Quick Study 7-4 1. True Separation of recordkeeping for assets from the custody over assets helps reduce fraud. 2. False The primary objective of internal control procedures is to safeguard the business against theft from government agencies. 3. True Internal control procedures should be designed to protect assets from waste and theft. 4. False Separating the responsibility for a transaction between two or more individuals or departments will not help prevent someone from creating a fictitious invoice and paying the money to themselves. Quick Study 7-5 1. Pressure 2. Opportunity 3. Rationalization 4. Opportunity 5. Rationalization

Quick Study 7-6 1. a (cash) The ____ category includes currency, coins, and deposits in bank accounts. 2. d (liquidity) The term ____ refers to a company‘s ability to pay for its current liabilities. 3. b (cash equivalents) The ____ category includes shortterm, highly liquid investment assets that are readily convertible to a known cash amount and sufficiently close to their due dates so that their market value will not greatly change. Quick Study 7-7 1. Weakness 2. Strength 3. Weakness

Quick Study 7-8 1. False, 2. True, 3. True, 4. False

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Quick Study 7-9 (a)

(b)

Cash ..................................................................430 Cash Over and Short .............................................. Sales....................................................................... Record cash sales and a cash overage. Cash ..................................................................972 Cash Over and Short ............................................ 8 Sales.......................................................................

10 420

980

Record cash sales and a cash shortage. Quick Study 7-10 1. May 1 Petty Cash ................................................................... Cash ................................................................... To record establishment of fund.

75.00 75.00

2. Wee Ones Agency Petty Cash Payments Report May 1 – 31, 2023: Receipts: Entertainment expense Film rentals ............................................................. $19.00 Refreshments for meeting .....................................23.00 $42.00 Postage expense .................................................... 7.00 Printing expense .................................................... 13.00 Total receipts ............................................................................................... Fund total ......................................................................... $75.00 Less: Cash remaining ..................................................... 13.00 Equals: Cash required to replenish petty cash .......... Cash over/(short) ........................................................... May

31 Entertainment Expense .............................................. Postage Expense ........................................................ Printing Expense ......................................................... Cash ................................................................... To reimburse the fund.

$62.00

62.00 $ -042.00 7.00 13.00 62.00

The Petty Cash account is credited when the size of the fund is being reduced or the fund is being eliminated.

Quick Study 7-11 Mar.

17 Printing Expense ......................................................... Taxi Expense ............................................................... Delivery Expense ........................................................

75.00 48.00 55.00

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Cash Over and Short .................................................. Cash ................................................................... To reimburse the fund.

3.00 181.00

Quick Study 7-12 Sept.

23 Entertainment Expense .............................................. Computer Repair Expense ......................................... Delivery Expense ........................................................ Cash Over and Short ........................................ Cash ................................................................... To reimburse the fund.

32.00 45.00 18.00 2.00 93.00

Quick Study 7-13 Coins ....................................................................

$ 100

Cash in safe .........................................................

1,000

Checking accounts ...............................................

4,000

Cash and cash equivalents

$5,100

Quick Study 7-14 Feb.

Cash ............................................................................. Credit Card Expense................................................... Sales .................................................................... To record sale of merchandise less credit card expense; 75,000 x 2.5% = 1,875.

73,125 1,875

Cost of Goods Sold .................................................... Merchandise Inventory ....................................... To record cost of sales.

62,000

Cash ............................................................................. Sales .................................................................... To record sale of merchandise to cash customers.

28,000

Cost of Goods Sold .................................................... Merchandise Inventory ....................................... To record cost of sales.

23,000

75,000

62,000

28,000

23,000

Quick Study 7-15 Oct.

Cash ............................................................................. Debit Card Expense .................................................... Sales ....................................................................

13,965 35

14,000

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Last revised: September 2021

To record sale of merchandise less debit card expense 14,000 x ¼% = 35. 1

Cost of Goods Sold .................................................... Merchandise Inventory ....................................... To record cost of sales.

8,000

3,500

Cost of Goods Sold .................................................... Merchandise Inventory ....................................... To record cost of sales. Quick Study 7-16

2,800

Part 1 a. b. c. d. e. f. g.

Bank; add Book; add Book; add Book; subtract Bank; subtract Book; subtract Book; subtract

8,000

3,500

2,800

Part 2 — JE required JE required JE required — JE required JE required

Quick Study 7-17 (1) Bank or Book Side

(2) Add or Subtract

(3) Adjusting Entry or Not

(1) Book

(2) Add

(3) Adjusting entry required

(1) Book

(2) Subtract

(3) Adjusting entry required

(1) Book

(2) Subtract

(3) Adjusting entry required

(1) Bank

(2) Subtract

(3) No Adjustment required

(1) Book

(2) Add

(3) Adjusting entry required

(1) Book

(2) Subtract

(3) Adjusting entry required

(1) Bank

(2) Add

(3) No Adjustment required

Quick Study 7-18 NOLAN COMPANY Bank Reconciliation

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Last revised: September 2021

June 30 Bank statement balance .............. Add: Deposit of June 30 .....................

$21,332 4,724 26,056

Deduct: Outstanding checks................... Adjusted bank balance.................

3,713 $22,343

Book balance ....................................................................................... $22,352 Add: Recording error on check .............................................................. 9 Interest earned.................................................................................. 23 22,384 Deduct: Bank service charges...................................................................... 41 Adjusted book balance ...................................................................... $22,343

Quick Study 7-19 BOLTON COMPANY Bank Reconciliation October 31, 2023 Bank statement balance .................. Add: Outstanding deposit ..................... Deduct: Outstanding cheques: #150: $ 980 #169: 2,515............................. Adjusted bank balance ....................

Oct. 31

$15,400

Book balance ........................ $13,150

1,200 $16,600 Deduct: Service charge ................... 3,495 $13,105

Adjusted book balance ......... $13,105

Service Charge Expense ...................................... Cash .................................................................. To record bank service charge.

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Quick Study 7-20

Part A ULTIMATE DISC Bank Reconciliation March 31, 2023 Bank statement balance .................. $66,362

Adjusted bank balance .................... $66,362

Book balance ......................... Add: EFT payment Interest income Deduct: Service charge ....................

$64,800

NSF cheque plus service fee Adjusted book balance .........

761 $66,362

2,300 48 25

Part B Mar. 31

Mar. 31

Cash ....................................................................... Accounts Receivable ....................................... To record collection from a customer.

2,300 2,300

Cash ....................................................................... Interest Income................................................. To record interest earned on the average cash balance.

Service Charge Expense....................................... Cash .................................................................. To record bank service charge.

Accounts Receivable ............................................ Cash .................................................................. To charge customer account for his NSF cheque and the bank’s fee.

761

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Quick Study 7-21

ORGANIC FOOD CO. Bank Reconciliation August 31 Bank statement balance........... Add Deposit of Aug. 31 .................. Bank error................................ Deduct Outstanding checks............... Adjusted bank balance .............

$5,160

Book balance ................................................................................. $5,500

1,240 80 6,480 1,120 _____ $5,360

Deduct Bank service charges ................................................................ 20 NSF check ................................................................................... 120 Adjusted book balance ................................................................. $5,360

Quick Study 7-22

Aug. 31 Accounts Receivable ..................................................... Cash .......................................................................... Charge accounts receivable for NSF check.

120

31 Miscellaneous Expenses ............................................... Cash .......................................................................... Record bank service charge.

120

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Quick Study 7-23

LIMA COMPANY Balance Sheet December 31 Assets Current assets Cash and equivalents ................................................. Accounts receivable ................................................... Merchandise inventory ............................................... Prepaid insurance ...................................................... Total current assets.....................................................

$ 4,000 2,000 5,000 1,000 $12,000

*Quick Study 7-24 Company A‘s Quick Ratio 1,200 + 2,700 = 1.16 3,100 + 250

Company B‘s Quick Ratio 1,200 + 2,700 = 0.68 4,750 + 950

Company A would be granted credit because the quick ratio is greater than 1.

Company B would not be granted credit because the quick ratio is less than 1 indicating possible liquidity problems.

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EXERCISES Exercise 7-1 (10 minutes) Lombard Company‘s internal control system failed to require a separation of asset custody and recordkeeping. The bookkeeper should not have been allowed to sign the company‘s cheques. In addition, since a loss was incurred, the company apparently had not bonded its employee. Otherwise, the loss would have been insured by the bonding company. Finally, if regular, independent reviews of the accounting records had been done, the payments of salary cheques to a nonemployee would have been discovered sooner. Exercise 7-2 (15 minutes) There are several weaknesses to be addressed in the city‘s process of collecting coins from the munipally owned parking meters.  First, there is no mechanism in the parking meters to track the input of coins (a meter reading that could be documented and subsequently verified against the collection); this means there is no verifiable means by which to reconcile the contents of each meter. As a result, the employee emptying the contents of the meters could withhold some of the coins since the dollar value cannot be verified. To correct the situation, optimally, the parking meters should be mechanized such that the contents can be reconciled. A new system that accepts credit card can also provide a better audit trail. If a major investment in new parking meters is not feasible, civic employees collecting coins from parking meters should operate in pairs; there is less risk of fraud if two employees are responsible for emptying the parking meters (unless there is collusion).  Second, the canvas bag is not secure; it can be opened at any time by an unauthorized individual. The canvas bag should be redesigned so that coins can go in but cannot be removed unless done so by an authorized individual.  Third, after emptying several parking meters, the contents of each canvas bag can easily exceed a thousand dollars; there is a safety risk to a lone employee carrying a canvas bag of money. Full moneybags should not be stored in an unattended vehicle. Full moneybags should be transferred to a secure location immediately; arrangements should be made with an armored vehicle to rendezvous with the pair of employees regularly at specified points along the route.

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Exercise 7-3 (15 minutes) Weakness or Strength

Internal Control Principle

Weakness

Divide Responsibility for Related Transactions

Weakness

Perform Regular and Independent Reviews

Weakness

Maintain Adequate Records

Strength

Separate Recordkeeping from Custody of Assets

Strength

Establish Responsibilities

Exercise 7-4 (15 minutes) a.

If a cash register is not used, the total sales value of the shirts and sunglasses given to the employee each day should be calculated. Then, the employee should sign a receipt for the merchandise and the amount of cash that he or she has been given. At the end of each day, the employee should be required to return cash plus remaining shirts and sunglasses equal to the amount taken to the stand.

The employee should sign a receipt for the total amount of cash he or she is given each weekend. Then, each time the employee makes a purchase, he or she should obtain a signed sales receipt for the payment. The sales receipt should list the items purchased and the prices paid. When the employee returns to the business office, the total value of the signed sales receipts plus any remaining cash should equal the amount of cash originally given to the employee. Also, the merchandise brought back by the employee should be the same as the items listed on the signed sales receipts.

Exercise 7-5 (15 minutes) The internal control problem is that the bookkeeper has physical control over the cash receipts and also has control over the accounting records. Nothing in the system prevents the bookkeeper from taking cash from the mail and using it personally. The bookkeeper might delay recording the cash receipt from a customer until more cash comes in at a later date from a second customer. Then, the new cash receipt would be deposited and recorded as a payment made by the first customer. No entry would be made in the second customer‘s account until cash was received from a third customer. (This type of fraud is called ―lapping.‖) Also, the bookkeeper may pocket cash and claim that a payment was never received and apparently lost in the mail. If only one person is present when the mail is opened, that person may steal cash and claim it was never received. If possible, two people should be present. Otherwise, the honesty and integrity of the person chosen to open the mail is critical. Most importantly,

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the bookkeeper should not have physical control over cash. Exercise 7-6 (15 minutes) Cash and cash equivalents .................................................. Currency and coins ............................................................ Checking account .............................................................. U.S. Treasury bill ................................................................

$9,000 $1,000 3,000 5,000

Exercise 7-7 (20 minutes) a. 2023 Jan. 1

Petty Cash ................................................................... Cash ..................................................................... To establish the fund.

200.00 200.00

b. Cameron Co. Petty Cash Payments Report January 1 – 8, 2023: Receipts: Postage expense .................................................... $ 51.60 Merchandise inventory........................................... 35.00 Store supplies expense ......................................... 41.55 Jim Cameron, Withdrawals.................................... 25.00 Total receipts ............................................................................................... Fund total ......................................................................... $200.00 Less: Cash remaining ..................................................... 46.85 Equals: Cash required to replenish petty cash .......... Cash over/(short) ........................................................... Jan.

Postage Expense ........................................................ Merchandise Inventory ............................................... Store Supplies Expense* ............................................ Jim Cameron, Withdrawals ........................................ Cash ..................................................................... To reimburse the fund.

$153.15

153.15 $ -0-

51.60 35.00 41.55 25.00 153.15

Analysis Component If the January 8 entry to reimburse the fund was not recorded, profit would be overstated. * Either Store Supplies Expense (an expense) or Store Supplies (an asset) could be debited. However, if supplies are being purchased through Petty Cash it is likely that they are for immediate use which justifies using an expense account over an asset.

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Exercise 7-8 (20 minutes) a. 2023 Sept. 9

Petty Cash ................................................................... Cash ..................................................................... To establish the fund.

400.00 400.00

b. Willard Company Petty Cash Payments Report September 9 – 30, 2023: Receipts: Merchandise inventory ............................................. Office supplies expense ........................................ Repairs expense .................................................... Total receipts ................................................................... Fund total ........................................................................ Less: Cash remaining ..................................................... Equals: Cash required to replenish petty cash .......... Cash over/(short) ...........................................................

Sept. 30

$ 32.45 113.55 87.60 $233.60 $400.00 159.40

Merchandise Inventory ............................................... Office Supplies Expense* ........................................... Repairs Expense ......................................................... Cash Over and Short .................................................. Petty Cash ........................................................... Cash ..................................................................... To reimburse the fund and decrease it by $100.

240.60 ($ 7.00)

32.45 113.55 87.60 7.00 100.00 140.60

Analysis component: There are several things that could be done. The Marketing Manager should review the prior month‘s petty cash journal entries to determine if the shortage is an anomaly or a recurring event. Hopefully it is an anomaly but, regardless, the manager will need to question the Petty Cash Custodian about the $7 cash shortage recorded in September. It is important to recognize that honest errors do occur. It is also possible that the Petty Cash Custodian requires training to help him manage the petty cash fund. If it is determined that the error was based on dishonesty, appropriate action will have to be taken (which normally results in the dismissal of the employee as a minimum). * Either Office Supplies Expense (an expense) or Office Supplies (an asset) could be debited. However, if supplies are being purchased through Petty Cash it is likely that they are for immediate use which justifies using an expense account over an asset. Exercise 7-9 (20 minutes)

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Last revised: September 2021

a. 2023 Oct. 31 Cleaning Expense ......................................................... Postage Expense .......................................................... Delivery Expense .......................................................... Cash Over and Short .................................................... Cash .................................................................... To reimburse the fund. b. Nov. 30 Computer Repair Expense ........................................... Entertainment Expense ................................................ Cash Over and Short ........................................... Cash ..................................................................... To reimburse the fund. c. Dec. 31 Gas Expense ................................................................. Office Supplies Expense* ............................................ Entertainment Expense ................................................ Petty Cash ..................................................................... Cash ..................................................................... To reimburse and increase the fund.

125.00 31.00 55.00 11.00 222.00

93.00 115.00 8.00 200.00

48.00 122.00 56.00 50.00 276.00

* Either Office Supplies Expense (an expense) or Office Supplies (an asset) could be debited. However, if supplies are being purchased through Petty Cash it is likely that they are for immediate use which justifies using an expense account over an asset.

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Exercise 7-10 (30 minutes) Part 1 July

Petty Cash ............................................................. Cash ............................................................... To establish the fund.

250.00 250.00

Part 2 DALLAS REPAIRS Petty Cash Payments Report July 5 – 31, 2023: Receipts: Auto expense July 30 Reimbursement for auto expense ............ 64.80 Postage expense July 28 Purchased stamps ..................................... 23.00 Transportation-in (Merchandise Inventory) July 6 Courier ....................................................... 18.00 Office supplies July 12 Purchased file folders ............................... $12.50 14 Reimbursement for office supplies ........... 34.26 18 Purchased paper......................................... 42.15 88.91 Total receipts ............................................................................................... Fund total ................................................................................ $250.00 Less: Cash remaining ............................................................ 51.04 Equals: Cash required to replenish petty cash ................. Cash over/(short) ..................................................................

$194.71

198.96 $ 4.25

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Exercise 7-10 (continued) Part 3 July

Delivery Expense .................................................. Auto Expense ........................................................ Postage Expense .................................................. Office Supplies Expense* ..................................... Cash Over and Short ............................................ Cash ............................................................... To reimburse fund.

18.00 64.80 23.00 88.91 4.25 198.96

Exercise 7-11 (20 minutes) Oct.

Cash ............................................................................. Debit Card Expense .................................................... Service Revenue ................................................. To record sale of services less debit card expense; 0.5% x 170,000 = 850.

169,150 850

Cash ............................................................................. Service Revenue ................................................. To record sale of services provided for cash.

20,000

Cash ............................................................................. Credit Card Expense................................................... Service Revenue ................................................. To record sale of services less credit card expense; 2% x 98,000 = 1,960.

96,040 1,960

Accounts Receivable – Edson CHC ........................... Service Revenue ................................................. To record sale of services; terms 2/15, n/30.

72,000

Cash ............................................................................. Sales Discounts .......................................................... Accounts Receivable – Edson CHC ................... To record collection of Oct. 10 credit sale; 2% x 72,000 = 1,440.

70,560 1,440

170,000

20,000

98,000

72,000

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Exercise 7-12 (30 minutes) Jan.

42,000

Cost of Goods Sold .................................................... Merchandise Inventory ....................................... To record cost of sales.

28,500

Accounts Receivable .................................................. Sales .................................................................... To record sale of merchandise on terms 2/10, n/30.

15,800

Cost of Goods Sold .................................................... Merchandise Inventory ....................................... To record cost of sales.

10,500

290,080 5,920

Cost of Goods Sold .................................................... Merchandise Inventory ....................................... To record cost of sales.

198,000

71,640 360

Cost of Goods Sold .................................................... Merchandise Inventory ....................................... To record cost of sales.

48,200

42,000

28,500

15,800

10,500

296,000

198,000

72,000

48,200

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Exercise 7-12 (concluded) Analysis component Although the possibility of theft is higher, cash sales would be preferable from the seller‘s perspective, however, often it is not convenient for customers. The inconvenience of cash might prevent customers from making purchases if that was the only means of payment accepted by Tundra Co.. Credit sales allow customers to purchase on impulse. However, two disadvantages: receipt of cash by Tundra Co. is delayed and credit sales require administrative time to monitor the timely collection from credit customers. Debit cards have the advantage of allowing customers to make impulse purchases but only if the cash balance is available in their bank account. Debit cards are also comparable to cash (no subsequent collection required) but the bank does charge a fee for this service although it is normally significantly less than the fee charged by banks for credit card transactions. Bank credit cards have the advantages of cash being collected by Tundra Co. immediately (positive effect on cash flow) and customers are limited only to their credit card limit (not their bank account balance); customers are buying on credit but the risk of collection is transferred to the credit card company. The disadvantage of credit cards is the fee charged by the administering bank. Tundra Co. will likely accept all forms of payment to enhance sales and in so doing recognize the costs and risks of each.

Exercise 7-13 (20 minutes) Bank Balance Add or Subtract

Add or Subtract

Adjust

Reconciliation

1. NSF check shown on bank statement but not yet recorded by company.

—

Subtract

Cr.

Shown

2. Interest earned on the account.

—

Add

Dr.

Shown

3. Deposit made on September 5 and processed by bank on September 6.

—

Not Shown

—

4. Check written by another depositor but charged against this company's

Book Balance

Shown or Not Shown on

Add

Shown

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Last revised: September 2021

account. 5. Bank service charge.

—

Subtract

Cr.

Shown

6. Checks outstanding on August 31 that cleared the bank in September.

—

Not Shown

7. Check written against the company account and cleared by the bank; erroneously not recorded by the company recordkeeper.

— Subtract

Cr.

8. A note receivable is collected by the bank for the company but not yet recorded by the company.

— Add

Dr.

Shown

9. Checks written and mailed to payees on October 2.

—

Not Shown

10. Checks written by the company and mailed to payees on September 30.

Deduct

—

Shown

11. Deposit made on September 30 after the bank closed.

Add

—

Shown

12. Bank fees for check printing are not yet recorded by the company.

—

Subtract

Cr.

Shown

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Last revised: September 2021

Exercise 7-14 (25 minutes) DEL GATO CLINIC Bank Reconciliation June 30 Bank statement balance........... Add Deposit of June 30 ................. Deduct Outstanding checks............... Adjusted bank balance.............

$10,555 2,856 13,411 1,829 $11,582

Book balance ............................................................................... $11,589 Add Error on Ck. No. 919 ................................................................. 9 11,598 Deduct Bank service charge ................................................................ 16 Adjusted book balance ............................................................... $11,582

Exercise 7-15 (10 minutes) June 30 Cash ......................................................................... Utilities Expense ...................................................... Correct a journal entry error.

30 Miscellaneous Expenses ............................................... Cash .......................................................................... Record bank service charge.

Exercise 7-16 (25 minutes) WRIGHT COMPANY Bank Reconciliation May 31 Bank statement balance............. Add Deposit of May 31..................... Bank error.................................. Deduct Outstanding checks................. Adjusted bank balance.............

$25,800

Book balance ............................................................................... $27,500

6,200 400 32,400 5,600 ______ $26,800

Deduct Bank service charges .............................................................. 100 NSF check ................................................................................. 600 Adjusted book balance ............................................................... $26,800

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Last revised: September 2021

Exercise 7-17 (25 minutes) 1. WINFIELD CONSTRUCTION Bank Reconciliation July 31, 2023 Bank statement balance .................. Add: Outstanding deposit ..................... Bank error (Winburn cheque) ...... Deduct: Outstanding cheques: #14: $740 #53: 894 ........................... Adjusted bank balance ....................

$11,242

Book balance ........................ $11,023

593 391 $12,226 Deduct: NSF — Jim Anderson ........ 1,634 $10,592

431

Adjusted book balance ......... $10,592

2. July 31

Accounts Receivable – Jim Anderson ................ Cash .................................................................. To reinstate customer account.

431 431

Analysis component If the journal entry in 2. is not recorded, profit, liabilities, and equity would not be affected. Assets would be increased and decreased by the same amount causing a net change of zero.

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Exercise 7-18 (25 minutes)

a. KESLER CO. Bank Reconciliation July 31, 2023 Bank statement balance ............. Add:............................................... Outstanding deposit ............ Deduct: ......................................... Outstanding cheques........... Adjusted bank balance ................

$ 10,077 3,671 $13,748 2,756 $10,992

Book balance of cash .............. Add: Error on Cheque #919 ......

$10,932 90 $11,022

Deduct: Bank service charge ......... Adjusted book balance ............

30 $10,992

b. July

Cash ............................................................................. Utilities Expense ................................................. To correct error.

Bank Service Charges Expense................................. Cash ..................................................................... To record bank service charges.

Analysis component If the journal entries in part b. were not recorded, profit, assets, and equity would each be understated by a net amount of $60 ($90 - $30 = $60); liabilities are not affected by the entries in b.

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Last revised: September 2021

Exercise 7-19 (20 minutes)

Not Shown Book Balance on the Must

Bank Balance ReconcilAdd Deduct 1. Interest income on the account. 2. Deposit made on September 30 after the bank was closed. 3. Cheques outstanding on August 31 that cleared the bank in September. 4. NSF cheque from customer returned on September 15 but not recorded by the company. 5. Cheques written and mailed to payees on September 30. 6. Deposit made on September 5 that was processed on September 8. 7. Bank service charge. 8. Cheques written and mailed to payees on October 5. 9. Cheque written by another company but charged against the company's account in error. 10. Customer payment through electronic fund transfer received in the bank but not recorded in the company‘s books. 11. Bank charge for collection of electronic fund transfer in Item 10. 12. Cheque written against the account and cleared by the bank; not recorded by the bookkeeper.

Add x

Deduct

Adjust Dr.

iation

Cr.

Dr.

Cr.

7-768

Last revised: September 2021

*Exercise 7-20 (15 minutes) Case X Cash ................................................ $ 870 Current investments ...................... -0Receivables .................................... -0Quick assets .................................. $ 870

Case Y $ 1,190 -01,340 $2,530

Case Z $1,520 640 1,080 $3,240

Current liabilities ........................... $2,900

$1,450

$4,700

1.74

0.69

Quick ratio ......................................

0.30

Case Y exhibits the superior ability to meet short-term obligations as they come due. The quick ratio of 1.74 exceeds the common benchmark of 1.0. Cases X and Z fall short of the 1.0 benchmark.

7-769

Last revised: September 2021

PROBLEMS Problem 7-1A (20 minutes) 1. Violates the principle of ensuring that transactions and activities are authorized. Only Jill should have access to the petty cash fund since she is the custodian. The company should implement a policy of not allowing petty cash transactions over the lunch hour. 2. Violates applying technological controls. While the daily backup is a very good internal control the tape needs to be taken off the premises every night. If the building and computer are destroyed the data can be restored from the tape that was kept safe off the premises. The company should implement a policy of storing tapes off the premises nightly. 3. Violates internal and external audits. Jack Mawben needs to implement a way to regularly and independently review his employees. Hiring of internal auditors or an outside consultant to objectively review the internal controls and employee‘s work needs to be implemented. 4. Violates insuring of assets and bonding of key employees. We do not have enough information to know if the company can afford the move to the higher deductible on the property insurance. However, we can say that dropping the insurance for bonding the employees weakens internal control. If the company does need to engage in cost cutting they should do it without compromising their internal controls. The insurance for the bonding of key employees should be reinstated. 5. Violates separation of duties and separate recordkeeping and custody of assets. The company should implement a policy whereby the person recording incoming cash receipts is not responsible for posting the payment to the customer accounts.

7-770

Last revised: September 2021

Problem 7-2A (30 minutes) Part 1 Feb.

Petty Cash ............................................................. Cash ............................................................... To establish the fund.

360 360

Part 2 HALIFAX FITNESS CONSULTING Petty Cash Payments Report February 2 – 28, 2023: Receipts: Delivery expense Feb. 23 Delivery of customer‘s $ 8.00 merchandise ........................................................... Auto expense Feb. 14 Reimbursement for business auto expense ................................................................... 148.00 Postage expense Feb. 12 Express delivery of contract ................... $17.00 28 Purchased stamps ...................................24.00 41.00 Transportation-in (Merchandise Inventory) Feb. 9 COD charges on purchased merchandise ........................................... $38.00 25 COD charges on purchased merchandise ..........................................20.00 58.00 Office supplies Feb. 5 Purchased paper for copier .................. $22.00 20 Purchased stationery ............................65.00 87.00 Total receipts ............................................................................................... Fund total ......................................................................... $360.00 Less: Cash remaining ..................................................... 11.00 Equals: Cash required to replenish petty cash .......... Cash over/(short) ...........................................................

$342.00

349.00 ($ 7.00)

7-771

Last revised: September 2021

Problem 7-2A (concluded) Part 3 Feb.

Delivery Expense .................................................. Auto Expense ........................................................ Postage Expense .................................................. Merchandise Inventory ......................................... Office Supplies Expense* ..................................... Cash Over and Short ............................................ Petty Cash ............................................................. Cash ............................................................... To reimburse fund and increase it by $140.

8.00 148.00 41.00 58.00 87.00 7.00 140.00 489.00

Analysis component This is a sensitive situation. Receipts are integral to authenticating accounting transactions (objectivity principle). You should first question the person involved to give them an opportunity to provide an explanation even if it is your direct supervisor. If the explanation you receive is not satisfactory, you should then raise your concerns with the business owner citing the manager‘s response to your question. It is then the owner‘s responsibility to investigate and/or take action as they deem appropriate. However, you have an ethical duty to do something; doing nothing is not an option.

Problem 7-3A (20 minutes) 2023 Apr. 1

Petty Cash ............................................................. Cash ............................................................... To establish fund.

300.00

Advertising Expense............................................. Janitorial Expense ................................................ Postage Expense .................................................. Office Supplies Expense* ..................................... Petty Cash ............................................................. Cash Over and Short..................................... Cash ............................................................... To reimburse fund and increase it by $100.

92.50 82.00 25.00 78.15 100.00

Delivery Expense ..................................................

14.80

300.00

2.00 375.65

7-772

Auto Expense ........................................................ Office Supplies Expense* ..................................... Petty Cash ..................................................... Cash ............................................................... To reimburse fund and decrease it by $50.

45.60 94.65 50.00 105.05

Analysis component If the April 30 replenishment is not made and no entry is recorded, several expenses would not be recognized and profit and equity would be overstated by $155.05 ($14.80 + $45.60 + $94.65). Similarly, the petty cash asset and total assets would be overstated by $155.05. Even if the April 30 entry shows a debit to Office Supplies instead of Office Supplies Expense, the expense would turn out to be understated without this entry. This result occurs because the expense equals the difference between the unadjusted Office Supplies account balance and the count of office supplies on hand at the end of the year. If the unadjusted Office Supplies account is understated, then the amount of office supplies expense will be understated.

9-773

Problem 7-4A (30 minutes) Sept

Cash ............................................................................. Service Revenue ................................................. To record sale of services provided for cash.

3,500

Accounts Receivable .................................................. Service Revenue ................................................. To record sale of services provided on account 2/10, n/30.

9,000

Cash ............................................................................. Credit Card Expense................................................... Service Revenue ................................................. To record sale of services less credit card expense; 3.25% x 18,000 = 585.

17,415 585

Cash ............................................................................. Debit Card Expense .................................................... Service Revenue ................................................. To record sale of services less debit card expense; 0.75% x 7,000 = 52.50.

6,947.50 52.50

3,500

9,000

18,000

7,000

Analysis Component: Maria would like to keep all these forms of payment as she will have the cash quicker to use for her business. For cash sales, the disadvantage can be that she can easily lose the cash before she gets it to the bank or that the customer doesn‘t have cash at this time to spend. For the credit card sales it is an advantage that she does not have to wait to collect the cash, but a disadvantage that she has to pay such a high fee. For the credit sales, some corporate clients don‘t have debit or credit cards or available cash, so credit sales are the only way they can pay. If she did not accept the payment on account, she might lose the client.

9-774

Problem 7-5A (30 minutes) a. GATZ COMPANY Bank Reconciliation June 30, 2023 Bank statement balance ............... Add: Deposit of June 29 .................... Deduct: Outstanding cheques: $3,040.60 No. 888 .......... 2,640.00 No. 890 .......... 2,590.81 No. 892 .......... 75.99 No. 893 .......... Adjusted bank balance .................

$ 8,903.59 1,845.35 $10,748.94

8,347.40 $ 2,401.54

Book balance .................... Add: Error, cheque no. 887 ... Error, cheque no. 891 ...

$1,936.54 180.00 360.00 $2,476.54

Deduct: Bank service charges ...

75.00

Adjusted book balance.....

$2,401.54

b. June 30

Cash ............................................................................... Office Supplies ...................................................... To account for error in Cheque #887.

180.00

Cash ............................................................................... Utilities Expense ................................................... To account for error in Cheque #891.

360.00

Bank Service Charge Expense..................................... Cash ....................................................................... To record bank service charges for June.

75.00

180.00

360.00

75.00

Analysis component: Because your position does not represent good internal controls (writing and recording of cheques should be segregated, if possible, from the preparation of the bank reconciliation), there is the potential for fraud. You should review the journal entry regarding cheque #882 to determine who the payee is. This information, along with the fact that the June bank statement had been mailed to the former employee‘s home, should be brought to the supervisor‘s attention. Prior bank reconciliations should be reviewed to determine if this is a recurring situation. If conflicting duties cannot be segregated in future, the bank reconciliations should be reviewed regularly by a supervisor/owner of the business. Problem 7-6A (30 minutes)

9-775

a) GEMMA TOURS Bank Reconciliation April 30, 2023 Bank statement balance ...............

$19,043

Deduct:

Book balance ............... Add: Interest income ........ Error Chq #93 ...........

$23,116 $46 81

127 $23,243

Deduct:

Outstanding cheques:

NSF............................... $6,540

#79 ................

$1,250

Payment .......................9,420

#91 ................

1,200

Interest Expense .........

#98 ................

2,900

Service Charge ............

16,050

#100...............

6,500

Adjusted book balance...........

$ 7,193

Adjusted bank balance .................

11,850 $ 7,193

b) Apr. 30

Cash ............................................................................... Interest Income ..................................................... To record interest earned.

Cash ............................................................................... Delivery Expense................................................... To account for error in Cheque #93.

Accounts Receivable – Laura Clark............................. Cash ....................................................................... To reinstate customer account.

6,540

Loan Payable or Notes Payable ................................... Cash ....................................................................... To record April loan payment.

9,420

Interest Expense ........................................................... Cash ....................................................................... To record April interest expense.

Bank Service Charges Expense................................... Cash ....................................................................... To record April bank charges.

6,540

9,420

Problem 7-7A (30 minutes)

9-776

Part 1 MONTROSE COMPANY Bank Reconciliation October 31, 2023 Bank statement balance ............... Add: Deposit of October 31 ...............

$29,355 6,856 $36,211

Book balance of cash ............. Add: EFT customer payment less bank service charge ($21,400 – $120)...... $21,280 Error recording Cheque No. 320………810

$13,219

22,090 $35,309 Deduct: Cheques No. 296 ....... 315......... 321.........

$1,334 893 2,000

4,227

Deduct: NSF cheque and fee — Jefferson Tyler ........ $3,251 Service charge ........... 74

Adjusted bank balance .................

$31,984

Adjusted book balance...........

3,325 $31,984

Part 2 Oct.

Cash ................................................................................... Bank Service Charges Expense...................................... Accounts Receivable ................................................ To record EFT less bank service charge.

21,280 120

Accounts Receivable—Jefferson Tyler ........................... Cash ........................................................................... To record NSF cheque.

3,251

Bank Service Charges Expense....................................... Cash ........................................................................... To record bank service charges.

Cash ................................................................................... Rent Expense ............................................................ To correct error in Cheque #320.

810

21,400

3,251

810

9-777

Problem 7-7A (concluded)

Analysis component a.

If the company‘s Cash account balance of $13,219 is listed on the bank reconciliation as $12,319, the final balance that results from adjusting the bank statement balance will not be affected by the error. However, the final balance that results from adjusting the book balance of cash will be understated by $900 ($13,219 – $12,319).

The electronic fund transfer of $21,400 less the $120 collection fee should have been added to the book balance of cash. Instead, it was added to the bank statement balance. As a result, the final balance that results from adjusting the bank statement balance will be overstated by $21,280 and the final balance that results from adjusting the book balance will be understated by $21,280. Therefore, the totals will be out by $42,560 because, if it is on the wrong side, it has a doubling effect.

9-778

Problem 7-8A (50 minutes) Part 1 PELZER COMPANY Bank Reconciliation September 30, 2023

Bank statement balance ............ Add: Deposit of September 30 .......

$6,795.50 1,133.70 $7,929.20

Deduct: Cheques No. 5893 ..... $1,485.65 5906 ..... 715.26 5908 ..... 856.40 Adjusted bank balance

3,057.31 $4,871.89

Book balance of cash .......... Add: Interest earned.................. Proceeds of EFT less bank service charge fee .......

$7,903.39 45.00 3,500.00 $11,448.39

Deduct: NSF cheque — Lisa Willis ........... $1,176.50 Error on Cheque No. 5904 .............. 5,400.00 Adjusted book balance ....

6,576.50 $4,871.89

Part 2 Sept. 30

Cash ....................................................................... Interest Income ............................................. To record interest earned.

45.00

Cash ....................................................................... Bank Service Charge Expense............................. Accounts Receivable .................................... To record EFT less bank service charge.

3,500.00 50.00

Accounts Receivable—Lisa Willis ....................... Cash ............................................................... To record NSF cheque.

1,176.50

Computer Equipment ........................................... Cash ............................................................... To correct error in Cheque #5904.

5,400.00

45.00

3,550.00

1,176.50

5,400.00

9-779

Problem 7-8A (concluded) Analysis component There are several possible reasons why the cancelled cheques returned with a bank statement may not be numbered sequentially. Common reasons for this include the following: — Some of the cheques in the numbered sequence may have cleared the bank in a previous period and been returned with the bank statement in that previous period. — Some of the cheques in the numbered sequence may remain outstanding. If so, they will be returned with the bank statement in a later period when they clear the bank. — The issuer of the cheques may have voided one or more of the cheques in the numbered sequence, perhaps because of making an error in writing the cheques. — Occasionally, a cheque will reach the bank but the bank will incorrectly charge the cheque to the wrong account. When the bank detects the error, it will return the cheque separately with a note of explanation.

9-780

Problem 7-9A (30 minutes) a) STEWART RECORDING STUDIO Bank Reconciliation April 30, 2023 Bank statement balance .................. $110,113 Add: Deposit of April 30 in transit ....... 44,600 Error (Chq #28: 9,400 – 4,900) ..... 4,500 $159,213 Deduct: Outstanding cheques: #14 ............. $840 #22 ............. 315 #25 ............. 940 #27 ............. 4,230 #30 ............. 41,000 #32 ............. 11,400 58,725 Adjusted bank balance .................... $100,488

Book balance .......................... Add: Owner Investment ..............

Deduct: NSF — Oprah Winney ... $14,200 Service charge ............... 175 Interest expense ............ 450 Payment ......................... 15,900

Adjusted book balance ..........

$11,213 120,000 $131,213

30,725

$100,488

b) Apr. 30

Accounts Receivable – Oprah Winney .......................... Cash ......................................................................... To reinstate customer account.

14,200

Bank Service Charges Expense..................................... Cash ......................................................................... To record April bank service charges.

175

Interest Expense ............................................................. Cash ......................................................................... To record April interest expense.

450

Note Payable ................................................................... Cash ......................................................................... To record April payment on note.

15,900

Cash ................................................................................. Ron Stewart, Capital ............................................... To record investment by owner.

120,000

14,200

175

450

15,900

120,000

9-781

Problem 7-10A (30 minutes) a) SCUBA DIVE COMPANY Bank Reconciliation November 30, 2023 Bank statement balance .................. Add: Deposit of Nov 30 in transit ....... Deduct: Outstanding cheques: #920 ........... $947.29 #991 ........... 2,843.50 #1030 ......... 1,971.34 #1064 ......... 824.66 Adjusted bank balance ..................

* Oct 31 adjusted balance of Add: November receipts Less: November disbursements November 30 unadjusted balance b) Nov. 30

$82,370.68 7,211.10 $89,581.78

6,586.79 $82,994.99

Book balance .......................... Add: Interest income ...................

$87,612.68* 615.32 $88,228.00

Deduct: NSF ....................... $5,200.75 Service charge ..... 32.26

5,233.01

Adjusted book balance ..........

$82,994.99

$ 99,657.29 64,805.69 76,850.30 $ 87,612.68

Bank Service Charges Expense........................... Cash ............................................................... To record November bank charges.

32.26

Accounts Receivable – Marnie Wiesen ............... Cash ............................................................... To reinstate customer account.

5,200.75

Cash ....................................................................... Interest Income ............................................. To record interest earned in November.

615.32

32.26

5,200.75

615.32

9-782

Problem 7-11A (30 minutes) Part 1 DUNDEE REALTY Bank Reconciliation October 31, 2023 Bank statement balance .................. Add: Deposit of October 31 in transit .... Error – E-Zone Networks .............

Deduct: Outstanding cheques: #8700 ................ $ 985 #8709 ................ 12,600 #8801 ................ 620 #8815 ................ 145 Adjusted bank balance .....................

$26,830 13,420 2,350 $42,600

14,350 $28,250

Book balance ................................... $ 5,575 Add: Error – Decker Company (A/P: 620 – 260) ................... $ 360 Accounts Receivable ............ 22,880 Less: Collection Fee ........ 50 23,190 28,765 Deduct: Service charge ..................... $ 65 Error – Teresa Krant 515 (7,500 – 7,050) ..................... 450

Adjusted book balance .....................

$28,250

9-783

Problem 7-11A (concluded)

Part 2 Oct. 31 Bank Service Charges Expense ............................... Cash ................................................................... To record October bank charges.

31 Accounts Receivable – Teresa Krant....................... Cash ................................................................... To correct error.

450

31 Cash ........................................................................... Accounts Payable – Decker Company ............. To correct error.

360

31 Cash ........................................................................... Bank Service Charge Expense ................................. Accounts Receivable .........................................

22,830 50

450

360

22,880

To record customer payment through EFT less bank service charge. Analysis component If the entries in Part 2 are not recorded, profit and equity would be overstated by $115 ($65 + $50 = $115), assets would be understated by $245 (–$65 – $450 + $450 + $360 + $22,830 – $22,880 = $245), and liabilities would be understated by $360.

9-784

ALTERNATE PROBLEMS Problem 7-1B (20 minutes) 1.

Violates separation of duties. It is a good internal control to separate duties for cash receipts and cash disbursements. An employee independent of these two functions should be given the responsibility for reconciling the bank account monthly. If no employees are available, this is an acceptable duty for the owner as it allows for owner supervision which is a good internal control.

Violates applying technological controls and separation of duties. It is safe to assume that Stan Spencer has knowledge of employee passwords since he implemented the system of password protection company wide. It is a potentially dangerous situation that Stan processes payroll and can now probably change employee pay rates at will, or add a fictitious employee to the file. The company should hire an outside consultant to rework the password protection system so Stan will not have the knowledge that he currently possesses.

Violates applying technological controls. The theatre‘s system needs to be backed up at least daily, not weekly. The theatre needs to change the back-up policy and make sure the back-up copies are stored off the premises.

Violates separation of duties. The company needs to have three employees handle these functions instead of two. One employee should place purchase orders, one should receive merchandise, and the third should pay vendors.

Violates applying technological controls. The use of the cheque protector is a good internal control. However the company needs to keep the cheques and cheque protector in a locked environment to prevent unauthorized use.

9-785

Problem 7-2B (30 minutes) Part 1 July

Petty Cash ............................................................. Cash ............................................................... To establish the fund.

500.00 500.00

Part 2 BABY PHOTOGRAPHY Petty Cash Payments Report July 5 – 31, 2023: Receipts: Delivery expense July 11 Delivery of customer‘s merchandise ............. Auto expense July 30 Reimbursement for auto expense ............ Postage expense July 28 Purchased stamps ..................................... Transportation-in (Merchandise Inventory) July 6 COD charges on purchased merchandise .............................................. $46 27 COD charges on purchased merchandise .............................................. 31 Office supplies July 12 Purchased file folders ............................... $76 18 Purchased printer paper ........................... 27 Total receipts ............................................................................................... Fund total ................................................................................ Less: Cash remaining ............................................................ Equals: Cash required to replenish petty cash ................. Cash over/(short) ..................................................................

$ 26 134 60

103 $400 $500.00 88.00

412 $ 12

9-786

Problem 7-2B (concluded) Part 3 July

Delivery Expense .................................................. Auto Expense ........................................................ Postage Expense .................................................. Merchandise Inventory ......................................... Office Supplies Expense* ..................................... Cash Over and Short ............................................ Petty Cash ......................................................... Cash ................................................................... To reimburse fund and decrease it by $100.

26 134 60 77 103 12 100 312

Analysis component: The balance in the Cash Over/Short Expense account for the seven months ended July 31, 2023 of $300 does appear to be unusual given that Petty Cash had only a $500 balance at the beginning of July. The $300 represents an average shortage of $43 per month. I would be concerned that the petty cashier might be defrauding the fund of money or making serious errors; either way, the situation requires further investigation and an appropriate resolution.

9-787

Problem 7-3B (20 minutes) Feb.

Petty Cash ................................................................... Cash ..................................................................... To establish fund.

200.00

Postage Expenses ...................................................... Repairs Expense, Computer ...................................... Merchandise Inventory ............................................... Office Supplies Expense* ........................................... Cash Over and Short .................................................. Petty Cash ................................................................... Cash ..................................................................... To reimburse fund and increase it by $50.

15.23 36.40 75.00 65.82 2.00 50.00

Advertising Expense................................................... Delivery Expense ........................................................ Office Supplies Expense* ........................................... Petty Cash ................................................................... Cash ..................................................................... To reimburse fund and increase it by $50.

45.00 69.35 96.35 50.00

200.00

244.45

260.70

Analysis component If the February 28 reimbursement is not made and no entry is recorded, the expenses would not be recognized and profit and equity would be overstated by $210.70 ($45.00 + $69.35 + $96.35). Similarly, the petty cash asset and total assets would be overstated by $210.70. Even if the February 28 entry shows a debit to Office Supplies Expense instead of Office Supplies, the expense would turn out to be understated without this entry. This result occurs because the expense equals the difference between the unadjusted Office Supplies account balance and the count of office supplies on hand at the end of the year. If the unadjusted Office Supplies account is understated, then the amount of office supplies expense will be understated.

9-788

Problem 7-4B (40 minutes) July

July

22,000

Cost of Goods Sold .................................................... Merchandise Inventory ....................................... To record cost of sales.

13,200

Accounts Receivable – Medi-Clinic ........................... Sales .................................................................... To record sale of merchandise; terms 2/10, n/30.

15,480

Cost of Goods Sold .................................................... Merchandise Inventory ....................................... To record cost of sales.

12,800

185,250 4,750

Cost of Goods Sold .................................................... Merchandise Inventory ....................................... To record cost of sales.

114,000

101,541 459

Cost of Goods Sold .................................................... Merchandise Inventory ....................................... To record cost of sales.

61,200

22,000

13,200

15,480

12,800

190,000

114,000

102,000

61,200

9-789

Problem 7-4B (continued) Analysis component: There are advantages and disadvantages for each type of sale Advantage

Disadvantage

Cash Sale

Use of funds immediately

Possible theft of cash while waiting to go to the bank

Credit Sale

No bank fees

It takes time to collect the money from credit sales based on the credit terms. (ie. 30 days)

Credit Card Sale

Use of funds quite quickly, often within a few days

High fees charged to use the credit card company

Debit Card Sale

Immediate use of funds directly in the bank account

Small fee charged by the bank.

Providing alternative forms of payment is important to ensure that customers are not lost because they do not have the right form of payment and to provide flexibility and options to potential customers will ensure that the sale is made.

9-790

Problem 7-5B (30 minutes) a. BAYLOR Bank Reconciliation

COMPANY November 30, 2023

Bank statement balance ............... Add: Deposit of Nov. 29 .....................

$11,620.97 1,250.65 $12,871.62

Deduct: Outstanding cheques: $ 56.45 No. 548 .......... 3,457.15 No. 550 .......... 5,556.71 No. 552 .......... 964.25 No. 553 ..........

Book balance .................... Add: Error Nov. 9 deposit

$4,716.06 36.00 $4,752.06

Deduct: Bank charges .... $115.00 Error #547 ........ 1,800.00 1,915.00 10,034.56

Adjusted bank balance .................

$ 2,837.06

Adjusted book balance .....

$2,837.06

b. Nov. 30

Nov. 30

Bank Service Charges Expense ................................... Cash ....................................................................... To record November bank charges.

115.00

Advertising Expense ..................................................... Cash ....................................................................... To account for error in Cheque #547.

1,800.00

Cash ............................................................................... Accounts Receivable – Val Pacino....................... To account for error in customer deposit.

36.00

115.00

1,800.00

36.00

Analysis component: Because your position does not represent good internal controls (writing and recording of cheques should be separated, if possible, from the preparation of the bank reconciliation), there is the potential for fraud. You should review the journal entry regarding cheque #543 to verify whether the payee is a legitimate supplier. This information should be brought to the supervisor‘s attention. If the payee was not legitimate, prior bank reconciliations should be reviewed to determine if this was a recurring situation. If conflicting duties cannot be separated in future, the bank reconciliations should be reviewed regularly by a supervisor/owner of the business.

9-791

Problem 7-6B (30 minutes) a) VILLAGE-ON-THE-LAKE CONDOS Bank Reconciliation June 30, 2023 Bank statement balance .................... $21,255 Add: Deposit of June 30 in transit .......... 6,340 $27,595 Deduct: Outstanding cheques: #120.................... $ 4,130 2,100 #127.................... 196 #131.................... #132.................... 6,420 820 13,666 #135.................... Adjusted bank balance ...................... $13,929

Book balance ............................ Add: Error (A/R: 16,200 – 12,600) ..

$10,729 3,600 $14,329

Deduct: Service charge .......................

400

Adjusted book balance ............

$13,929

b) Jun. 30

Bank Service Charges Expense ................................... Cash ....................................................................... To record June bank charges.

400

Cash ............................................................................... Accounts Receivable – Darla Smith ..................... To correct error.

3,600

400

3,600

9-792

Problem 7-7B (30 minutes) Part 1 FROGBOX MOVING Bank Reconciliation December 31, 2023 Bank statement balance ............... Add: Deposit of December 31............

$36,780 4,293

Book balance of cash .............. Add: Error recording Cheque No. 3199 ............................. EFT less bank service charge ............

$41,073 Deduct: Cheques No.

3221 ..... $ 1,672 3115 ..... 1,119 3201 ..... 2,507 Adjusted bank balance .................

5,298 $35,775

Deduct: NSF — Tork Ind. ...................... $4,064 Printing charge ...... 93 Adjusted book balance ............

$16,562

720 22,650 $39,932

4,157 $35,775

Part 2 Dec.

Cash ............................................................................... Office Supplies ...................................................... To correct error for Cheque #3199.

720

Cash ............................................................................... Bank Service Charge Expense..................................... Accounts Receivable ............................................... To record the EFT less bank service charge.

22,650 150

Accounts Receivable — Tork Industries ..................... Cash ....................................................................... To record NSF cheque.

4,064

Office Supplies Expense .............................................. Cash ....................................................................... To record cheque printing charge.

720

22,800

4,064

9-793

Problem 7-7B (Continued) Analysis component In a banking context, a debit memo is a notification from the bank that they have debited the depositor's account. Since the depositor‘s account is a liability of the bank (a credit balance account), the debit notification means they have reduced the depositor‘s account balance. Conversely, a credit memo is a notification that the depositor‘s account has been credited, which means increased the depositor‘s account balance. Problem 7-8B (50 minutes) Part 1 YARDWORX Bank Reconciliation May 31, 2023 Bank statement balance ............... $30,128.65 Add: Deposit of May 31 ...................... 8,400.95 $38,529.60 Deduct: Cheques No. 1780 . 1786... 1789...

$ 955.65 974.35 1,398.25

Adjusted bank balance .............. ....................................................

3,328.25 $35,201.35

Book balance of cash ........................ $ 45,826.75 Add: EFT…… ……. $5,300.00 Less: Bank service charge 100.00 5,200.00 $51,026.75 Deduct: NSF — Gertie Mayer $15,600.40 Service charge ................. 135.00 Error recording Cheque No. 1788 ........................ 90.00 15,825.40 Adjusted book balance ...................... $35,201.35

Part 2 May

5,200.00 100.00

Accounts Receivable—Gertie Mayer ................... Cash ............................................................... To record NSF cheque.

15,600.40

Bank Service Charges Expense........................... Cash ............................................................... To record May bank charges.

135.00

Utilities Expense ................................................... Cash ............................................................... To correct error in Cheque #1788.

90.00

5,300.00

15,600.40

135.00

90.00

9-794

Problem 7-8B (concluded) Analysis component There are several possible reasons why the cancelled cheques returned with a bank statement may not be numbered sequentially. Common reasons for this include the following: — Some of the cheques in the numbered sequence may have cleared the bank in a previous period and been returned with the bank statement in that previous period. — Some of the cheques in the numbered sequence may remain outstanding. If so, they will be returned with the bank statement in a later period when they clear the bank. — The issuer of the cheques may have voided one or more of the cheques in the numbered sequence, perhaps because of making an error in writing the cheques. — Occasionally, a cheque will reach the bank but the bank will incorrectly charge the cheque to the wrong account. When the bank detects the error, it will return the cheque separately with a note of explanation.

9-795

Problem 7-9B (30 minutes)

Part 1 BALLOON SUPPLY CO. Bank Reconcilliation November 30, 2023 Bank statement balance ........... Add: Deposit of November 30..........

Deduct: Outstanding cheques: No. 1393 ........ $ 9,800 No. 1406 ........ 12,980 No. 1408 ........ 25,740 Adjusted bank balance ............

$46,675 33,377 $80,052

Book balance ...................................... Add: Interest income ................ $ 250 EFT ................................... 10,700 Less: Bank service charge ............................................. 150 Error Cheque #1404 ....... 3,600 Deduct: NSF—Jerry Skyles...........

48,520 $31,532

$18,942

14,400 $33,342 1,810

Adjusted book balance .......................

$31,532

Part 2 Nov.

Cash Bank Service Charge Expense ................................... Accounts Receivable ........................................... To record EFT less bank service charge.

10,550 150

Cash Interest Income ...................................................... To record interest income.

250

Account Receivable—Jerry Skyles ................................ Cash To record NSF cheque.

1,810

Cash Computer Equipment ............................................. To correct error in Cheque #1404.

3,600

10,700

250

1,810

3,600

9-796

Problem 7-10B (30 minutes) SHANGHAI COMPANY Bank Reconciliation February 28, 2023 Bank statement balance ............... Add: Deposit of February 28 in transit .....................................

Deduct: Outstanding cheques: #200 ........................ $2,600 #202 ........................ 960 #205 ........................ 1,075 #213 ........................ 610 #240 ........................ 840 Adjusted bank balance .................

$23,620

6,835 $30,455

6,085 $24,370

Book balance ................. Add: Accounts Rec‘ble (EFT)$14,000 Less: Fee ............... 65 Error (Office Sup) ....... 7,200 Interest income .......... 120

$ 9,400

21,255 $30,655

Deduct: NSF—Loni Fung ............. $6,250 Cheque printing ............ 35

6,285

Adjusted book balance ...............

$24,370

Feb. 28 Accounts Receivable – Loni Fung ................................... Cash......................................................................... To record NSF cheque.

6,250

28 Cash ................................................................................... Office Supplies ....................................................... To correct error in Cheque #219.

7,200

28 Office Supplies Expense .................................................. Cash......................................................................... To record cheque printing expense.

28 Cash ................................................................................... Interest income ....................................................... To record interest earned.

120

28 Cash ................................................................................... Bank Service Charge Expense ......................................... Accounts Receivable .............................................. To record EFT less collection less bank service charge expense.

13,935 65

6,250

7,200

120

14,000

9-797

Problem 7-11B Part 1 DONUT HOLES CAFE Bank Reconciliation December 31, 2023 Bank statement balance .................. Add: Deposit of Dec. 31 in transit ......... Error .............................................

Deduct: Outstanding cheques: #197 .................... $ 920 #199 .................... 1,220 Adjusted bank balance ..................... Part 2 Dec. 31

$50,860 6,860 5,000 $62,720

Book balance ................................... Add: Error (962 - 692).............. $ 270 EFT ................................. 14,150 Less: Bank service charge 50

2,140 $60,580

Deduct: NSF – Neon Company .....$ 10,140 Service charge ................ 35 Error (8,760 – 7,860) ....... 900 Adjusted book balance .......................

Accounts Receivable – Della Armstrong ....................... Cash ............................................................................ To correct error.

900

Accounts Receivable – Neon Company ........................ Cash ............................................................................ To record NSF cheque.

10,140

Cash ................................................................................. Accounts Payable – CT Financial ............................. To correct error.

270

Bank Service Charges Expense ..................................... Cash ............................................................................ To record December bank charges.

Bank Service Charge Expense....................................... Cash ................................................................................. Accounts Receivable .................................................

50 14,100

$57,285

14,370 $71,655

11,075 $60,580

900

10,140

270

14,150

To record EFT less bank service charge expense.

9-798

Problem 7-11B (concluded)

Analysis component If the entries in Part 2 were not recorded, profit and equity would be overstated by $85 (– 35 – 50 = – $85); assets would be understated by $185 (-900 + 900 – 10,140 + 10,140 + 270 – 35 + 14,100 – 14,150); and liabilities would be understated by $270.

9-799

ANALYTICAL AND REVIEW PROBLEMS A&R Problem 7-1 1. CANDY‘S CLEANING SERVICES Bank Reconciliation April 30, 2023 Bank statement balance

$33,452

Add: Error Cheque #879 .................

$21,051

Deduct: 2,600 $36,052

Deduct: Error Cheque #93 .........

Book balance ...............

100

Interest expense ................. $ 47 NSF ............................... 412 Service charge .............

499

Adjusted book balance...........

$20,552

Outstanding cheques: # 86 ..........................

14,000

#100...........................

1,400

Adjusted bank balance ................. 2. April 30

15,500 $20,552

Interest Expense ......................................................... Cash ..................................................................... To record interest expense.

Accounts Receivable — Bonne ................................. Cash ..................................................................... To record NSF cheque.

412

Bank Service Charges Expense................................. Cash ..................................................................... To record April bank service charges.

412

9-800

A&R Problem 7-2 (a) BRANDON COMPANY Bank Reconciliation May 31, 2023 Balance per books ....................................... Add: ....................................................... EFT ...................................................................... ...................................................................... Deduct: .................................. Bank charges Error in cheque #78 .................................. NSF cheque—Rhonda Teal ...................... Adjusted book balance ................................ Balance per bank ......................................... Add: ................................. Deposit in transit ...................................................................... Deduct: ..................... Outstanding cheques Adjusted bank balance ................................

$ 9,500 $1,060 $10,560 $ 36 500

546 $10,014 $ 9,359 2,455

$11,814 1,800 $10,014

(b) May 31 Cash .......................................................................... Accounts Receivable ..................................... To record collection of EFT. 31 Accounts Payable—Delta Co. ................................. Bank Service Charges Expense ............................. Accounts Receivable—Rhonda Teal ...................... Cash ............................................................ To record error, bank service charges, and NSF cheque.

1,060 1,060

36 10 500 546

A&R Problem 7-3 1.

The weakness in the operation of the petty cash fund is that no one person is in charge of the funds and ―disbursements‖ are made without approval of a responsible person and without supporting documentation (vouchers, invoices, etc.) Improvement in the operation of the fund can be accomplished by placing one individual in charge of the fund and requiring that disbursements from the fund can only be made on the basis of an authorized voucher, authorization to be by a person(s) other than the custodian of the fund.

9-801

The principle of objectivity is violated. Disbursements are made without the necessary documentation, that is, an authorized voucher supported by an invoice, cash register tape, etc.

9-802

Ethics Challenge EC 7-1 1.

In a small business office it is very important that the owner of the business become involved with overseeing procedures. In this dental office it would enhance the internal control environment if Dr. Thomson would reconcile the bank statement.

Unfortunately, due to collusion of the employees the bank reconciliation will not detect the fraud. The cash deposits per the books will reconcile to the cash deposits per the bank.

Despite the collusion the scheme is not foolproof. The bank employee may become suspicious and call Dr. Thomson and ask if she is aware that occasionally her employees cash patient cheques. An astute patient might notice that the statement received contains a miscellaneous credit rather than a cash payment notation. If the patient is aware of accounting practices Dr. Thomson might be advised. Dr. Thomson might be able to uncover the fraud herself if she reviews the daily posting log generated by most computers and notices in the batch totals that miscellaneous credits are posted at times instead of all cash payment credits.

Dr. Thomson should review her salary schedules for employees to make sure that she is at least offering market pay. She may want to consider bonding the employees to insure herself against material losses. Dr. Thomson should probably reconcile the bank statement herself as well as make it a practice to review the daily posting log for miscellaneous credits. Also she should implement a policy whereby she is the only one to authorize any miscellaneous credits to patient accounts.

9-803

Focus on Financial Statements FFS 7-1 Worton Consulting Balance December 31, 2023 Assets Current assets: Cash1............................................................................... Accounts receivable2 ..................................................... Prepaid rent3 .................................................................. Total current assets .......................................................

Sheet

$ 16,855 49,085 2,250 $ 68,190

Property, plant and equipment: Store fixtures .............................................................. Less: Accumulated depreciation4 .......................... Total assets ....................................................................... Liabilities Current liabilities: Accounts payable ....................................................... Salaries payable ......................................................... Current portion of long-term note ............................. Total current liabilities ........................................... Long-term liabilities: Note payable, less $20,000 current portion .............. Total liabilities ................................................................

$113,250 68,900

44,350 $112,540

$31,500 17,750 20,000 $ 69,250 36,000

Equity Ellis Worton, capital ...................................................... Total liabilities and equity.................................................

$105,250 7,2908 $112,540

Calculations: 1. Petty Cash has been combined with Cash = ($19,340 + $350) – $2,835 NSF cheque = $16,855 2. Accounts receivable = $46,250 + $2,835 NSF cheque = $49,085 3. Prepaid rent = $16,200 – $2,250 unexpired rent = $13,950 expired or used 4. Accumulated depreciation = $61,000 + $7,900 depreciation = $68,900 5. Rent expense = $11,250 + $13,950 expired rent for December = $25,200 6. Depreciation expense = $7,900 7. Profit (loss) = 721,400 – 469,000 – 11,330 – 2,240 – 25,2005 – 213,000 – 6,000 – 7,9006 = (13,270) 7 8. Ending capital = 89,560 – 69,000 – 13,270 = 7,290 FFS 7-1 (concluded)

9-804

Analysis component: a. Current Ratio Quick Ratio $68,190/$69,250 = 0.98 ($16,855 + $49,085)/$69,250 = 0.95 Worton Consulting‘s current ratio shows that at December 31, 2023 the company has an unfavourable ratio indicating that they do not have enough current assets to cover current liabilities as they come due; a current ratio of 2 is generally considered good. The quick ratio, a more strict measure of liquidity, shows that Worton does not have enough quick assets to cover current liabilities as they come due. b. Current Ratio Quick Ratio $68,190/($31,500 + $17,750) = 1.38 ($16,855 + $49,085)/ ($31,500 + $17,750) = 1.34 If Worton did not include the current portion of the long-term note as part of current liabilities, both the current ratio and quick ratio would portray a better liquidity position which, in fact, is not true. Misclassification can lead decision makers to make inappropriate decisions. This demonstrates the importance of classifying current vs. long-term assets and liabilities properly.

FFS 7-2 1.

2. 3.

Cash ―comprises cash on hand and demand deposits‖ (IAS 7, par. 6). The benefits of holding cash include minimising the transaction costs associated with raising external funds or liquidating assets (‗transactions motive') and being able to finance projects in case other sources become too costly (‗precautionary motive). Recipe shows cash and cash equivalents of $40,539 (thousand) at December 27, 2020. Recipe‘s cash increased by $188 (thousand) calculated as $40,539 (thousand) at December 27, 2020 compared to $40,351 (thousand) at December 29, 2019. This represents a increase of 0.5%. The fact that the cash increased is within the ordinary course of business operations and helps to improve Recipe‘s current ratio with a low value of 0.65 (current assets of 278,361 ($thousand), divided by current liabilities of 427,927 ($thousand)).

Analysis component: Yes, it is possible for there to be excessive cash. The purpose of having assets, regardless of type, is to generate revenues either directly or indirectly. If Recipe, for example, had excessive cash, they might want to consider purchasing additional products for production/resale or expanding their business operations. As noted above, their current ratio is low at 0.65. Therefore it is not indicating an excessive balance of cash as there is less than $1 of current assets to pay for $1 of current obligations.

9-805

Critical Thinking Question

CT 7-1 Note to instructor: Student responses will vary therefore the answer here is only suggested and not inclusive of all possibilities; it is presented in point form for brevity. Problem(s): — Internal controls over cash did not prevent a $35,000 theft Goal(s)*: — To try and discover how the money disappeared and who is responsible — To improve internal controls over cash Assumption(s)/Principle(s): — That there is a bank nearby Facts: — as presented Conclusion(s)/Consequence(s): — Basic internal controls over cash need to be implemented such as:  cash collections must be deposited regularly into the bank  large amounts of cash must not be kept on the premises  for small amounts of cash that are kept on the premises, a secure device is required as opposed to a filing cabinet

*The goal is highly dependent on ―perspective.‖

9-806

SOLUTIONS MANUAL to accompany

Fundamental Accounting Principles th

17 Canadian Edition by Larson/Dieckmann/Harris

Revised for the 17 Edition by: John Harris, Seneca College

Technical checks by: Rhonda Heninger, SAIT

9-807

Chapter 8

Receivables

Chapter Opening Critical Thinking Challenge Questions* -

It is critical for businesses like WN Pharmaceuticals to assess customer credit to determine whether a customer can pay for purchases on a timely basis. Collecting payments on a timely basis provides businesses the cash to continue their business activities such as buying more inventory or paying for expenses. Assessing customer credit also limits the cost of having customers default on payments due to financial difficulty. If customers cannot pay for purchases, a bad debt expense needs to be recorded in the income statement, which decreases profit.

*The Chapter 8 Critical Thinking Challenge questions are asked at the beginning of this chapter. Students are reminded at the conclusion of this chapter to refer to the Critical Thinking Challenge questions at the beginning of the chapter. The solutions to the Critical Thinking Challenge questions are available here in the Solutions Manual and accessible to students in the print and ebooks.

9-808

Knowledge Check-Up Questions 4. c) 9. a)

2. a) 7. b)

3. a) 8. c)

4. b) 9. d)

5. c) 10. c)

Concept Review Questions

In order to record accounts receivable and revenue the criteria of performance, measurement and collectability need to be met. Performance indicates that a company transfers the product or service to the customer. Measurement indicates that there is a determined price and cost of a sale transaction. Collectability indicates that it is probable that the company will collect payments from a customer.

2. The roles or responsibilities that should be separated within the accounts receivable process are: 1. Employee responsible for receipt of cash should not have access to record or authorize transactions in the Accounts Receivable ledger or customer accounts. 2. Employee receiving the cash or preparing the deposit should not be able to record cash transactions or prepare the bank reconciliation 3. The bank reconciliation should not be prepared by an employee that is involved in either cash receipts or disbursements. 4. Write offs and adjustments to receivables should be performed by an employee that does not have ability to record transactions. 3.Writing off a bad debt against the allowance does not reduce the estimated realizable value of a company‘s accounts receivable because the write-off reduces the balances of both Accounts Receivable and Allowance for Doubtful Accounts by equal amounts so the difference between the two accounts remains the same. 4.The adjusted balances of Bad Debt Expense and Allowance for Doubtful Accounts are virtually never equal because the expense describes only the events of the current year, and the allowance is the accumulated result of events over a number of past years. The only way that they could be equal would be if write-offs during the past year exactly equalled the beginning balance of the allowance. 5.Revenues and expenses are not matched under the direct write-off method because the revenue from the bad debt sales often appears on the income statement of one period while the expense of getting those sales appears on the income statement of a later period. 6.The accounting principle of materiality holds that the requirements of accounting principles may be ignored if the effect on the financial statements is unimportant to their users. 7.Creditors prefer notes to accounts receivable because the notes can be more easily converted into cash before becoming due by discounting (or selling) them to a bank. Also, a note represents a clear written acknowledgement by the debtor of both the debt and its amount and terms. 8.Trade (Accounts) receivable decreased a total of $105,500,000 from $370,700,000 at December 31, 2019 to $265,200,000 at December 31, 2020.

9-809

*9.If receivables are sold without recourse then the buyer of the receivables has responsibility to make sure the accounts are ultimately collected and takes the loss for any bad debts. QUICK STUDY Quick Study 8-1 March 1

Accounts Receivable – JP Holdings ........................ Sales ............................................................... To record credit sale; terms n/30.

40,000

Cost of Goods Sold ................................................. Merchandise Inventory .................................... To record cost of sale.

32,000

Cash ....................................................................... Accounts Receivable – JP Holdings ................ To record receipt of payment in full.

40,000

32,000

40,000

Quick Study 8-2 a. Trophy Services has finished delivering their products on June 1 when the order was delivered to Central High School. As the shipping terms are FOB destination, Central High School takes ownership of the goods when they are delivered at the school. b. The revenue is measurable because the price of the order is determined to be $900. The price was determined on a quote or a price list. c. It is probable that Trophy Services will collect the amount owed from Central High School. A school is generally a reliable customer as it is accountable to many stakeholders such as the government, teachers, parents and students. There is also no indication that Central High School will not be able to pay the invoice. d. Trophy Services should recognize the accounts receivable and revenue on June 1 when the products have been delivered, the revenue and expenses related to the transaction are measurable and it is probable that Trophy Services will collect payment from Central High School.

9-810

Quick Study 8-3

March

April

4 Accounts Receivable – Various ..................................... Service Revenue ................................................. Performed work for customers on account.

165,000

15 Cash .............................................................................. Accounts Receivable – Various ........................... Collected cash from credit customers.

80,000

20 Allowance for Doubtful Accounts ................................... Accounts Receivable – Tom Williams .................. Wrote off customer account.

5,000

25 Accounts Receivable – Tom Williams ............................ Allowance for Doubtful Accounts ......................... Reversed the write-off.

5,000

25 Cash .............................................................................. Accounts Receivable – Tom Williams .................. Collected cash from credit customer.

5,000

2 Accounts Receivable – Various ..................................... Service Revenue ................................................. Performed services for customers on account.

280,000

9 Cash .............................................................................. Accounts Receivable – Various ........................... Collected cash from credit customers.

110,000

30 Bad Debt Expense ........................................................ Allowance for Doubtful Accounts ......................... Estimated bad debts expense.

8,000

165,000

80,000

5,000

280,000

110,000

8,000

9-811

Quick Study 8-4 BIOTECH Partial Balance Sheet December 31, 2023 Assets Current assets: Cash ...................................................................... Accounts receivable ............................................... Less: Allowance for doubtful accounts ............... Office supplies ....................................................... Prepaid insurance .................................................. Total current assets................................................

$10,000 $29,000 1,300

27,700 400 950 $39,050

Note: Bad Debt Expense is an income statement account and is therefore not listed on the balance sheet. Machinery is a balance sheet account but is shown under Property, Plant and Equipment.

Quick Study 8-5 Oct. 31

Bad Debt Expense .................................................. Allowance for Doubtful Accounts ..................... To estimate uncollectible accounts (690,000 × 2/3 = 460,000 × .006 = 2,760).

2,760

9-812

Quick Study 8-6 Part A Allowance for Doubtful Accounts 6,000 Dec. 31 unadjusted balance

26,000 Dec. 31 required adjusted balance

20,000 credit entry is necessary in order to get the required adjusted balance of 26,000 (26,000-6,000).

Part B

$20,000 of bad debt needs to be recorded to have a balance of $26,000 in the allowance for doubtful account at year-end.

Part C Dec. 31

Bad Debt Expense .................................................. Allowance for Doubtful Accounts ..................... To estimate uncollectible accounts. ....................

20,000

9-813

Quick Study 8-7 Allowance for Doubtful Accounts 450 Dec. 31 unadjusted balance

16,000 Dec. 31 required adjusted balance Dec. 31

15,550 credit entry is necessary in order to get the required adjusted balance of 16,000 (640,000 × .025).

Bad Debt Expense .................................................. Allowance for Doubtful Accounts ..................... To estimate uncollectible accounts.

15,550 15,550

Quick Study 8-8 a. Dec. 31

Bad Debt Expense .................................................. Allowance for Doubtful Accounts ..................... ($89,000 × 1.5%) – $500 = $835

($89,000 × 1.5%) + $200 = $1,535

$270,000 × 1% = $2,700

835

9-814

Quick Study 8-9 Dec.

31 Bad Debt Expense ......................................................... Allowance for Doubtful Accounts ......................... Adjusting entry to estimate uncollectible accounts receivable.

7,400 7,400

Calculated as: Allowance for Doubtful Accounts 800 Dec. 31 unadjusted balance 7,400 credit entry is necessary in order to get the required adjusted balance of 8,200. 8,200*.

8,200 Dec. 31 required adjusted balance *(110,000 × 2% = 2,200) + (40,000 × 5% = 2,000) + (10,000 × 40% = 4,000) = 8,200

Quick Study 8-10 Mar. 28

Bad Debt Expense .................................................. Accounts Receivable – Jim Patterson ............. To write-off an uncollectible receivable using the direct write-off method.

Quick Study 8-11 Aug. 2 Notes Receivable (90-day, 5%) .............................. Accounts Receivable—Will Carr...................... Maturity date: Oct. 31 Cash ....................................................................... Notes Receivable ............................................ Interest Income ............................................... $5,500 × 5% × 90/365 = $67.81.

1,100 1,100

5,500.00 5,500.00 5,567.81 5,500.00 67.81

9-815

Quick Study 8-12 Dec. 31

Interest Receivable ................................................. Interest Income ............................................... $8,000 × 4.5% × 30/365.

29.59 29.59

Maturity date: Jan. 15

Cash ....................................................................... 8,044.38 Interest Receivable ......................................... Interest income ............................................... Notes Receivable ............................................ *[($8,000 × 4.5% × 45/365) – $29.59] or [$8,000 × 4.5% × 15/365]

29.59 14.79* 8,000.00

Quick Study 8-13 April 4

Accounts Receivable – Beatrice Inc. ....................... Interest Income ............................................... Note Receivable .............................................. To charge the account of Beatrice for a dishonoured note including interest of $17,000 × 7% × 30/365 = $97.81.

17,097.81 97.81 17,000.00

Quick Study 8-14 1. Maturity date is April 30, which is computed as follows: Days in March .................................................................................. Minus the date of the note ................................................................ Days remaining in March .................................................................. Add days in April to equal 60 days (April 30) .................................... Period of the note in days.................................................................

31 1 30 30 60

Interest Expense is $98.63. Computed as $10,000 x 6% x (60/365).

2. Maturity date is August 13, which is computed as follows: Days in May ..................................................................................... Minus the date of the note ................................................................ Days remaining in May ..................................................................... Add days in June.............................................................................. Add days in July ............................................................................... Add days in August to equal 90 days (August 13) ............................ Period of the note in days.................................................................

31 15 16 30 31 13 90

Interest Expense is $295.89. Computed as $15,000 x 8% x (90/365).

3. Maturity date is December 4, which is computed as follows: Days in October ...............................................................................

9-816

Minus the date of the note ................................................................ Days remaining in October ............................................................... Add days in November ..................................................................... Add days in December to equal 45 days (December 4) ................... Period of the note in days.................................................................

20 11 30 4 45

Interest Expense is $39.45. Computed as $8,000 x 4% x (45/365). Quick Study 8-15 1. Maturity date is October 31, which is computed as follows: Days in August ................................................................................. Minus the date of the note ................................................................ Days remaining in August ................................................................ Add days in September .................................................................... Add days in October to equal 90 days (October 31) ......................... Period of the note in days................................................................. 2. Aug. 2

Notes Receivable—R. Albany ..........................................

31 2 29 30 31 90

6,000

Accounts Receivable—R. Albany ...................

6,000

Record receipt of note on account.

Quick Study 8-16 Oct. 31

Cash ................................................................................ Notes Receivable—R. Albany ................................... Interest Revenue ...................................................... Record cash received on note plus interest ($6,000 x 12% x 90/365).

6,178 6,000 178

Quick Study 8-17 1. Dec. 31

Interest Receivable ...................................................

9-817

Interest Revenue ..............................................

Record the year-end adjustment for interest earned ($10,000 x 6% x 30/365). 2. Maturity date Jan. 15 Cash ......................................................................... Interest Receivable ................................................... Interest Revenue* ..................................................... Notes Receivable...................................................... Record cash received on note plus interest. *($10,000 x 6% x 15/365)

10,074 49 25 10,000

Quick Study 8-18

Accounts receivable turnover =

= =

Net sales Average accounts receivable $861,105 ($153,400 + $138,500) / 2

5.9 times

Interpretation: An accounts receivable turnover of 5.9 implies that the company‘s average accounts receivable balance is converted into cash 5.9 times per year. The 5.9 turnover is about 21% lower than the average turnover of 7.5 for its competitors. The company needs to identify the cause of this poor performance and rectify the situation to at least compete at the average level. Quick Study 8-19 a) Mega Company b) Holton Company; unfavourable c) Holton Company

*Quick Study 8-20 Year 1: $600 = $10,000 x 8% x 9/12 Year 2: $200 = $10,000 x 8% x 3/12 *Quick Study 8-21 April 1 Notes Receivable—Travis ....................................................

5,000

9-818

Accounts Receivable—Travis ......................................... Record receipt of note on account. June 30 Accounts Receivable—Travis ............................................... Interest Revenue ............................................................ Notes Receivable—Travis .............................................. Record note dishonored plus interest earned [$5,000 x 0.04 x 90/365 = $49].

5,000

5,049 49 5,000

*Quick Study 8-22 June 4

Cash ....................................................................... Factoring Fee Expense ........................................... Accounts Receivable ....................................... Sold accounts receivable for cash, less a 2.5% factoring fee; 108,000 × 2.5% = 2,700.

105,300.00 2,700.00 108,000.00

*Quick Study 8-23 Aug. 10

50,087.69

Principal of Note ..................................................... Add: Interest from Note ($50,000 × 5% × 45/365) .. Maturity Value ......................................................... Less: Bank Discount ($50,308.22 × 8% × 20/365) ..... Proceeds ....................................................................

$50,000.00 308.22 $50,308.22 220.53 $50,087.69

87.69 50,000.00

EXERCISES Exercise 8-1 (25 minutes) 1. GENERAL LEDGER Accounts Receivable Nov. 3 8,500 Nov. 19 214 8 2,600 11 1,560 28 4,980 Bal. 17,426

Sales Nov. 3 8 11 28

8,500 2,600 1,560 4,980 17,640

Sales Returns and Allowances Nov. 19 214

9-819

ACCOUNTS RECEIVABLE SUBLEDGER ABC Shop Nov. 3 8,500 28 4,980 Bal. 13,480

Nov. 8

Colt Enterprises 2,600

Red McKenzie Nov. 11 1,560 Nov. 19 Bal. 1,346

2. Subledger proof: ABC Shop ....................................................................... Colt Enterprises............................................................... Red McKenzie ................................................................. Balance of the Accounts Receivable account ..................

$13,480 2,600 1,346 $17,426

Exercise 8-2 (10 minutes)

1. Hotel de Paris is selling the service of providing a 14 night stay at the hotel. Hotel de Paris fulfills their service once they have provided the 14 day room booking on June 15, 2023. 2. Hotel de Paris can measure the amount of revenue as the room prices are readily available upon booking in person, over the phone or online. You were also required to pay the hotel room upon booking, which means a dollar amount has already been determined for the transaction. 3. It is probable that Hotel de Paris will collect payment as you have already paid for the hotel upon booking on May 1, 2023. 4. Hotel de Paris should recognize the accounts receivable and revenue on June 15, 2023 when they have completed providing their hotel services. At this point, they have provided their service and the total amount of the transaction is measureable and collectable. Exercise 8-3 (15 minutes)

Part 1 Weakness #1

There is a lack of separation of duties at Snappy Frames because Quinn, accounts receivable clerk has responsibility over cash, recordkeeping and the authorization over both the bank account and the recordkeeping.

9-820

214

Implication

With lack of separation of duties, Quinn can steal cash through withdrawals from the bank and cover up the fraud through the recordkeeping.

Recommendation

The responsibilities of handling the deposits, recordkeeping and authorization over the bank account and recordkeeping should be performed by separate individuals. If it is not possible to completely separate these duties due to the small size of Snappy Frames, Carolyn, the owner or another qualified individual should perform a regular review over the bank account and recordkeeping.

Weakness #2

The customer payments received in the mail are filed in the office and deposited on a monthly basis.

Implication

These customer payments may be misplaced or stolen in the office as deposits are not made in a timely manner.

Recommendation

Customer payments should be deposited on a daily basis to prevent payments from being lost or stolen.

9-821

Exercise 8-3 (Continued) Weakness #3

Quinn, Accounts Receivable clerk has full authorization over the bank account.

Implication

This could lead to unauthorized withdrawals and theft from the bank account.

Recommendation

Cheques and direct bank withdrawals should require two signatures by authorized individuals prior to processing cheques or withdrawals.

Weakness #4

There is a lack of review over the Accounts Receivable Clerk‘s work.

Implication

Errors or fraud may be undetected in the bank reconciliation and accounts receivable write-offs.

Recommendation

The bank reconciliation and accounts receivable write-offs should be reviewed on a monthly basis by an accounting manager or the owner.

Part 2

The fraud that may have occurred is called a lapping scheme. If money is stolen from customer #1‘s payment, the related accounts receivable remains outstanding. Once customer #2 pays, this payment is applied against customer #1‘s accounts receivable. Customer #3‘s payment is then used to cover customer #2‘s accounts receivable and so on. For Snappy Frames, once accounts receivables are outstanding for greater than 90 days, they are written off and assumed to be uncollectible. The payments from some of accounts receivables written off were likely stolen as four customers insisted that they had paid their accounts in full. Further investigation is required to determine the full extent of the potential fraud in this situation.

Exercise 8-4 (15 minutes) a. Oct. 31

b. Dec. 9

Allowance for Doubtful Accounts ............................ Accounts Receivable—Gwen Rowe ................

1,200

Accounts Receivable—Gwen Rowe ........................ Allowance for Doubtful Accounts .....................

800

Cash ....................................................................... Accounts Receivable—Gwen Rowe ................

800

1,200

800

9-822

Exercise 8-5 (15 minutes) a. Jan. 31

b. Jul. 15

Allowance for Doubtful Accounts ............................ Accounts Receivable—Glass Tech Company .

8,750

Accounts Receivable—Glass Tech Company ......... Allowance for Doubtful Accounts .....................

5,000

Cash ....................................................................... Accounts Receivable—Glass Tech Company .

5,000

8,750

5,000

Exercise 8-6 (20 minutes) Dec. 31

Feb. 1

June 5

Bad Debt Expense .................................................. Allowance for Doubtful Accounts ..................... Expense = 0.0070 × $1,700,000 = $11,900.

11,900

Allowance for Doubtful Accounts ............................ Accounts Receivable—Catherine Hicks ..........

2,400

Accounts Receivable—Catherine Hicks ................. Allowance for Doubtful Accounts .....................

2,400

Cash ....................................................................... Accounts Receivable—Catherine Hicks ..........

2,400

11,900

2,400

9-823

Exercise 8-7 (15 minutes) a. Dec. 31

Bad Debt Expense .............................................. Allowance for Doubtful Accounts .............

7,450 7,450

Allowance for Doubtful Accounts

Accounts Receivable Unadjusted balance

1,920 ?

Bal. 158,000 × 3.5% $ 5,530

b. Dec. 31

5,530

Bad Debt Expense .................................................. Allowance for Doubtful Accounts .............

Accounts Receivable

Bal. 158,000 × 3.5% $ 5,530

= 7,450 Adjustment Required Balance

3,610 3,610

Allowance for Doubtful Accounts Unadjusted 1,920 balance ? = 3,610 Adjustment Required 5,530 Adjusted Balance

9-824

Exercise 8-8 (15 minutes) Part 1 Date (2023)

Account Titles and Explanation

Dec. 2 Accounts Receivable ..............................................

Debit

Credit

5,000

Sales .............................................................

5,000

To record sales. Cost of Goods Sold ................................................

2,500

Merchandise Inventory ......................................

2,500

To record cost of sale and reduce inventory. ...... 20 Allowance for Doubtful Accounts ............................

3,700

Accounts Receivable – Rocky Co. .................

1,200

Accounts Receivable – Grouse Co. ..............

2,500

To write off uncollectible accounts. 23

Accounts Receivable – Grouse Co. ......................

2,500

Allowance for Doubtful Accounts ...................

2,500

To reinstate the account of Grouse Co. 23 Cash ......................................................................

2,500

Accounts Receivable – Grouse Co. ................

2,500

To record full payment of account. 31 Bad Debt Expense ................................................. Allowance for Doubtful Accounts ..................

1,330 1,330

9-825

Exercise 8-8 Continued Part 2 Accounts Receivable Allowance for Doubtful Accounts Beg. 50,000 Dec. 20 1,200 Dec. 20 3,700 Beg. 5,000 Dec. 23 2,500 Dec. 2 5,000 Dec. 20 2,500 31 1,330 23 2,500 Dec. 23 2,500 Bal.

51,300 X 10% $5,130

Bal.

5,130

Bad Debt Expense Beg. 0 Dec. 31

1,330

Bal.

1,330

Exercise 8-9 (15 minutes) a) b) c) d) e)

$470,000 $503,000 $3,650 $260 $3,100

Exercise 8-10 (15 minutes) LisTel Partial Balance Sheet March 31, 2023 Assets Current assets: Cash ...................................................................... Accounts receivable ............................................... Less: Allowance for doubtful accounts ............... Notes receivable, due November 30, 2023............. Merchandise inventory ........................................... Supplies ................................................................. Total current assets................................................

$ 19,000 $110,000 2,350

107,650 14,300 82,000 5,260 $228,210

Note: Bad Debt Expense is an income statement account and is therefore not listed on the balance sheet. Notes Receivable due May 1, 2025, Building and Accumulated Depreciation, Building are asset accounts shown on the balance sheet but they are not current assets.

9-826

Exercise 8-11 (30 minutes) a. 2023 Dec. 31 Bad Debt Expense ............................................................ Allowance for Doubtful Accounts ................................. To record estimate for uncollectible accounts; 480,000 – 8,000 = 472,000 x 1.5% = 7,080.

7,080 7,080

b. 2024 Accounts Receivable ......................................................... Sales .......................................................................... To record credit sales during 2024.

620,000

Cost of Goods Sold ........................................................... Merchandise Inventory ............................................... To record cost of sales during 2024.

406,500

Cash .................................................................................. Sales Discounts ................................................................. Accounts Receivable .................................................. To record collections less sales discounts.

428,000 12,000

Allowance for Doubtful Accounts ...................................... Accounts Receivable ................................................. To record the write-off of uncollectible accounts.

10,000

620,000

406,500

440,000

10,000

c. 2024 Dec. 31 Bad Debt Expense............................................................. Allowance for Doubtful Accounts .................................. To record estimate for uncollectible accounts; 620,000 – 12,000 = 608,000 x 1.5% = 9,120.

9,120

9-827

Exercise 8-11 (concluded) d. Assets Current assets: Accounts receivable1 ................................................................... Less: Allowance for doubtful accounts2 ......................................

$240,000 7,300

$232,700

OR Accounts receivable (net of $7,300 estimated uncollectible accounts) ......................................................... Calculations: 1. Accounts Receivable 70,000 2024 440,000 collections 2024 sales 620,000 2024 10,000 write-offs Bal. Dec 31/24 240,000 Bal. Dec 31/23

$232,700

2. Allowance for Doubtful Accounts Unadj.Bal. Dec 1,100 31/23 Adjustment 7,080 Dec 31/23 8,180 Adj. Bal. Dec 31/23 2024 write-offs 10,000

Adjustment 9,120 Dec 31/24 7,300 Adj. Bal. Dec 31/24

Analysis component: The main advantage of the income statement approach is its simplicity. Like the balance sheet approach, it satisfies the generally accepted accounting principles of matching and prudence. The main disadvantage is that it does not compensate for over or under estimations from year to year because it is not focused on the element that is uncollectible, namely, the accounts receivable.

9-828

Exercise 8-12 (30 minutes) a. 2023 Dec. 31 Bad Debt Expense ....................................................... Allowance for Doubtful Accounts .............................. To record estimate for uncollectible accounts; 70,000 x 2% = 1,400; 1,400 – 1,100 = 300.

300 300

b. 2024 Accounts Receivable ..................................................... Sales ...................................................................... To record credit sales during 2024.

620,000

Cost of Goods Sold ....................................................... Merchandise Inventory ........................................... To record cost of sales during 2024.

406,500

Cash ............................................................................... Sales Discounts .............................................................. Accounts Receivable ............................................... To record collections less sales discounts.

428,000 12,000

Allowance for Doubtful Accounts .................................. Accounts Receivable ............................................. To record the write-off of uncollectible accounts.

10,000

620,000

406,500

440,000

10,000

c. 2024 Dec. 31 Bad Debt Expense ......................................................... Allowance for Doubtful Accounts .............................. To record estimate for uncollectible accounts; 240,000 x 2% = 4,800; 4,800 – 1,400 + 10,000 = 13,400.

13,400

9-829

Exercise 8-12 (concluded) d. Assets Current assets: Accounts receivable ................................................................. Less: Allowance for doubtful accounts ....................................

$240,000 4,800

$235,200

OR Accounts receivable (net of $4,800 estimated uncollectible accounts) ..........................................................

$235,200

Calculations: Accounts Receivable Bal. Dec 31/23 70,000 2024 440,000 collections 2024 sales 620,000 2024 10,000 write-offs Bal. Dec 31/24

Allowance for Doubtful Accounts Unadj. Bal. Dec 31/23 1,100

300

240,000

1,400 2024 write-offs 10,000

Adjustment Dec 31/23 Adj. Bal. Dec 31/23

13,400 Adjustment Dec 31/24

4,800

Adj. Bal. Dec 31/24

Analysis component The main advantage of the balance sheet approach is that it adjusts the allowance for doubtful accounts to the estimated amount of uncollectibles. Like the income statement approach, it satisfies the generally accepted accounting principles of matching and prudence. The main disadvantage is that it does require more effort in terms of calculations.

9-830

Exercise 8-13 (30 minutes) a. 2023 Dec. 31 Bad Debt Expense ................................................................ Allowance for Doubtful Accounts ..................................... To record estimate for uncollectible accounts; $155,000 × 1% = $1,550 $45,000 × 4% = $1,800 $10,500 × 10% = $1,050 $2,500 × 60% = $1,500 $5,900

3,600 3,600

$ 5,900 - 2,300 $3,600

b. 2024 Dec. 31 Bad Debt Expense ................................................................ Allowance for Doubtful Accounts ..................................... To record estimate for uncollectible accounts; $290,000 × 1% = $2,900 90,000 × 4% = $3,600 25,000 × 10% = $2,500 16,000 × 60% = $9,600 $18,600 c. Assets Current assets: Accounts receivable ........................................................................ Less: Allowance for doubtful accounts ........................................... OR Accounts receivable (net of $18,600 estimated uncollectible accounts) .................................................................

41,700 41,700 $18,600 – $5,900 +29,000 $41,700

$421,000 18,600

$402,400

Calculations: Accounts Receivable Bal. Dec 31/23 213,000 2024 1,220,000 collections 2024 sales 1,457,000 2024 29,000 write-offs Bal. Dec 31/24 421,000

Allowance for Doubtful Accounts Unadj.Bal. Dec 2,300 31/23

3,600 5,900 2024 writeoffs 29,000

Adjustment Dec 31/23 Adj. Bal. Dec 31/23

41,700 Adjustment 18,600

Dec 31/24 Adj. Bal. Dec 31/24

9-831

Exercise 8-13 (concluded) Analysis component One of the ways to apply the balance sheet approach is to use an aging analysis of outstanding receivables. The main advantage of the aging analysis is that it adjusts the allowance for doubtful accounts to the estimated amount of uncollectible receivables based on a detailed analysis that considers the risk associated with the age of a receivable. Like the income statement approach, it satisfies the generally accepted accounting principles of matching and prudence. The main disadvantage is that it does require more effort in terms of calculations. However, computerization of the accounting information system has negated that disadvantage.

Exercise 8-14 (15 minutes) May 3

Bad Debt Expense .................................................. Accounts Receivable – Wilma Benz ................ To write-off an uncollectible receivable using the direct write-off method.

3,350 3,350

Analysis component: Using 2% of credit sales, bad debt expense would be $6,780 ($339,000 × 2% = $6,780) for 2023 thereby decreasing profit by $3,430 more than the direct write-off method. Using 4% of outstanding accounts receivable would result in a bad debt expense of $5,750 ($60,000 × 4% = $2,400 + $3,350 = $5,750) thereby decreasing profit by $2,400 more than the direct write-off method.

9-832

Exercise 8-15 (10 minutes)

Part 1

Interest income is earned each month through the passage of time and needs to be recorded based on the accrual basis of accounting.

Part 2

Note Receivable A : 4 months

Note Receivable B : 1 month (1 month received on December 1)

Part 3 Dec. 31

Dec. 31

Interest Receivable – Note Receivable A ................ Interest Income .............................................. To record accrued interest ($690,000 x 6% x 4/12).

13,800

Interest Receivable—Note Receivable B ................ Interest Income ............................................... To record accrued interest ($395,000 x 4.5% x 1/12).

1,481

13,800

1,481

Exercise 8-16 (20 minutes) Mar. 21

Sept. 21

Dec. 31

Notes Receivable .................................................... Accounts Receivable—Bradley Brooks ........... To record 6-month, 4% note to replace past-due account.

6,200.00

Accounts Receivable—Bradley Brooks ................... Interest Income ............................................... Notes Receivable ............................................ To record dishonoured note; $6,200 × 0 .04 × 6/12 = $124.00.

6,324.00

Allowance for Doubtful Accounts ............................ Accounts Receivable—Bradley Brooks ........... To record write-off of Brooks’ account.

6,324.00

6,200.00

124.00 6,200.00

6,324.00

9-833

Exercise 8-17 (15 minutes) Oct. 31

Dec. 31

Apr. 30

Notes Receivable—Leann Grimes .......................... Accounts Receivable—Leann Grimes ............. To record six-month, 4.5% note to replace past-due account.

15,000.00

Interest Receivable ................................................. Interest Income ............................................... To record accrued interest; $15,000 × .045 × 2/12 = $112.50.

112.50

Cash ....................................................................... Notes Receivable—Leann Grimes .................. Interest Income ............................................... Interest Receivable ......................................... To record collection of note and interest; $15,000 × .045 × 4/12 = $225.00.

15,337.50

15,000.00

112.50

15,000.00 225.00 112.50

9-834

Exercise 8-18 (25 minutes) 2023 Dec. 16

2024 Feb. 14

Mar. 2

May 31

Notes Receivable .................................................... 22,000.00 Accounts Receivable—Carmel Karuthers .... To record 60-day, 5% note to replace past-due account.

22,000.00

Interest Receivable ................................................. 45.21 Interest Income ............................................... To record accrued interest; $22,000 × 0.05 × 15/365 = $45.21.

45.21

Interest Income ....................................................... Income Summary ............................................ To record the closing of the Interest Income account.

45.21

Cash ....................................................................... Interest Income ............................................... Interest Receivable ......................................... Notes Receivable ............................................ To record collection of note plus interest; $22,000 x 0.05 x 60/365 = 180.82; 180.82 – 45.21 = 135.61.

45.21

22,180.82 135.61 45.21 22,000.00

Notes Receivable ............................................................ Accounts Receivable—ATW Company ........ To record 90-day, 4% note to replace past-due account.

8,000.00

Notes Receivable .................................................... Accounts Receivable—Leroy Johnson........ To record 30-day, 4.5% note to replace past-due account.

3,200.00

8,078.90

8,000.00

3,200.00

78.90 8,000.00

NOTE: Not required, but some students may record receipt of the payment of the note: April 17 Cash ....................................................................... 3,211.84 Interest Income ............................................... 11.84 Notes Receivable .......................................... 3,200.00 To record payment 30-day, 4.5% note 3,200 x .045 x 30/365 = 11.84

9-835

Exercise 8-19 (15 minutes) Part 1 Accounts Receivable Turnover $7,280 = 13.43 times ($598 + $486)/2

Days‘ Sales Outstanding $598 x 365 = 29.98 days $7,280

Part 2 WestCon is not collecting its receivables as quickly as the industry average which is generally unfavourable. WestCon has more days of uncollected sales (or receivables) than the industry average, also unfavourable. Exercise 8-20 (10 minutes) Dec. 13

Dec. 31

Notes Receivable—M. Lee ................................................. Accounts Receivable—M. Lee ...................................... Record receipt of note on account.

9,500

Interest Receivable ............................................................. Interest Revenue .......................................................... Record interest earned [$9,500 x 0.08 x 18/365].

9,500

9-836

Exercise 8-21 (15 minutes) Jan. 27 Cash .................................................................................... Interest Revenue* .......................................................... Interest Receivable ........................................................ Notes Receivable—M. Lee ............................................ Record cash received on note plus interest. * $9,500 x 0.08 x (45-18)/365 = $56

9,593

Mar. 3 Notes Receivable—Tomas Co............................................. Accounts Receivable-Tomas Co.................................... Record receipt of note on account.

5,000

17 Notes Receivable—H. Cheng .............................................. Accounts Receivable—H. Cheng ................................... Record receipt of note on account.

2,000

Apr. 16 Accounts Receivable—H. Cheng ......................................... Interest Revenue ........................................................... Notes Receivable—H. Cheng ........................................ Record receivable for dishonored note plus interest [$2,000 x 0.09 x 30/365].

2,015

May 1 Allowance for Doubtful Accounts ......................................... Accounts Receivable—H. Cheng ................................... Write off account.

2,015

June 1 Cash .................................................................................... Interest Revenue ........................................................... Notes Receivable—Tomas Co....................................... Record cash received on note with interest [$5,000 x 0.10 x 90/365].

5,123

56 37 9,500

5,000

2,000

15 2,000

2,015

123 5,000

9-837

Exercise 8-22 (15 minutes) Nov. 1 Notes Receivable—K. White .................................... Accounts Receivable—K. White .................................. Record receipt of note on account.

6,000

Dec. 31 Interest Receivable ............................................................

6,000

Interest Revenue................................................. Record interest earned [$6,000 x 0.08 x 60/365]. Apr. 30 Cash .................................................................................. Notes Receivable—K. White ....................................... Interest Revenue* ........................................................ Interest Receivable ...................................................... Record cash received on note plus interest earned. *[$6,000 x 0.08 x 120/365]

Exercise 8-23 (20 minutes) Mar. 21 Notes Receivable—T. Jackson .................................. Accounts Receivable—T. Jackson ................................ Record receipt of note on account.

6,237 6,000 158 79

9,500 9,500

Sept. 17 Accounts Receivable—T. Jackson ...................................... Interest Revenue ........................................................... Notes Receivable—T. Jackson ...................................... Record note dishonored plus interest earned [$9,500 x 0.08 x 180/365 = $375].

9,875

Dec. 31 Allowance for Doubtful Accounts ......................................... Accounts Receivable—T. Jackson ................................ Write off an account.

9,875

375 9,500

9,875

*Exercise 8-24 (20 minutes) Aug. 2

Accounts Receivable .............................................. Sales ............................................................... To record sales on credit.

6,295.00 6,295.00

9-838

Cost of Goods Sold ................................................. Merchandise Inventory ................................. To record cost of sales.

3,150.00

Cash ....................................................................... Factoring Fee Expense ........................................... Accounts Receivable .................................... To record sale of accounts receivable; $18,770 × .015 = $281.55.

18,488.45 281.55

Cash ....................................................................... Accounts Receivable .................................... To record collection from credit customers.

3,436.00

Cash ....................................................................... Notes Payable ................................................. To record note; pledged $14,000 of accounts receivable as security for the loan.

10,000.00

3,150.00

18,770.00

3,436.00

10,000.00

Note: Accounts receivable in the amount of $14,000 are pledged as security for a $10,000 note payable to Fidelity Bank. *Exercise 8-25 (20 minutes) Jan. 20

Feb. 19

Notes Receivable .................................................... Accounts Receivable – Steve Stewart ............. Received note in settlement of account.

170,000.00

170,487.58

170,000.00

487.58 170,000.00

Principal of Note ..................................................... $170,000.00 Add: Interest from Note ($170,000 × 9% × 90/365) 3,772.60 Maturity Value ......................................................... $173,772.60 Less: Bank Discount ($173,772.60 × 11.5% × 60/365) 3,285.02 Proceeds ................................................................ $170,487.58

PROBLEMS Problem 8-1A (15 minutes)

9-839

Performance: Google is selling the service of advertising. Once Tech Expert‘s advertisement is posted and users click on their ad, they have completed the performance of their service. Measurable: The advertising service is measurable as Google determines the billing based on customer clicks and a rate per click. Collectability: The collectability criteria is based on whether Google will be able to collect payment from Tech Experts. As Google would require payment information such as credit card information to be provided upfront, it is probable that the revenue will be collectible. There is also no information that indicates that Tech Expert will not be able to pay for the advertising services. Conclusion: Based on analyzing the above criteria, Google should recognize the accounts receivable and revenue at the end of November. At this time, Google has provided the advertising service, the service usage of $90 ($0.30 x 300) can be determined and it is probable that the $90 is collectible.

Problem 8-2A (35 minutes) Part 1 a.

Expense is 2% of credit sales:

Dec.

Bad Debt Expense .......................................................... 171,000 Allowance for Doubtful Accounts ..................... 171,000 $11,400,000 – $2,850,000 = $8,550,000 × 0.02 = $171,000.

Allowance is 5% of accounts receivable:

Dec.

Bad Debt Expense .......................................................... Allowance for Doubtful Accounts ..................... Calculations: Total receivables $2,100,000 Percent uncollectible × 5.0% Required allowance balance $ 105,000

138,000

9-840

Problem 8-2A (concluded) Part 2 Current assets: Accounts receivable ................................................ $2,100,000 Less: Allowance for doubtful accounts .................... 138,000*

$1,962,000

OR Accounts receivable (net of $138,000 estimated uncollectible accounts*) ..................... ... $1,962,000 *Adjustment to AFDA .............................................. $171,000credit Less: Unadjusted debit balance in AFDA ................ 33,000 debit Adjusted AFDA balance .......................................... $138,000credit Part 3 Current assets: Accounts receivable ................................................ $2,100,000 Less: Allowance for doubtful accounts .................... 105,000$1,995,000 OR Current assets: Accounts receivable (net of $105,000 estimated uncollectible accounts) ...................... ... $1,995,000 Analysis component: If bad debts are not adjusted for at the end of the accounting period, matching is violated. If bad debts are not recorded at period end, they are not being matched to the revenues that caused the resulting profit and assets being overstated for that period.

9-841

Problem 8-3A (35 minutes) Part 1 1. Calculation of the required balance of the allowance: Not due: $1,500,000 ×.0125 = $ 18,750 1 to 30: $ 708,000 ×.0200 = 14,160 31 to 60: $ 152,000 ×.0650 = 9,880 61 to 90: $ 98,000 ×.3275 = 32,095 Over 90: $ 24,000 ×.6800 = 16,320 $ 91,205 credit 2. Dec.31

Bad Debt Expense .................................................. Allowance for Doubtful Accounts ..................... Calculation: AFDA 31,000 ?

60,205 60,205

= 60,205

91,205

Analysis component:

Writing off the account receivable will not affect 2024 profit. The entry to write off an account involves a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable, both of which are balance sheet accounts. Profit is affected only by the annual recognition of the estimated bad debt expense, which is journalized as an adjusting entry. Profit for 2023 (the year of the original sale) should have included an estimated expense for write-offs like this one.

9-842

Problem 8-4A (35 minutes) Part 1 1. Calculation of the required balance of the allowance: Not due: $2,050,000 ×.0125 = $ 25,625 1 to 30: $ 971,000 ×.0200 = 19,420 31 to 60: $ 207,000 ×.0650 = 13,455 61 to 90: $ 132,000 ×.3300 = 43,560 Over 90: $ 34,000 ×.6800 = 23,120 $ 125,180 credit 2. Dec.31

Bad Debt Expense .................................................. Allowance for Doubtful Accounts ..................... Calculation: AFDA 42,000 ?

83,180 83,180

= 83,180

125,180

Analysis component:

Writing off the account receivable will not affect 2024profit. The entry to write off an account involves a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable, both of which are balance sheet accounts. Profit is affected only by the annual recognition of the estimated bad debt expense, which is journalized as an adjusting entry. Profit for 2023 (the year of the original sale) should have included an estimated expense for write-offs like this one.

9-843

Problem 8-5A (35 minutes) Part A 1. a)

Cash ............................................................................. Accounts Receivable ..................................................... Sales ...................................................................... To record sales; 25% x $2,800,000 total sales = cash sales of $700,000.

700,000 2,100,000

Cost of Goods Sold ....................................................... Merchandise Inventory ........................................... To record cost of sales.

1,804,000

Sales Returns and Allowances ...................................... Accounts Receivable .............................................. Cash ...................................................................... To record return of defective merchandise to be scrapped.

108,000

Accounts Receivable ..................................................... Allowance For Doubtful Accounts........................... To reverse write-off due to recovery.

24,000

Cash ............................................................................. Accounts Receivable .............................................. To record recovery.

24,000

Allowance For Doubtful Accounts.................................. Accounts Receivable .............................................. To record write-off of uncollectible accounts.

26,000

Cash ............................................................................. Accounts Receivable .............................................. To record collections from credit customers.

1,790,000

2,800,000

1,804,000

54,000 54,000

24,000

26,000

1,790,000

9-844

Problem 8-5A (continued) Part B 2. Dec. 31

Bad Debt Expense .................................................. Allowance for Doubtful Accounts ..................... 2,100,000 – 54,000 = 2,046,000 2,046,000 × 1% = 20,460. Current assets: Accounts receivable ........................................ Less: Allowance for doubtful accounts ...........

20,460 20,460

$720,000 34,860

$685,140

OR Current assets: Accounts receivable (net of $34,860 estimated uncollectible accounts) ............... Calculation of balance in AFDA :

$685,140 AFDA 16,400

26,000

24,000 20,460 34,860

4. $20,460

9-845

Problem 8-5A (concluded) Part C 5. Dec. 31

Bad Debt Expense .................................................. Allowance for Doubtful Accounts ..................... 720,000 × 3% = 21,600 – 14,400 = 7,200.

7,200 7,200

Calculations: Accounts Receivable Dec. 31/22 490,000 Balance a) 2,100,000 54,000 c) 24,000 24,000 26,000 1,790,000 Dec. 31/23 Balance

Allowance for Doubtful Accounts 16,400 Dec. 31/22 Balance b) c) d) e)

24,000 c) d) 26,000 Unadjusted balance, 14,400 Dec. 31/23

720,000

What adjustment is needed?

? × 3% $21,600

21,600 Required adjusted balance

6. Current assets: Accounts receivable ........................................ Less: Allowance for doubtful accounts ..........

$720,000 21,600

$698,400

9-846

Current assets: Accounts receivable (net of $21,600 estimated uncollectible accounts)............... 7.

$698,400

$7,200

9-847

Problem 8-6A (35 minutes) 2023 a. Accounts Receivable ...........................................................2,250,000 Sales ........................................................................... .. 2,250,000 Cost of Goods Sold .............................................................1,240,000 Merchandise Inventory ................................................ .. 1,240,000 b.

Allowance for Doubtful Accounts .........................................34,000 Accounts Receivable ................................................... ..

34,000

Cash....................................................................................1,330,000 Accounts Receivable ................................................... .. 1,330,000

Bad Debt Expense ..............................................................47,290 Allowance for Doubtful Accounts ................................. ..

47,290

Calculations:

Beginning Balance Credit Sales

Accounts Receivable 0

2,250,000

Allowance for Doubtful Accounts Write-off

34,000

34,000 Write-offs 1,330,000 Collections 47,290

Balance

886,000 ×

13,290

Adjustment needed

Required Balance

1.5% 13,290

9-848

Problem 8-6A (concluded) 2024 e. Accounts Receivable ...........................................................2,940,000 Sales ........................................................................... .. 2,940,000 Cost of Goods Sold .............................................................1,592,000 Merchandise Inventory ................................................ .. 1,592,000 f.

Allowance for Doubtful Accounts ......................................... Accounts Receivable ................................................... ..

53,000 53,000

Cash....................................................................................2,210,000 Accounts Receivable ................................................... .. 2,210,000

Bad Debt Expense ..............................................................63,155 Allowance for Doubtful Accounts ................................. ..

63,155

Calculations:

Bal. Credit Sales

Accounts Receivable 886,000 2,940,000

53,000 Write-offs

Allowance for Doubtful Accounts Bal. 13,290 Write-offs

53,000

2,210,000 Collections 63,155

Bal.

1,563,000 ×

23,445

Adjustment needed

Required Balance

1.5% 23,445

9-849

Problem 8-7A (30 minutes) Part 1 a. 2023 Oct. 31 Bad Debt Expense ...................................................... Allowance for Doubtful Accounts ........................... To record estimate for uncollectible accounts; 1,650,000 x 1.5% = 24,750. b. Assets Current assets: Accounts receivable .............................................................. Less: Allowance for doubtful accounts* ................................

24,750 24,750

$148,000 21,550

$126,450

OR Accounts receivable (net of $21,550 estimated uncollectible accounts) .......................................................

$126,450

*Calculations: Allowance for Doubtful Accounts Unadj. Bal. Oct 31/23 3,200 Adjustment 24,750 Oct 31/23 21,550 Adj. Bal. Oct 31/23

9-850

Problem 8-7A (concluded) Part 2 c. 2023 Oct. 31 Bad Debt Expense ...................................................... Allowance for Doubtful Accounts ........................... To record estimate for uncollectible accounts; 148,000 x 5% = 7,400; 7,400 + 3,200 = 10,600.*

10,600 10,600

*Calculations: Allowance for Doubtful Accounts Unadj. Bal. Oct 31/23 3,200 Adjustment 10,600 Oct 31/23 0 7,400

Adj. Bal. Oct 31/23

d. Assets Current assets: Accounts receivable .............................................................. Less: Allowance for doubtful accounts .................................

$148,000 7,400

$140,600

OR Accounts receivable (net of $7,400 estimated uncollectible accounts) .......................................................

$140,600

9-851

Problem 8-8A (25 minutes) Part 1 Jul. 31

Bad Debt Expense .................................................. Allowance For Doubtful Accounts .................... To record estimated uncollectible accounts.

8,7201

Bad Debt Expense .................................................. Allowance For Doubtful Accounts .................... To record estimated uncollectible accounts.

6,480

8,720

Part 2 Aug. 31

6,480

Calculations:

July write-offs

Allowance for Doubtful Accounts 14,800 Balance, June 30 17,000 8,7201 Adjustment to estimate bad debts for July 6,520 Balance, July 31 2,000 Recovery of account previously written off 8,520 Unadjusted balance, August 31 What adjustment is necessary to get the 2 desired balance ? 15,000 Desired adjusted balance, August 31 based on aging analysis

6,4802

1. (904,000 – 32,000) × 1% = 8,720. 2. 15,000 – 8,520 = 6,480 is the required adjustment.

9-852

Problem 8-9A (30 minutes) a) Sept.

Customer B. Axley T. Holton W. Nix C. Percy K. Willis Totals

Not yet due

Percent Uncollectible Estimated uncollectible accounts

Aug. 1 to 29 days past due

July 30 to 59 days past due

June 60 to 89 days past due

May 90 to 119 days past due $35,000

$ 16,500 12,200 15,800 92,500 $137,000

$36,000 9,900

$45,900

$ 79,600

× 0.5%

× 10%

× 20%

459

$ 3,184

$ 2,310

$ 7,000

685

$ 74,000 $23,100 5,600 $23,100

$35,000

Total = $13,638

b) Sept. 30

Bad Debt Expense………………………… 11,738 Allowance for Doubtful Accounts……. 11,738 To record estimate for uncollectible accounts.

Calculations: Allowance for Doubtful Accounts Unadjusted Sept. 1,900 balance 30 13,638 Desired adjusted balance

What adjustment is necessary to achieve the desired adjusted balance? 11,738

9-853

Problem 8-10A (30 minutes) a. 2023 Dec. 31 Bad Debt Expense .................................................... Allowance for Doubtful Accounts ......................... To record estimated uncollectible accounts using the income statement approach; 1,940,000 x 2.5% = 48,500. 2024 Dec. 31 Bad Debt Expense .................................................... Allowance for Doubtful Accounts ......................... To record estimated uncollectible accounts; 514,000 x 4% = 20,560; 20,560 – 1,000 = 19,560. 2025 Dec. 31 Bad Debt Expense .................................................... Allowance for Doubtful Accounts ......................... To record estimated uncollectible accounts; 26,500 + 700 = 27,200.

48,500 48,500

19,560 19,560

27,200 27,200

Analysis component The normal balance in AFDA is a credit. Write-offs greater than the estimated uncollectibles recorded at the end of the previous accounting period would create a debit unadjusted balance.

9-854

Problem 8-11A (30 minutes) a), b), c)

Note 1 2 3 4

Date of Note Nov. 1/22 Jan. 5/23 Nov. 20/23 Dec. 10/23

Interest Principal Rate 4% $240,000 $100,000 5% $ 90,000 4.5% $120,000 5.5%

Term 180 days 90 days 45 days 30 days

Maturity Date Apr. 29/231 Apr. 4/232 Jan. 4/233 Jan. 9/234

Days of Accrued Interest at Dec. 31, 2023 0 0 41 days 21 days

Accrued Interest at Dec. 31, 2023 0 0 $454.935 $379.736

Calculations as denoted by superscripts: 1. Days in November ...................... 30 Minus date of note ........................... 1 Days remaining in November ........... 29 Add days in December ..................... 31 Add days in January ........................ 31 Add days in February ....................... 29 Add days in March ........................... 31 Add days in April .............................. 29 Period of note in days ...................... 180 2. Days in January .......................... Minus date of note ........................... Days remaining in January............... Add days in February ....................... Add days in March ........................... Add days in April .............................. Period of note in days ......................

31 5 26 29 31 4 90

3. Days in November ..................... Minus date of note .......................... Days remaining in November.......... Add days in December ................... Add days in January ....................... Period of note in days .....................

30 20 10 31 4 45

4. Days in December ..................... Minus date of note .......................... Days remaining in December.......... Add days in January ....................... Period of note in days .....................

31 10 21 9 30

5. $90,000 × 4.5% × 41/365 = $454.93 6. $120,000 × 5.5% × 21/365 = $379.73 d) Dec. 31/23

e) Jan. 4/24

Interest Receivable – Note 3 ................................... Interest Income ............................................... To accrue interest on Note 3.

454.93

Cash ....................................................................... 90,499.32 Interest Income ............................................... Interest Receivable ......................................... Note Receivable – Note 3 ............................... To record collection of Note 3 and interest; 90,000 x 4.5% x 45/365 = 499.32; 499.32 – 454.93 = 44.39

454.93

44.39 454.93 90,000.00

9-855

Problem 8-12A (30 minutes) a), b), c)

Note 1 2 3 4

Date of Note Dec. 1/22 April 5/23 June 20/23 July 10/23

Interest Principal Rate 4% $170,000 $ 71,000 5% $ 64,000 4.5% $ 85,000 5.5%

Term 180 days 90 days 45 days 30 days

Maturity Date May 30 /231 July 4/232 Aug. 4/233 Aug. 9/234

Days of Accrued Interest at July 31, 2023 0 0 41 days 21 days

Accrued Interest at July 31, 2023 0 0 $323.515 $268.976

Calculations as denoted by superscripts: 1. Days in December ...................... 31 Minus date of note ........................... 1 Days remaining in December ........... 30 Add days in January ........................ 31 Add days in February ....................... 28 Add days in March ........................... 31 Add days in April .............................. 30 Add days in May ............................. 30 Period of note in days ...................... 180 2. Days in April ................................ Minus date of note ........................... Days remaining in April .................... Add days in May .............................. Add days in June ............................. Add days in July ............................... Period of note in days ......................

30 5 25 31 30 4 90

3. Days in June .............................. Minus date of note .......................... Days remaining in June .................. Add days in July ............................. Add days in August ......................... Period of note in days .....................

30 20 10 31 4 45

4. Days in July ............................... Minus date of note .......................... Days remaining in July.................... Add days in August ......................... Period of note in days .....................

31 10 21 9 30

5. $64,000 × 4.5% × 41/365 = $323.51 6. $85,000 × 5.5% × 21/365 = $268.97 d) Jul. 31/23

e) Aug. 4/23

Interest Receivable – Note 3 ................................... Interest Income ............................................... To accrue interest on Note 3.

323.51

Cash ....................................................................... 64,355.07 Interest Income ............................................... Interest Receivable ......................................... Note Receivable – Note 3 ............................... To record collection of Note 3 and interest; 64,000 x 4.5% x 45/365 = 355.07; 355.07 – 323.91 = 31.56

323.51

31.56 323.51 64,000.00

9-856

Problem 8-13A (75 minutes) a) 2022 Dec.

2023 Feb.

Mar.

Apr.

Notes Receivable .................................................... Accounts Receivable—Hal Krueger .............

20,000.00

Interest Receivable ................................................. Interest Income ............................................... 20,000 x 0.055 x 15/365 = 45.21

45.21

Interest Income ....................................................... Income Summary ..........................................

45.21

20,000.00

45.21

Cash ....................................................................... 20,180.82 Interest Income ............................................... Interest Receivable ......................................... Notes Receivable .......................................... 20,000 x 5.5% x 60/365 = 180.82; 180.82 – 45.21 = 135.61 Notes Receivable .................................................... Accounts Receivable—ARC Company ........

15,000.00

Notes Receivable .................................................... Accounts Receivable—Penny Bobek ..........

6,500.00

Accounts Receivable—Penny Bobek ...................... Interest Income ............................................... Notes Receivable ............................................ 6,500 × .04 × 30/365 = 21.37

6,521.37

Days in March ............................... Minus date of note......................... Days remaining in March............... Add days in April ........................... Add days in May............................ Days to equal Maturity date ...........

135.61 45.21 20,000.00

15,000.00

6,500.00

21.37 6,500.00

31 2 29 30 31 90

Therefore, the maturity date is May 31, 2023. 2023 May

15,138.70 138.70 15,000.00

9-857

Problem 8-14A (30 minutes) a.

2023 Apr. 15 Notes Receivable – John Daley ................................ Accounts Receivable – John Daley ..................... To record acceptance of a 5%, 90-day note.

130,000.00 130,000.00

May 1 Notes Receivable – ABC Drilling .............................. Accounts Receivable – ABC Drilling .................... To record acceptance of a 4.75%, six-month note.

50,000.00

31 Interest Receivable ................................................... Interest Income ................................................... To record accrued interest at year end; Daley: 130,000 x 5% x 46/365 = 819.18; ABC: 50,000 x 4.75% x 1/12 = 197.92 1,017.10

1,017.10

50,000.00

1,017.10

July 14 Cash ......................................................................... 131,602.74 Interest Receivable .............................................. Interest Income ................................................... Notes Receivable – John Daley ........................... To record collection of note; 130,000 x 5% x 90/365 = 1,602.74 - 819.18 = 783.56. Nov. 1 Accounts Receivable – ABC Drilling ......................... Interest Income ................................................... Interest Receivable .............................................. Notes Receivable – ABC Drilling ......................... To record dishonour of note; 50,000 x 4.75% x 6/12 = 1,187.50 – 197.92 = 989.58.

51,187.50

15 Allowance for Doubtful Accounts .............................. Accounts Receivable – ABC Drilling .................... To record write-off of account receivable.

51,187.50

819.18 783.56 130,000.00

989.58 197.92 50,000.00

51,187.50

Analysis component: The debit balance of $55,187.50 (4,000 + 51,187.50) in AFDA after recording the write-off of November 15 indicates that write-offs were greater than the expected amount of uncollectibles. $55,187.50 may not be a material amount relative to total accounts receivable (unknown) in which case the underestimation is not a concern. However, if the $55,187.50 is significant in comparison to total outstanding accounts receivable, then a review of the estimating procedure and/or the credit policy are in order. Problem 8-15A (15 minutes) March 28, 2020

March 30, 2019

9-858

c. Accounts receivable turnover ratio

d. Days‘ sales outstanding

957,722,000

= 105.34

1,046,824,000

= 121.09

(7,640,000+10,543,000)/2

(10,543,000 + 6,747,000)/2

(7,640,000/ 957,722,000) x 365

(10,543,000 / 1,046,824,000) x 365

= 3 days

= 4 days

Indigo‘s accounts receivable turnover has decreased meaning that accounts receivable is being collected slower in 2020 compared to 2019. The Days‘ sales outstanding shows that the company is collecting accounts receivable in 2.9 days in 2020 compared to 3.7 days in 2019. Collecting accounts receivable in more days is favourable as the company receives cash faster to continue their operating cycle. This is a relatively small reduction in days. Overall, accounts receivable turnover ratio shows the most change from 2019 to 2020 and is unfavourable.

9-859

*Problem 8-16A (30 minutes) Mar. 2

Apr. 21

June 2

July 16

Sept. 3

Notes Receivable .................................................... Accounts Receivable – JNC Company ............

10,240.00

10,190.00 50.00

Accounts Receivable – JNC Company.................... Cash ............................................................... $10,240 + ($10,240 × .05 × 90/365) = $10,366.25

10,366.25

10,430.15

Notes Receivable .................................................... Accounts Receivable – Cecile Duval ...............

4,160.00

4,135.00 25.00

10,240.00

10,366.25

63.90 10,366.25

4,160.00

Analysis component When a business discounts notes receivable with recourse and these notes have not matured prior to year end, the business must disclose this information in the notes to the financial statements. This is a requirement because the business has a contingent liability, which means that if the maker of the note dishonours (fails to pay) the note, the business will have to pay the third party the full maturity value. This contingent liability must be disclosed to satisfy the full-disclosure principle.

9-860

*Problem 8-17A (60 minutes) 2023 Dec.

Notes Receivable .................................................... Accounts Receivable—Fred Calhoun ..............

15,000.00

Interest Receivable ................................................. Interest Income ............................................... [Interest = $15,000 × 0.06 × 20/365 = $49.32]

49.32

Interest Income ....................................................... Income Summary ............................................

49.32

15,000.00

49.32

2024 Jan.

Feb.

Mar.

May

Cash ....................................................................... 15,060.80 Interest Receivable ......................................... Interest Income ............................................... Notes Receivable ............................................ Calculations: Principal ........................................................ $15,000.00 Interest = $15,000.00 × 0.06 × (60/365) ........ 147.95 Maturity value ................................................ $15,147.95 Discount = $15,147.95 × 0.07 × (30/365) ...... 87.15 Proceeds ....................................................... $15,060.80 Accounts Receivable—Fred Calhoun...................... Cash ............................................................... [Balance = $15,147.95 + $30.00 = $15,177.95]

15,177.95

Notes Receivable .................................................... Accounts Receivable—Donna Reed ...............

4,500.00

49.32 11.48 15,000.00

15,177.95

Cash ....................................................................... 4,507.09 Interest Income ............................................... Notes Receivable ............................................ Calculations: Principal .......................................................... $4,500.00 Interest = $4,500.00 × 0.055 × (60/365) .......... 40.68 Maturity value .................................................. $4,540.68 Discount = $4,540.68 × 0.075 × (36/365) ........ 33.59 Proceeds ......................................................... $4,507.09

4,500.00

7.09 4,500.00

No entry required.

9-861

*Problem 8-17A (concluded) June

Aug.

Oct.

Nov.

Dec.

Notes Receivable .................................................... Accounts Receivable—Jack Miller...................

6,750.00

6,805.48

Notes Receivable .................................................... Accounts Receivable—Roger Addison ............

8,000.00

Cash ....................................................................... Interest Income ............................................... Notes Receivable ............................................ Calculations: Principal ........................................................ Interest = $8,000.00 × 0.05 × (60/365) .......... Maturity value ................................................ Discount = $8,065.75 × 0.065 × (40/365) ...... Proceeds .......................................................

8,008.30

6,750.00

55.48 6,750.00

8,000.00

8.30 8,000.00 $8,000.00 65.75 $8,065.75 57.45 $8,008.30

Accounts Receivable—Roger Addison.................... Cash ............................................................... [Balance = $8,065.75 + $30 = $8,095.75]

8,095.75

Cash ....................................................................... Interest Income ............................................... Accounts Receivable—Roger Addison ............ Calculations: Maturity value ................................................ Bank fee ........................................................ Balance due .................................................. Interest = $8,095.75 × 0.05 × (40/365) .......... Amount collected ...........................................

8,140.11

Allowance for Doubtful Accounts ............................ Accounts Receivable—Fred Calhoun ..............

8,095.75

44.36 8,095.75 $8,065.75 30.00 $8,095.75 44.36 $8,140.11 15,177.95 15,177.95

9-862

*Problem 8-18A (75 minutes) Year 1 Dec. 16 Notes Receivable—D. Todd ...................................... Accounts Receivable—D. Todd .................................... Record note received on account.

10,800

31 Interest Receivable ............................................................. Interest Revenue........................................................... Record interest earned. [$10,800 x .08 x 15/365 = $36].

Feb. 14 Cash ................................................................................... Interest Revenue* ......................................................... Interest Receivable ....................................................... Notes Receivable—D. Todd .......................................... Record cash received on note with interest. *[$10,800 x 0.08 x 45/365 = $106]

10,942

Mar. 2 Notes Receivable—Midnight Co.......................................... Accounts Receivable—Midnight Co. ............................. Record note received on account.

6,100

17 Notes Receivable—A. Privet ............................................... Accounts Receivable—A. Privet .................................... Record note received on account.

2,400

Apr. 16 Accounts Receivable—A. Privet .......................................... Interest Revenue........................................................... Notes Receivable—A. Privet ......................................... Record receivable for dishonored note plus interest [$2,400 x .07 x 30/365= $14].

2,414

May 31 Accounts Receivable—Midnight Co. ................................... Interest Revenue* ......................................................... Notes Receivable—Midnight Co.................................... Record receivable for dishonored note plus interest *[$6,100 x 0.08 x 90/365 = $120]

6,220

10,800

Year 2 106 36 10,800

6,100

2,400

14 2,400

120 6,100

9-863

*Problem 8-18A (Concluded) Aug. 7 Notes Receivable—Mulan ................................................... Accounts Receivable—Mulan........................................ Record note received on account.

7,440

Sept. 3 Notes Receivable—N. Carson ............................................ Accounts Receivable—N. Carson ................................. Record note received on account.

2,100

Nov. 2 Cash ................................................................................... Interest Revenue* ......................................................... Notes Receivable—N. Carson ...................................... Record cash received on note plus interest *($2,100 x 0.10 x 60/365 = $35).

2,135

5 Cash ................................................................................... Interest Revenue* ......................................................... Notes Receivable—Mulan ............................................. Record cash received on note plus interest. *($7,440 x 0.10 x 90/365 = $183)

7,623

Dec. 1 Allowance for Doubtful Accounts......................................... Accounts Receivable—A. Privet .................................... Record write-off of account.

2,414

7,440

2,100

35 2,100

183 7,440

2,414

Analysis component Financial statement footnotes Explanation: When a business pledges its receivables as security for a loan and the loan is still outstanding at period-end, the business must disclose this information in notes to its financial statements. This is a requirement because the business has committed a portion of its assets to cover a specific portion of its liabilities, which means that if the business dishonors its obligations under the loan, the creditor can claim the amount of receivables identified in the pledge as collateral to cover the loan.

9-864

ALTERNATE PROBLEMS Problem 8-1B (15 minutes) Performance: Google is selling the service of advertising. Once Google posts Ramen Noodle House‘s advertisement on the selected websites three times per day, they have completed the performance of their service. Measurable: The advertising service is measurable as Google determines the billing based on the number of times an advertisement is displayed. Collectability: The collectability criteria is based on whether Google will be able to collect payment from Ramen Noodle House. As Google would require payment information such as credit card information to be provided upfront, it is probable that the revenue will be collectible. There is also no information that indicates that Ramen Noodle House will not be able to pay for the advertising services. Conclusion: Based on analyzing the above criteria, Google should record the accounts receivable and revenue at the end of April 2023. At this time, Google has provided the advertising service, the service usage of $45 ($0.50 x 3 x 30 days) can be determined and it is probable that the $45 is collectible.

Problem 8-2B (35 minutes) Part 1 a.

Expense is 3% of credit sales:

Dec.

Bad Debt Expense .................................................. Allowance for Doubtful Accounts ..................... ($1,128,000 – $470,000 = $658,000) × .03 = $19,740.

19,740 19,740

Allowance is 6% of accounts receivable:

Dec.

Bad Debt Expense .................................................. Allowance for Doubtful Accounts ..................... Calculations: Accounts Receivable

11,240 11,240 Allowance for Doubtful Accounts 3,100 Bal. 11,240

Bal.

239,000

Adjustment Needed

14,340 Required Adjusted Bal.

× 6% 14,340

9-865

Problem 8-2B (Continued) Part 2 Current assets: Accounts receivable ............................................ Less: Allowance for doubtful accounts ................

$239,000 22,840*$216,160

OR Accounts receivable (net of $22,840 estimated uncollectible accounts) .......................................

$216,160

*Calculations: Allowance for Doubtful Accounts 3,100 Unadjusted balance 19,740 Adjustment 22,840 Adjusted balance Part 3 Current assets: Accounts receivable ............................................ Less: Allowance for doubtful accounts ................

$239,000 14,340

$224,660

OR Accounts receivable (net of $14,340 estimated uncollectible accounts) .......................................

$224,660

Analysis component: I would recommend that Stilton use the balance sheet approach to estimate uncollectible accounts receivable because it more accurately reflects uncollectible receivables since it is based on an aging analysis. The balance sheet approach does require more effort to calculate than the income statement approach. Bad debt expense represents accounts that are not expected to be collected so the fact that the income statement approach mixes both collected and uncollected accounts in its estimation of uncollectible accounts makes it less accurate than the balance sheet approach.

9-866

Problem 8-3B (35 minutes) 1. Calculation of the required balance of the allowance: Allowance for Not due: $620,000 × .0175 = $10,850 Doubtful Accounts 1 to 30: $355,600 × .025 = 8,890 Unadjusted 7,800 balance 31 to 60: $ 91,000 × .085 = 7,735 Adjustment 61 to 90: $ 11,500 × .350 = 4,025 43,860 Needed Over 90: $ 7,600 × .600 = 4,560 $36,060 36,060 Required adjusted balance

2. Dec.31

Bad debt expense ................................................... Allowance for Doubtful Accounts .....................

43,860 43,860

Analysis component Writing off the account receivable will not affect 2024 profit. The entry to write off an account involves a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable, both of which are balance sheet accounts. Profit is affected only by the annual recognition of the estimated bad debt expense, which is journalized as an adjusting entry. Profit for 2023 (the year of the original sale) should have included an estimated expense for write-offs like this one.

9-867

Problem 8-4B (35 minutes) 1. Calculation of the required balance of the allowance: Not due: 1 to 30: 31 to 60: 61 to 90: Over 90:

2. Dec.31

$1,510,000 × .0125 = $18,875 $ 715,000 × .020 = 14,300 $ 152,000 × .065 = 9,880 $ 97,000 × .330 = 32,010 $ 25,000 × .500 = 12,500 $87,565

Allowance for Doubtful Accounts Unadjusted 9,800 balance

Bad Debt Expense .................................................. Allowance for Doubtful Accounts .....................

97,365

Adjustment Needed

87,565 Required adjusted balance

97,365 97,365

9-868

Problem 8-5B (30 minutes) Part A 1. a)

Cash .............................................................................. Accounts Receivable ..................................................... Sales ...................................................................... To record sales; 15% x $1,800,000 total sales = cash sales of $270,000.

270,000 1,530,000

Cost of Goods Sold ....................................................... Merchandise Inventory............................................ To record cost of sales.

987,000

Sales Returns and Allowances ...................................... Accounts Receivable .............................................. To record return of defective merchandise to be scrapped.

31,000

Accounts Receivable ..................................................... Allowance For Doubtful Accounts ........................... To reverse write-off due to recovery.

29,000

Cash .............................................................................. Accounts Receivable .............................................. To record recovery.

29,000

Allowance For Doubtful Accounts .................................. Accounts Receivable .............................................. To record write-off of uncollectible accounts.

65,500

Cash .............................................................................. Sales Discounts ............................................................. Accounts Receivable .............................................. To record collections from credit customers less discounts of $22,000.

1,608,000 22,000

1,800,000

987,000

31,000

29,000

65,500

1,630,000

Part B 2. Dec. 31

Bad Debt Expense .................................................. 118,160 Allowance for Doubtful Accounts ..................... 118,160 1,530,000 – 31,000 – 22,000 = 1,477,000; 1,477,000 x 8% = 118,160.

9-869

Problem 8-5B (continued)

3. Current assets: Accounts receivable ........................................ Less: Allowance for doubtful accounts ............

$293,500 93,960

$199,540

OR Current assets: Accounts receivable (net of $93,960 estimated uncollectible accounts) ............... Calculation of balance in AFDA:

$199,540

AFDA 12,300 65,500

29,000 118,160 93,960

$118,160

Part C 5. Dec. 31

Bad Debt Expense .................................................. Allowance for Doubtful Accounts ..................... To record estimated uncollectible accounts receivable.

Calculations: Accounts Receivable Dec. 31/22 490,000 Balance a) 1,530,000 31,000 c) 29,000 29,000 65,500 1,630,000

35,940 35,940

Allowance for Doubtful Accounts 12,300 Dec. 31/22 Balance b) c) d) e)

29,000 c) d) Unadjusted

65,500 24,200 35,940

What adjustment is needed?

9-870

balance, Dec. 31/23 Dec. 31/23 Balance

293,500 × 4% = $11,740

11,740 Required adjusted balance

9-871

Problem 8-5B (concluded)

6. Current assets: Accounts receivable ........................................ Less: Allowance for doubtful accounts ............

$293,500 11,740

$281,760

OR Current assets: Accounts receivable (net of $11,740 estimated uncollectible accounts) ...............

$281,760

7. $35,940 Problem 8-6B (35 minutes) 2023 a. Accounts Receivable .............................................................. 1,640,000 Sales .............................................................................. ..... 1,640,000 Cost of Goods Sold ................................................................ 1,070,000 Merchandise Inventory ................................................... ..... 1,070,000 b.

Cash............................................................................................. 1,175,000 Accounts Receivable ...................................................... ..... 1,175,000

Allowance for Doubtful Accounts .................................................. Accounts Receivable ...................................................... .....

7,500 7,500

Bad Debt Expense ....................................................................... Allowance for Doubtful Accounts .................................... .....

12,075 12,075

Calculations: Accounts Receivable Credit Sales

1,640,000 1,175,000 Collections 7,500 Write-offs

Balance

Allowance for Doubtful Accounts

457,500

Write-offs

7,500

12,075

Adjustment needed

4,575

Required Adjusted Balance

9-872

1% 4,575

9-873

Problem 8-6B (concluded) 2024 e. Accounts Receivable .............................................................. 1,876,000 Sales .............................................................................. ... 1,876,000 Cost of Goods Sold ................................................................ 1,224,000 Merchandise Inventory ................................................... ... 1,224,000 f.

Cash........................................................................................... Accounts Receivable ...................................................... ...

1,444,000 1,444,000

Allowance for Doubtful Accounts ................................................ Accounts Receivable ...................................................... ...

8,600 8,600

Bad Debt Expense ..................................................................... Allowance for Doubtful Accounts .................................... ...

12,834 12,834

Bal. Credit Sales

Accounts Receivable 457,500 1,876,000

1,444,000 Collections 8,600 Write-offs

Bal.

880,900 ×

Allowance for Doubtful Accounts Bal. 4,575 Write-offs

8,600 12,834

Adjustment needed

8,809

Required Adjusted Bal.

1% 8,809

9-874

Problem 8-7B (30 minutes) Part 1 a. 2023 May 31 Bad Debt Expense .................................................................. Allowance for Doubtful Accounts ....................................... To record estimate for uncollectible accounts; 860,000 x 2.5% = 21,500. b. Assets Current assets: Accounts receivable ............................................. $132,000 Less: Allowance for doubtful accounts* ............... 23,300

21,500 21,500

$108,700

OR Accounts receivable (net of $23,300 estimated uncollectible accounts) .........................................

$108,700

*Calculations: Allowance for Doubtful Accounts Unadj. Bal. 1,800 May 31/23 Adjustment 21,500 May 31/23 23,300 Adj. Bal. May 31/23

9-875

Problem 8-7B (concluded) c. 2023 May 31 Bad Debt Expense ...................................................... Allowance for Doubtful Accounts ........................... To record estimate for uncollectible accounts; 5,560* – 1,800 = 3,760.**

3,760 3,760

*Calculations: May 31, 2023 Accounts Receivable $ 98,000 27,000 7,000

Expected Percentage Uncollectible 1% 4% 50%

Estimated Uncollectibles = 980 = 1,080 = 3,500 5,560

**Calculations: Allowance for Doubtful Accounts Unadj. Bal. 1,800 May 31/23 3,760

Adjustment May 31/23

5,560

Adj. Bal. May 31/23

d. Assets Current assets: Accounts receivable ............................................. Less: Allowance for doubtful accounts ................

$132,000 5,560

$126,440

OR Accounts receivable (net of $5,560 estimated uncollectible accounts) .........................................

$126,440

9-876

Problem 8-8B (35 minutes) Part 1 Oct. 31

Bad Debt Expense .................................................. Allowance For Doubtful Accounts .................... To record estimated uncollectible accounts; 1,746,000 x .005 = 8,730.

8,730

Bad Debt Expense .................................................. Allowance For Doubtful Accounts .................... To record estimated uncollectible accounts.

2,820

8,730

Part 2 Nov. 30

2,820

Calculations:

Bal. Sept. 30

Accounts Receivable 235,000

Revenues on credit

1,746,000

Set-up recovery

6,1002

Bal. Oct. 31

440,400

Revenues on credit

1,680,000

1,532,000

Allowance for Doubtful Accounts 13,700 Bal. Sept. 30 2

14,700 Write-off of uncollectible account

225,000

6,100 Write-off of uncollectible account

14,700

Recovery

8,7301 Adjustment to estimate bad debts for October 13,830 Bal. Oct. 31

1,890,000 Collection of customer accounts 5,400 Write-off of uncollectible account

Bal. Nov. 30

Collection of customer accounts

Write-off of uncollectible account

5,400

8,430 Unadjusted bal. Nov. 30 What 2,820 adjustment is necessary to get the balance? 11,2503 Desired bal. Nov. 30

9-877

Problem 8-8B (concluded) Calculations: 1. 1,746,000 × ½% = 8,730 2. To record the collections, which included the 6,100 recovery: Cash (6,100 of this amount was a recovery) A/R (6,100 of this amount was a recovery). Accounts receivable Allowance for doubtful accounts 3. 225,000 × 5% = 11,250 4. 11,250 – 8,430 = 2,820

1,532,000 1,532,000 6,100

6,100

9-878

Problem 8-9B (30 minutes) a) Aug. + July

June 1 to 29 days past due

Not yet due A. Leslie T. Meston P. Obrian L. Timms W. Victor Totals Percent Uncollectible

May 30 to 59 days past due

32,000 + 58,000 = 90,000

April 60 to 89 days past due

$24,000 $52,000

42,000 + 104,000 = 146,000 28,000 122,000 + 64,000 = 186,000 $450,000

Estimated uncollectible accounts

$52,000 166,000 $218,000

126,000 $150,000

$52,000

× 20%

1.5%

6,750

4,360

$10,400

$ 7,500

Total = $29,010

b) Aug. 31

Bad Debt Expense .................................................. Allowance for Doubtful Accounts ..................... To record estimate for uncollectible accounts.

38,610 38,610

Calculations: Allowance for Doubtful Accounts Unadjusted balance Aug. 31

9,600 38,610 Desired 29,010 adjusted balance

What adjustment is necessary to achieve the desired adjusted balance?

9-879

Problem 8-10B (30 minutes) 2023 Mar. 31 Bad Debt Expense .................................................... Allowance for Doubtful Accounts ......................... To record estimated uncollectible accounts using the income statement approach; 4,640,000 x .4% or .004 = 18,560. 2024 Mar. 31 Bad Debt Expense .................................................... Allowance for Doubtful Accounts ......................... To record estimated uncollectible accounts; 298,000 x 5.5% = 16,390; 16,390 + 900 = 17,290. 2025 Mar. 31 Bad Debt Expense .................................................... Allowance for Doubtful Accounts ......................... To record estimated uncollectible accounts; 12,900 – 4,600 = 8,300.

18,560 18,560

17,290 17,290

8,300 8,300

Analysis component Year 2023 2024 2025

Allowance for Doubtful Accounts $17,460* 16,390 12,900

Accounts Receivable $243,000 298,000 253,000

Sales $4,640,000 3,971,000 3,750,000

*18,560 – 1,100 = 17,460 Sales have decreased by almost 20% since 2023, while the balance in Accounts Receivable has increased by $10,000, indicating that the collection of receivables is less efficient in 2025 than in 2023. This should be investigated further. The balance in the Allowance for Doubtful Accounts account remains at a small percentage of sales.

9-880

Problem 8-11B (30 minutes) (a)

Note 1 2 3 4

Date of Note Sept. 20/22 Jun. 1/23 Nov. 23/23 Dec. 18/23

Principal $490,000 $240,000 $164,000 $120,000

Interest Rate 3% 3.5% 4.5% 4%

Term 120 days 45 days 90 days 30 days

Maturity Date Jan. 18/231 July 16/232 Feb. 21/243 Jan. 17/244

(b) Days of Accrued Interest at Dec. 31, 2023 0 0 38 days 13 days

Calculations as denoted by superscripts: 1. Days in September ...................... 30 Minus date of note ............................ 20 Days remaining in September .......... 10 Add days in October ......................... 31 Add days in November ..................... 30 Add days in December ..................... 31 Add days in January ......................... 18 Period of note in days....................... 120 2. Days in June ............................... Minus date of note ............................ Days remaining in June .................... Add days in July ............................... Period of note in days.......................

30 1 29 16 45

3. Days in November ......................... Minus date of note .............................. Days remaining in November .............. Add days in December ........................ Add days in January ........................... Add days in February .......................... Period of note in days .........................

30 23 7 31 31 21 90

4. Days in December ......................... Minus date of note .............................. Days remaining in December .............. Add days in January ........................... Period of note in days .........................

31 18 13 17 30

5. $164,000 × 4.5% × 38/365 = $768.33 6. $120,000 × 4% × 13/365 = $170.96 d)

2023 Dec. 31

Interest Receivable – Note 4 ................................... Interest Income ............................................... To accrue interest on Note 4.

170.96 170.96

2024 Jan. 17

Cash ....................................................................... 120,394.52 Interest Income ............................................... Interest Receivable ......................................... Note Receivable – Note 4 ............................... To record collection of Note 4 and interest; 120,000 x 4% x 30/365 = 394.52; 394.52 – 170.96 =223.56.

223.56 170.96 120,000.00

9-881

Problem 8-12B (30 minutes) (a)

Note 1 2 3 4

Interest Date of Note Principal Rate Nov. 1/22 $370,000 3% Jan. 5/23 $212,000 3.5% Nov. 20/23 $102,000 4.5% Dec. 10/23 $135,000 5.5% Calculations as denoted by superscripts: 1. Days in November ....................... 30 Minus date of note ............................ 1 Days remaining in November ........... 29 Add days in December ..................... 31 Add days in January ......................... 31 Add days in February ....................... 28 Add days in March............................ 31 Add days in April .............................. 30 Period of note in days....................... 180 2. Days in January........................... 31 Minus date of note ............................ 5 Days remaining in January ............... 26 Add days in February ....................... 28 Add days in March............................ 31 Add days in April .............................. 30 Add days in May ............................... 5 Period of note in days....................... 120

Maturity Date Apr. 30/231 May 5/232 Feb. 18/243 Jan. 9/244

30 20 10 31 31 18 90

31 10 21 9 30

5. $102,000 × 4.5% × 41/365 = $515.59 6. $135,000 × 5.5% × 21/365 = $427.19

2023 Dec. 31

Term 180 days 120 days 90 days 30 days

(b) Days of Accrued Interest at Dec. 31, 2023 0 0 41 days 21 days

Interest Receivable – Note 4 ................................... Interest Income ............................................... To accrue interest on Note 4.

427.19 427.19

2024 Jan. 9

Cash ....................................................................... 135,610.27 Interest Income ............................................... Interest Receivable ......................................... Note Receivable – Note 4 ............................... To record collection of Note 4 and interest; 135,000 x 5.5% x 30/365 = 610.27; 610.27 – 427.19 = 183.08.

183.08 427.19 135,000.00

9-882

Problem 8-13B (75 minutes) a. 2023 Nov. 16

Dec.

Notes Receivable .................................................... Accounts Receivable—Bess Parker ................ 31

2024 Feb.

Mar.

74,000.00 74,000.00

Interest Receivable ......................................................... Interest Income ............................................... $74,000 × .04 × 45/365 = $364.93

364.93

Interest Income ............................................................... Income Summary ............................................

364.93

74,729.86 364.93 364.93 74,000.00

Notes Receivable ............................................................ Accounts Receivable—The Simms Co. ...........

36,000.00 36,000.00

Notes Receivable ............................................................ Accounts Receivable—Bedford Holmes ..........

62,000.00 62,000.00

Accounts Receivable—The Simms Co ............................ Interest Income ............................................... Notes Receivable ............................................ $36,000 × .055 × 30/365 = $162.74.

36,162.74

b. Days in March .............................. Minus date of note ........................ Days remaining in March .............. Add days in April .......................... Days to equal Maturity date ..........

162.74 36,000.00

31 1 30 30 60

Therefore, the maturity date is April 30, 2024. 2024 Apr.

62,484.11 484.11 62,000.00

9-883

Problem 8-14B (30 minutes) a.

2023 Nov. 17 Notes Receivable – RoadWorks ............................... Accounts Receivable – RoadWorks .................... To record acceptance of 5.5%, 90-day note. Dec. 1 Notes Receivable – Ellen Huskey ............................. Accounts Receivable – Ellen Huskey .................. To record acceptance of 5.5%, four-month note. 2024 Jan. 31 Interest Receivable ................................................... Interest Income ................................................... To record accrued interest; RoadWorks: 90,000 x 5.5% x 75/365 = 1,017.12; Huskey: 36,000 x 5.5% x 2/12 = 330.00 1,347.12

90,000.00 90,000.00

36,000.00 36,000.00

1,347.12 1,347.12

Feb. 15 Cash......................................................................... Notes Receivable – RoadWorks .......................... Interest Receivable .............................................. Interest Income ................................................... To record collection of note; 90,000 x 5.5% x 90/365 = 1,220.55; 1,220.55 – 1,017.12 = 203.43.

91,220.55

Apr. 1 Accounts Receivable – Ellen Huskey ....................... Interest Receivable .............................................. Interest Income ................................................... Notes Receivable – Ellen Huskey ........................ To record dishonour of note; 36,000 × 5.5% × 4/12 = 660.00; 660.00 – 330.00 = 330.00.

36,660.00

July 15 Allowance for Doubtful Accounts .............................. Accounts Receivable – Ellen Huskey .................. To record write-off of accounts receivable.

36,660.00

90,000.00 1,017.12 203.43

330.00 330.00 36,000.00

36,660.00

Analysis component: The credit balance in AFDA is $13,340.00 (50,000 – 36,660) after recording the July 15 writeoff. Assuming no additional write-offs were recorded prior to year end, the large unused portion of AFDA indicates that write-offs were significantly less than expected.

9-884

Problem 8-15B (10 minutes)

2020 a. Accounts receivable turnover ratio

1,570,600,000

2019 = 4.94 times

(265,200,000+ 370,700,000)/2

1,581,600,000

= 4.96

times (370,700,000 +266,800,000)/2

b. Days‘ sales in inventory

(265,200,000 /1,570,600,000) x 365 = 62 days

(370,700,000 /1,581,600,000) x 365 = 86 days

Spin Master‘s accounts receivable turnover ratio has decreased very slightly meaning that accounts receivable is being collected slower in 2020 compared to 2019. (The difference is so small that it is basically the same.) A decrease is generally unfavourable. The days‘ sales outstanding shows that the company is collecting accounts receivable in fewer days in 2020 compared to 2019. This change is favourable and consistent with the lower ending A/R balance as a percentage of sales in 2020, which was 16.89% compared to 23.44% in ending 2019.

These results appear contradictory because the accounts receivable turnover ratio is calculated using the average accounts receivable balance and the days‘ sales outstanding is calculated using the ending accounts receivable balance.

9-885

*Problem 8-16B (30 minutes) Date Mar. 1

June 21

July 5

Sept. 25

Description ...................................................... Notes Receivable .................................................... Accounts Receivable – Bolton Company .........

Debit Credit 50,000

49,900 100

Notes Receivable .................................................... Accounts Receivable – Vince Soto ..................

22,000

21,525 475

50,000

22,000

No entry required.

9-886

*Problem 8-17B (60 minutes) Jan.

Mar.

June

July

Aug.

Sept.

Notes Receivable .................................................... Accounts Receivable—David Huerta ...............

3,000.00

Accounts Receivable—David Huerta ...................... Interest Income ............................................... Notes Receivable ............................................ $3,000 × .06 × 60/365 = $29.59.

3,029.59

Notes Receivable .................................................... Accounts Receivable—Rose Jones.................

2,100.00

Cash ....................................................................... Interest Expense ..................................................... Notes Receivable ............................................ Calculations: Principal ........................................................ Interest = $2,100.00 × 0.05 × (90/365) .......... Maturity value ................................................ Discount = $2,125.89 × 0.08 × (81/365) ........ Proceeds .......................................................

2,088.15 11.85

3,000.00

29.59 3,000.00

2,100.00

2,100.00 $2,100.00 25.89 $2,125.89 37.74 $2,088.15

No entry required

Cash ....................................................................... Notes Receivable .................................................... Accounts Receivable—Jake Thomas ..............

700.00 1,300.00

Cash ....................................................................... Interest Income ............................................... Notes Receivable ............................................ Calculations: Principal ........................................................ Interest = $1,300.00 × 0.06 × (60/365) .......... Maturity value ................................................ Discount = $1,312.82 × 0.07 × (33/365) ........ Proceeds .......................................................

1,304.51

2,000.00

4.51 1,300.00 $1,300.00 12.82 $1,312.82 8.31 $1,304.51

Accounts Receivable—Jake Thomas...................... Cash ...................................................................

1,322.82

Notes Receivable .................................................... Accounts Receivable—Ginnie Bauer ..................

1,500.00

1,322.82

1,500.00

9-887

*Problem 8-17B (concluded) Oct.

Nov.

Dec.

Cash ....................................................................... Interest Income ............................................... Notes Receivable ............................................ Calculations: Principal ........................................................ Interest = $1,500.00 × 0.055 × (60/365) ........ Maturity value ................................................ Discount = $1,513.56 × 0.07 × (21/365) ........ Proceeds .......................................................

1,507.46 7.46 1,500.00 $1,500.00 13.56 $1,513.56 6.10 $1,507.46

Accounts Receivable—Ginnie Bauer ...................... Cash ...............................................................

1,523.56

Cash ....................................................................... Interest Income ................................................ Accounts Receivable—Ginnie Bauer ............... 1,523.56 x 5.5% x 30/365 = 6.89.

1,530.45

Allowance for Doubtful Accounts ............................ Accounts Receivable—David Huerta ............... Accounts Receivable—Jake Thomas ..............

4,352.41

1,523.56

6.89 1,523.56

3,029.59 1,322.82

9-888

*Problem 8-18B (75 minutes) Part 1 Year 1 Nov. 1 Notes Receivable—S. Julian ......................................... Accounts Receivable—S. Julian........................................ Record note received on account.

4,800

Dec. 31 Interest Receivable ........................................................ Interest Revenue............................................................... Record interest earned [$4,800 x 0.08 x 60/365].

4,800

Year 2 Jan. 30 Cash ....................................................................................... Interest Revenue* ............................................................. Interest Receivable ........................................................... Notes Receivable—S. Julian ............................................. Record cash received on note with interest. *[$4,800 x 0.08 x 30/365]

4,895

Feb. 28 Notes Receivable—King Co .................................................... Accounts Receivable—King Co. ....................................... Record note received on account.

12,600

Mar. 1 Notes Receivable—M. Shelley ................................................ Accounts Receivable—M. Shelley ..................................... Record note received on account.

6,200

30 Accounts Receivable—King Co .............................................. Interest Revenue............................................................... Notes Receivable—King Co .............................................. Record receivable for dishonored note plus interest [$12,600 x 0.08 x 30/365].

12,683

Apr. 30 Cash ....................................................................................... Interest Revenue............................................................... Notes Receivable—M. Shelley .......................................... Record cash received on note plus interest ($6,200 x 0.12 x 60/365 = $122).

6,322

32 63 4,800

12,600

6,200

83 12,600

122 6,200

*Problem 8-18B (Concluded) June 15 Notes Receivable—R. Solon ...................................... Accounts Receivable—R. Solon...................................... Record note received on account.

2,000

9-889

June 21 Notes Receivable—J. Felton ................................................

9,500

Accounts Receivable—J. Felton .................................... Record note received on account.

9,500

Aug. 26 Cash .................................................................................... Interest Revenue* .......................................................... Notes Receivable—R. Solon .......................................... Record cash received on note plus interest. *[$2,000 x 0.08 x 72/365]

2,032

Sept. 19 Cash ............................................................................. Interest Revenue* .......................................................... Notes Receivable—J. Felton .......................................... Record cash received on note plus interest. *[$9,500 x 0.08 x 90/365]

9,687

Nov. 30 Allowance for Doubtful Accounts .......................................... Accounts Receivable—King Co ..................................... Record write-off of accounts.

12,683

32 2,000

187 9,500

12,683

Part 2 Financial statement footnotes Explanation: When a business pledges its receivables as security for a loan and the loan is still outstanding at period-end, the business must disclose this information in notes to its financial statements. This is a requirement because the business has committed a portion of its assets to cover a specific portion of its liabilities, which means that if the business dishonors its obligations under the loan, the creditor can claim the amount of receivables identified in the pledge as collateral to cover the loan.

9-890

Analytical and Review Problems

A&R Problem 8-1 (20 minutes) a) b) c) d) e) f)

$96,500 (158,500 – 48,000 – 14,000) $89,500 (96,500 + 52,000 + 21,000 – 7,000 – 52,000 – 21,000) $168,000 (104,000 + 43,000 + 21,000) $104,000 (48,000 + 104,000 – 48,000) $206,500 (48,000 + 17,000 + 89,500 + 52,000) $237,000 [(–158,500 + 7,000 + 206,500 + 14,000) + 168,000]

Dec. 31 Bad Debt Expense ................................................... Allowance for Doubtful Accounts ..................... $168,000 × .025 = $4,200; $14,000 + $4,200 – $200 = $18,000.

$4,200

Current assets: Accounts receivable ....................................................... Less: Allowance for doubtful accounts ...........................

18,000 18,000

$168,000 4,200

$163,800

OR Current assets: Accounts receivable (net of $4,200 estimated uncollectible accounts) ..............................

$163,800

Analysis component: Farthington maintains an Accounts Receivable Subledger because keeping records by individual credit customer makes it easier to retrieve and track information such as which customers are/are not paying their accounts in a timely manner. Farthington might also maintain an accounts payable subledger to monitor credit with suppliers, an inventory subledger to monitor inventory, and a capital asset subledger to monitor capital assets.

9-891

A&R Problem 8-2 a. Maturity dates are April 30, 2023 and February 1, 2024, respectively. b. 2023 Jan. 15 Accounts Receivable – JanCo .............................. Sales ................................................................ To record credit sales; terms 3/5, n/15.

29,000.00 29,000.00

15 Cost of Goods Sold ............................................... Merchandise Inventory ..................................... To record cost of sales.

25,000.00

16 Allowance for Doubtful Accounts ........................... Accounts Receivable – Fedun ........................ Write-off uncollectible account.

15,000

20 Cash ..................................................................... Sales Discounts .................................................... Accounts Receivable – JanCo ......................... To record collection of credit sale within the discount period.

28,130.00 870.00

Mar. 1 Notes Receivable – Parker Holdings ..................... Accounts Receivable – Parker Holdings .......... To record acceptance of 60-day, 7% note.

12,000.00

Apr. 15 Cash ..................................................................... Credit Card Expense ............................................. Sales ................................................................ Credit card sale; 71,000 x 1% = 710.00. 15 Cost of Goods Sold ............................................... Merchandise Inventory ..................................... To record cost of sales. 30* Cash ..................................................................... Notes Receivable – Parker Holdings ................ Interest Income ................................................ To record collection of note and interest; 12,000 x 7% x 60/365 = 138.08.

70,290.00 710.00

* Days in March Minus date of note Days remaining in March Days to equal 60 days or Maturity Date, April 30 Period of the note in days

25,000.00

15,000

29,000.00

12,000.00

71,000.00 62,000.00 62,000.00 12,138.08 12,000.00 138.08

31 1 30 30 60 days

A&R Problem 8-2 (continued)

9-892

Nov. 1 Notes Receivable – Grant Company ............. Accounts Receivable – Grant Company ... To record acceptance of three-month, 6% note.

24,000.00 24,000.00

Dec. 31 Interest Receivable ....................................... Interest Income ........................................ To record accrued interest; 24,000 x 6% x 2/12 = 240.

240.00

31 Bad Debt Expense ........................................ Allowance for Doubtful Accounts .............. To record estimated uncollectible accounts; 9,700 – 1,600 = 8,100.

8,100.00

2024 Feb. 1 Accounts Receivable – Grant Company ........ Interest Receivable .................................. Interest Income ........................................ Notes Receivable – Grant Company ........ To record dishonour of note; 24,000 x 6% x 1/12 = 120.

240.00

8,100.00

24,360.00 240.00 120.00 24,000.00

Mar. 5 Accounts Receivable – Derek Holston .......... Allowance for Doubtful Accounts .............. To reverse write-off.

1,500.00

5 Cash ............................................................. Accounts Receivable – Derek Holston To record collection of account previously written off.

1,500.00

14 Allowance for Doubtful Accounts ................... Accounts Receivable – Grant Company To record write-off.

24,360.00

1,500.00

24,360.00

Analysis component: A change in the receivable turnover from 7 to 7.5 in 2023 to 2024 is favourable and indicates that receivables are being collected more quickly which has a positive effect on cashflow.

9-893

Ethics Challenge EC 8-1 1.

If the estimate for bad debts is reduced then a lower bad debt expense will be recognized on the Income Statement resulting in a higher profit. Also a smaller allowance will be shown on the Balance Sheet which will result in a higher realizable value for receivables and, therefore, a larger amount of current, liquid assets.

Often accounting procedures allow for alternate accounting treatments or require the use of estimates. Therefore executives have some leeway in their application of accounting procedures. In this case it seems reasonable to doubt the motivation behind the CEO‘s recommendation for a lower bad debt expense. There does not appear to be any economic or business justification for the change in estimate aside from the self-interest of the CEO.

An effective board of directors will be aware of alternate accounting treatments and how estimates can affect the financial statements. The board should review the reasonableness of the CEO‘s and controller‘s estimates for bad debt expense. Also, the external auditors will review the estimate for reasonableness as part of their annual review.

9-894

Focus on Financial Statements FFS 8-1 Dover Plumbing Sales and Service Balance Sheet March 31, 2023 Assets Current assets: Cash1 ................................................................................... Accounts receivable ............................................................. $28,000 Less: Allowance for doubtful accounts ............................ 1,800 Merchandise inventory ......................................................... Prepaid insurance ................................................................ Prepaid rent ......................................................................... Total current assets .............................................................

$16,4001 26,200 9,000 3,800 6,500 $ 61,900

Non-current investments: Notes receivable, due December 1, 2025 ............................ Property, plant and equipment: Tools ................................................................................ Less: Accumulated depreciation ................................... Truck ................................................................................ Less: Accumulated depreciation ................................... Total property, plant and equipment ................................. Total assets ............................................................................. Liabilities Current liabilities: Accounts payable............................................................... Salaries payable ................................................................ Unearned plumbing fees .................................................... Notes payable, due February 1, 2024 .............................. Total current liabilities ................................................... Non-current liabilities: Notes payable, due August 31, 2026................................ Total liabilities ......................................................................

14,000

$82,000 11,000 $67,000 14,000

$71,000 53,000 124,000 $199,900

$ 6,900 3,200 9,000 6,000 $25,100 17,000 $ 42,100

Equity Clara Dover, capital2 ............................................................ Total liabilities and equity ........................................................

157,800 $199,900

Calculations: 1. Cash of 16,000 was combined with Petty cash of 400 = 16,400 2. 248,770 – 5,600 – 20 – 72,000 – 103,000 – 2,000 – 5,000 – 7,100 – 250 + 121,000 – 23,000 – 118,000 + 124,000 = 157,800

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FFS 8-1 (concluded) Analysis component: 2023 $26,200/$121,000 × 365 = 79.03 days

2022 $21,200/$86,000 × 365 = 89.98 days

Dover has a shorter days‘ sales uncollected at March 31, 2023 than at March 31, 2022 indicating that it has become more efficient in collecting receivables. This is a favourable change especially considering that sales and receivables are at a higher level in 2023 than in 2022.

FFS 8-2 1. Accounts receivable is a current asset. It results from credit sales to customers. 2. Spin Master‘s trade receivables decreased in total by $105,500,000 or 28.46% (105,500,000/370,700,000 × 100), which is less than the corresponding decrease in revenue of $11,000,000 or .7% (11,000,000/1,581,600,000 × 100). Revenues for the year ended December 31, 2020 were $1,570,600,000 and for the year ended December 31, 2019 $1,581,600,000. It would seem logical that if revenue decreased, receivables would also decrease by a similar proportion. Spin Master has a larger percentage decrease in receivables which may indicate that they have tightened their customer credit policies. The allowance for doubtful accounts at December 31, 2020 was $3,200,000 and at December 31, 2019 was $600,000. The dollar value of receivables written off in fiscal 2020 was $1,600,000 and in fiscal 2019 was $800,000.

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Critical Thinking Question CT 8-1 Note to instructor: Student responses will vary therefore the answer here is only suggested and not inclusive of all possibilities; it is presented in point form for brevity. This mini-case is based on a real life situation where the external auditor detected a fraud perpetrated for the purpose of ensuring that the bank did not call in a loan because the required quick ratio was not being maintained. Problem(s): — To determine if Delta Designs should be approved for a $600,000 loan Goal(s)*: — To review information provided by Delta Designs to determine if a loan should be granted or not Assumption(s)/Principle(s): — Information provided by Delta Designs should be based on GAAP Facts: — as presented — If sales, all on credit, occur evenly throughout the year, that averages out to $331,667/month (3,980,000/12 = 331,667). — 85% or $401,200 of the receivables balance are not yet due (472,000 × 85% = 401,200) — The receivables not yet due is 21% (401,200 – 331,667 = 69,533/331,667 × 100) greater than the average monthly sales on credit; receivables not yet due should be less than the average monthly sales on credit Conclusion(s)/Consequence(s): — The accounts receivable balance needs to be investigated as it appears that it is inflated (whether the overstatement is intentional or not also needs to be determined which, if intentional, may have legal implications for Delta Designs and, whether intentional or not, will likely cause the bank to impose consequences)

*The goal is highly dependent on ―perspective.‖

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SOLUTIONS MANUAL to accompany

Fundamental Accounting Principles th

17 Canadian Edition by Larson/Dieckmann/Harris

Revised for the 17th Edition by:

John Harris, Seneca College Technical checks by: Rhonda Heninger, SAIT

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Chapter 9

Property, Plant and Equipment and Intangibles

Chapter Opening Critical Thinking Challenge Questions* You are asked by the CFO of YVR to evaluate the newest capital asset, the Airside Operations Building at YVR, and to break it into major components for depreciation purposes. Identify at least five major components and determine an expected life for each of those components. Components of the Airside Operations Building could include:

1. Building exterior walls 2. Roofing 3. Pavement 4. Landscaping 5. Electrical Components 6. Flooring 7. Plumbing 8. Furniture and Fixtures 9. Fire Equipment 10. Snow Removal Equipment

40 years 25 years 15 years 10 years 15 years 15 years 15 years 15 years 20 years 20 years

*The Chapter 9 Critical Thinking Challenge questions are asked at the beginning of this chapter. Students are reminded at the conclusion of the chapter to refer to the Critical Thinking Challenge questions at the beginning of the chapter. The solutions to the Critical Thinking Challenge questions are available here in the Solutions Manual and accessible to students in the print and ebooks.

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Knowledge Check-Up Questions 1. a)

2. d)

3. d)

4. d)

7. b)

8. d)

9. c)

5. c) 6. c) 10. c)

Concept Review Questions 1.

A property, plant and equipment asset is long-lived in that it has a service life of longer than one accounting period; it is used in the production or sale of products or services. It is different from other assets such as receivables or inventory in that the property, plant and equipment is used within the operations of business to generate profit, whereas inventory is purchased or manufactured for resale. Receivables represent the amounts due from customers based on past transactions.

Land held for future expansion is classified as a long-term investment. It is not a property, plant and equipment asset because it is not being used in the production or sale of other assets or services.

The cost of a property, plant and equipment asset includes all normal, reasonable, and necessary costs of getting the asset in place and ready to use. For example, cost includes such items as the invoice price paid, freight costs, non refundable sales taxes (PST, HST) and all costs incurred related to installing and testing an asset before it is put into use.

Land is an asset with an unlimited life and, therefore, is not subject to depreciation. Land improvements refer to items such as fencing, parking lots surfaces, landscape lighting and have limited lives and are depreciated over their useful lives.

5. No. The Accumulated Depreciation, Machinery account is a contra asset account with a credit balance that does not represent cash or any other funds. Funds available for buying machinery would be shown on the balance sheet as liquid assets with debit balances, such as the account Cash and Cash Equivalents. The balance of the Accumulated Depreciation, Machinery account shows the portion of the machinery's original cost that has been charged to depreciation expense, and gives some indication of how soon the asset will need to be replaced. 6. Repairs are made to keep a plant and equipment asset in normal, good operating condition, and should be charged to expense of the current period. Repairs and maintenance expenses decrease profit on the income statement in the current period. Betterments are made to extend the service potential or the life of a plant and equipment asset beyond the original estimated life and are charged to the plant and equipment asset account. After incurring a betterment, a depreciation policy also needs to be established. 7. Because the $75 cost of the plant and equipment asset is not likely to be material to the users of the financial statements, the materiality principle justifies charging it to expense.

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8. Spin Master had Depreciation and amortization of 103 and 84.6 (millions) in 2020 and 2019 as seen on the Consolidated statements of Cash flows. 9. A company might sell or exchange an asset when it reaches the end of its useful life, or if it becomes inadequate or obsolete, or because the company has changed its business plans. An asset may also be damaged or destroyed by fire or some other accident. 10. An intangible asset has no physical existence. Its value comes from the unique legal and contractual rights held by its owner.

11. Types of intangible assets are patents, copyrights, leaseholds, drilling rights, and trademarks. 12. Indigo reported $24,571,000 as Intangible assets at March 28, 2020. 13. A business can only record goodwill when the price paid for a company being purchased exceeds the fair market value of this company‘s net assets (assets minus liabilities) if purchased separately. 14. Recipe reported Goodwill at December 31, 2020 of $198,313,000. 15. When an asset is constructed, such as the development of a new runway, all costs for construction-related materials and labour costs can be capitalized. Also, any electricity and utilities consumed relating to the project, plus a reasonable amount for depreciation on any equipment used during construction. Other permitted costs include design fees, building materials and any interest charges on debt outstanding during the period of construction incurred to finance the project.

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QUICK STUDY Quick Study 9-1 (5 minutes) $18,000 + $180,000 + $3,000 + $600 = $201,600

Quick Study 9-2 (10 minutes) Invoice cost ............................................................. Freight costs ........................................................... Steel mounting ........................................................ Assembly ................................................................ Less: discount ($11,000 × 2%) .............................. Total acquisition costs ........................................

$11,000 280 815 4,055 (220) $15,930

Note: The $50 gloves are an expense and therefore not capitalized.

Quick Study 9-3 (10 minutes) 1.

(a) Repairs & Maintenance Expense (b) Betterment (c) Repairs & Maintenance Expense (d) Betterment

2. (a) Mar. 15

(b) Mar. 15

(d) Mar. 15

Repairs Expense ................................. Accounts Payable .......................... To record repairs.

120

Refrigeration Equipment .................... Accounts Payable .......................... To record a betterment.

40,000

Repairs Expense ................................. Accounts Payable .......................... To record repairs.

200

Office Building .................................... Accounts Payable .......................... To record a betterment.

175,000

120

40,000

200

175,000

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Quick Study 9-4 (10 minutes) (a) PPE Item

Land Building Totals

Appraised Values $ 320,000 180,000 $ 500,000

(b) Ratio of Individual Appraised Value to Total Appraised Value (a)  Total Appraised Value

320,000  500,000 = .64 or 64% 180,000  500,000 = .36 or 36%

$ 345,6001 2 194,400 $ 540,000

1. 64% x 540,000 = 345,600 2. 36% x 540,000 = 194,400

2023 Apr. 14

Land ........................................................... Building ..................................................... Cash ...................................................... Notes Payable ...................................... To record purchase of land and building.

345,600 194,400 85,000 455,000

Quick Study 9-5 (10 minutes) TechCom Partial Balance Sheet October 31, 2023 Assets Current assets: Cash ....................................................................... Accounts receivable .............................................. Less: Allowance for doubtful accounts ............ Total current assets .............................................. Property, plant and equipment: Land ........................................................................ Vehicles .................................................................. Less: Accumulated depreciation ....................... Equipment .............................................................. Less: Accumulated depreciation ....................... Total property, plant and equipment .................... Intangible assets: Patent ...................................................................... Less: Accumulated amortization, patent Total assets ......................................................................

$ 9,000 $16,400 800

15,600 $ 24,600 $48,000

$62,000 13,800 $25,000 3,800

48,200 21,200 117,400

$20,100 3,100

17,000 $159,000

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Quick Study 9-6 (10 minutes) ($55,900 – $1,900)/4 = $13,500/year Quick Study 9-7 (10 minutes) 1. Straight-line depreciation for the first year. [($140,000 - $20,000) / 6 years] x 3/12

= $ 5,000

2. Straight-line depreciation for the second year. ($140,000 - $20,000) / 6 years = $20,000

Quick Study 9-8 (10 minutes) Rate per copy = ($45,000 – $5,000)/4,000,000 copies = $0.01/copy

Year 2023 2024 2025 2026 2027

Calculation $.01 × 650,000 $.01 × 798,000 $.01 × 424,000 $.01 × 935,000 $.01 × 1,193,000

= = = = =

Annual Depreciation $6,500 7,980 4,240 9,350 11,930 $40,000

Quick Study 9-9 (10 minutes) Annual rate of depreciation = 2/5 = .40 or 40% per year Annual Year Calculation Depreciation 2023 40% × $86,000 = $34,400 2024 40% × ($86,000 – $34,400) = 20,640 2025 40% × ($86,000 – $34,400 – $20,640) = 12,384 2026 40% × ($86,000 – $34,400 – $20,640 – $12,384) = 2,576* 2027 0 $70,000 *The calculation shows $7,430 of depreciation but that amount would cause accumulated depreciation to exceed the maximum allowed of cost less residual ($86,000 – $16,000 = $70,000). Therefore, the depreciation for 2026 must be adjusted to $2,576.

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Quick Study 9-10 (10 minutes) Computer panel: $4,000/8 years = $500 depreciation Dry-cleaning drum: $70,000 - $5,000 = $65,000/400,000 garments = $0.1625/garment; $0.1625/garment × 62,000 garments = $10,075 depreciation Stainless steel housing: $85,000 - $10,000 = $75,000/20 years = $3,750 depreciation Miscellaneous parts: $26,000/2 years = $13,000 depreciation Total depreciation on the dry-cleaning equipment for 2023= $500 + $10,075 + $3,750 + $13,000 = $27,325

Quick Study 9-11 (10 minutes) a. b.

2023 $5,000 $3,000

2024 $6,000 $6,000

Calculations: a. 60,000 - 0 = 6,000/year x 10/12 = 5,000 10 years b. 6,000/year x 6/12 = 3,000

Quick Study 9-12 (10 minutes) a. b.

2023 2024 $10,000 $10,000 $6,000 $10,800

Calculations: a. 2/10 = .2 or 20%; 20% x 60,000 = 12,000 x 10/12 = 10,000 for 2023 20% x (60,000 – 10,000) = 10,000 for 2024 b. 20% x 60,000 = 12,000 x 6/12 = 6,000 for 2023 20% x (60,000 – 6,000) = 10,800 for 2024

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Quick Study 9-13 (10 minutes) a. b.

2023 10,000 10,000

2024 14,000 14,000

Calculations: 75,000 – 15,000 = 60,000/120,000 = $0.50 depreciation expense per unit produced $0.50 x 20,000 = $10,000 for 2023; $0.50 x 28,000 = $14,000 for 2024 NOTE: The units-of-production method is a usage-based method as opposed to a time-based method (such as straight-line and double-declining-balance) and therefore partial periods do not affect the calculations.

Quick Study 9-14 (10 minutes) 1

[($35,720 – $11,820 ) – $1,570]/ 7 years remaining = $3,190 1.($35,720 – $4,200)/8 = $3,940/year × 3 years = $11,820 2.10 – 3 = 7

Quick Study 9-15 (10 minutes) 2023 Jan. 3

Dec. 31

Barbecue – Rotisserie…………………………………… Cash………………………………………………….. To record the purchase of electronic rotisserie.

1,000 1,000

Depreciation Expense, Barbecue……………………… 1,560 Accumulated Depreciation, Barbecue………… 1,560 To record revised depreciation on the barbecue caused by the addition of a rotisserie; $7,000 - $200 = $6,800 ÷ 5 years = $1,360 PLUS $1,000 ÷ 5 years = $200; Total depreciation = $1,360 + $200 = $1,560.

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Quick Study 9-16 (10 minutes)

$65,800 Cost - 15,950 Accumulated depreciation (first year) 49,850 Book value at point of revision - 2,000 Salvage value 47,850 Remaining depreciable cost ÷ 2 Years of life remaining $23,925 Depreciation per year for years 2 and 3

Quick Study 9-17 (10 minutes) Impairment losses occurred on the computer and the furniture in the amounts of $1,500 and $21,000, respectively. Calculations: Asset Building

Cost

Accumulated Depreciation

Book Value

Recoverable Amount

Impairment Loss

$1,200,000

$465,000

$735,000

N/A

Computer

3,500

1,800

1,700

200

$ 1,500

Furniture

79,000

53,000

26,000

5,000

21,000

Land

630,000

790,000

N/A

Machine

284,000

117,000

167,000

172,000

N/A

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Quick Study 9-18 (10 minutes) a. 2023 Oct. 1

b. Oct. 1

c. Oct. 1

d. Oct. 1

Accumulated Depreciation, Equipment .................... Cash ........................................................................ Equipment .......................................................... To record sale of equipment.

39,000 17,000

Accumulated Depreciation, Machinery ..................... Cash ........................................................................ Machinery ........................................................... Gain on Disposal ................................................ To record sale of machinery.

96,000 27,000

Accumulated Depreciation, Truck ............................ Cash ........................................................................ Loss on Disposal ..................................................... Delivery Truck ..................................................... To record sale of delivery truck.

33,000 11,000 4,000

Accumulated Depreciation, Furniture ....................... Loss on Disposal ..................................................... Furniture .................................................................. To record disposal of furniture.

21,000 5,000

56,000

109,000 14,000

48,000

26,000

Quick Study 9-19 (15 minutes) Book value of old equipment = $76,800 - $40,800 = $36,000 1.

Cash .............................................................................................. Accumulated depreciation .......................................................... Equipment............................................................................. Gain on sale of equipment* ................................................. Record sale of equipment. *(Gain = $47,000 - $36,000)

47,000 40,800

36,000 40,800

Cash .............................................................................................. Accumulated depreciation .......................................................... Loss on sale of equipment* ........................................................ Equipment............................................................................. Record sale of equipment. *(Loss = $31,000 - $36,000)

31,000 40,800 5,000

76,800 11,000

76,800

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Quick Study 9-20 (10 minutes) 2023 Dec 31

Accumulated Depreciation, Automobile ................... Computer* ............................................................... Automobile .......................................................... Cash ................................................................... Gain on Disposal ................................................ To record exchange. *Computer = FV of assets received= $5,800 as given

13,500 5,800 15,000 2,750 1,550

Quick Study 9-21 (15 minutes) 2023 Mar. 1

Accumulated Depreciation, Machine (old) ............... 2 Machine (new) ....................................................... 1 Cash ...................................................................... Machine (old) ................................................ To record exchange of machines.

36,000 117,000 63,000 90,000

1. Cash paid = $123,000 - $60,000 = $63,000 2. Machine (new) = $63,000 cash paid + $54,000 book value of old = $117,000

Quick Study 9-22 (10 minutes) 2023 Jan. 4

Dec. 31

Franchise ................................................................ Cash ................................................................. To record purchase of franchise.

95,000

Amortization Expense, Franchise............................ Accumulated Amortization, Franchise .............. To record amortization of franchise; $95,000/10 years = $9,500 per year

9,500

95,000

9,500

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Quick Study 9-23 (10 minutes) 2023 Oct. 1

Dec. 31

Mineral Rights Water Rights Cash Long-Term Note Payable To record the purchase of intangibles.

35,000,000 4,000,000 9,000,000 30,000,000

Amortization Expense, Mineral Rights Accumulated Amortization, Mineral Rights To record amortization of mineral rights; $35,000,000 ÷ 10 years = $3,500,000/year; $3,500,000/year × 3/12 = $875,000.

875,000

31 Amortization Expense, Water Rights Accumulated Amortization, Water Rights To record amortization of water rights; $4,000,000 ÷ 10 years = $400,000/year; $400,000/year × 3/12 = $100,000.

100,000

875,000

100,000

Quick Study 9-24 (10 minutes) Jan.1

Iron Ore Mine .............................................................................. 1,400,000 Cash ........................................................................................ Record purchase of iron ore mine

1,400,000

Jan.1

Iron Ore Mine .............................................................................. 400,000 Cash ........................................................................................ Record purchase of iron ore mine access costs Dec. 31

400,000

Depreciation Expense—iron ore mine……….288,000 Accumulated Depreciation— iron ore mine ... ……..288,000 Record depreciation [$(1,800,000-$200,000)/1,000,000 tons= $1.60 per ton; 180,000 tons x $1.60 = $288,000].

*Quick Study 9-25 (20 minutes) Motor (old)

$45,000 - $5,000 = $40,000 ÷ 10 yrs × 8/12 =

$ 2,667

Motor (new)

$60,000 - $10,000 = $50,000 ÷ 8 yrs × 4/12 =

2,083

Metal housing

$68,000 - $15,000 = $53,000 ÷ 25 yrs =

2,120

Misc. parts

$15,000 ÷ 5 yrs =

3,000

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Total depreciation expense to be recorded on the machine for 2023 =

$ 9,870

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EXERCISES Exercise 9-1 (10 minutes) Invoice cost ............................................................. Freight costs ........................................................... Steel mounting ........................................................ Assembly ................................................................ Raw materials for testing ........................................ Less: discount ($28,000 × 1%) .............................. Total acquisition costs ........................................

$28,000 450 985 660 310 (280) $30,125

Note: The $380 repairs are an expense and therefore not capitalized. Note: The special insurance is an expense and therefore not capitalized.

Exercise 9-2 (15 minutes) Cost of land: Purchase price for land ........................................................................ $1,200,000 Purchase price for old building ............................................................. 480,000 Demolition costs for old building ........................................................... 75,000 Levelling the lot .................................................................................... 105,000 Total cost of land ............................................................................... $1,860,000 Cost of new building: Construction costs................................................... Less: Cost of land improvements* .......................... Cost of new building ................................................

$2,880,000 215,000 $2,665,000

*The land improvements are a distinct PPE asset that depreciates at a different rate than the building. Therefore, it should be debited to an account separate from the building.

Journal entry: 2023 Mar. 10 Land........................................................................ Land Improvements ................................................ Building ................................................................... Cash ................................................................. To record costs of plant assets.

1,860,000 215,000 2,665,000 4,740,000

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Exercise 9-3 (15 minutes) Allocation of total cost: (a)

1. 2. 3. 4.

PPE Asset

Appraised Values

Land Land Imprv. Building Totals

$249,480 83,160 261,360 $594,000

(b) Ratio of Individual Appraised Value to Total Appraised Value (a)  Total Appraised Value 249,480  594,000 = .42 or 42% 83,160  594,000 = .14 or 14% 261,360  594,000 = .44 or 44%

552,375 + 29,400 = 581,775 42% x 581,775 = 244,346 14% x 581,775 = 81,448 44% x 581,775 = 255,981

Journal entry: 2023 Apr. 12 Land .................................................................................... 244,346 Land Improvements ........................................................... 81,448 Building .............................................................................. 255,981 Cash ............................................................................. To record costs of lump-sum purchase.

581,775

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Exercise 9-4 (20 minutes) 2023 Jan. 1 Land ................................................................................ 1,296,000 Building .......................................................................... 1,512,000 Equipment ...................................................................... 1,123,200 Tools ............................................................................... 388,800 Cash .......................................................................... Notes Payable ........................................................... To record lump-sum purchase.

1,104,000 3,216,000

Calculations: (a) PPE Asset Land Building Equipment Tools Totals

Appraised Values $ 1,152,000 1,344,000 998,400 345,600 $ 3,840,000

(b) Ratio of Individual Appraised Value to Total Appraised Value (a)  Total Appraised Value 1,152,000  3,840,000 = .30 or 30% 1,344,000  3,840,000 = .35 or 35% 998,400  3,840,000 = .26 or 26% 345,600  3,840,000 = .09 or 9%

1. 30% x 4,320,000 = 1,296,000 2. 35% x 4,320,000 = 1,512,000 3. 26% x 4,320,000 = 1,123,200 4. 9% x 4,320,000 = 388,800

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Exercise 9-5 (10 minutes) 2023 Jan. 1 Truck ............................................................................... Cash ..........................................................................

87,000 87,000

Calculation: 52,500 + 21,000 + 7,500 + 6,000 = 87,000

Jan. 4 Prepaid Insurance .......................................................... Gas Expense .................................................................. Cash ..........................................................................

5,100 225 5,325

2023 Dec 31 Depreciation Expense, Truck ........................................ Accumulated Depreciation, Truck ........................... To record depreciation.

15,600 15,600

Calculation: [(52,500 + 21,000 + 7,500 + 6,000) – 9,000] / 5 years = 15,600

Note: Insurance expense entries could also be made, to move from prepaid insurance, although not required in question.

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Exercise 9-6 (15 minutes)

Year

a. Straight-Line

b. Double-DecliningBalance

c. Units-ofProduction

2021

$32,550

$75,100

$26,880

2022

$32,550

$37,550

$28,910

2023

$32,550

$17,550

$36,890

2024

$32,550

Total

$130,200

$37,520 $130,200

$130,200

Explanation: a. ($150,200 – $20,000)/4 = $32,550/year b. Double-declining-balance (Rate = 2/4 = 0.50 or 50%): 50% × $150,200 = $75,100 50% × ($150,200 – $75,100) = $37,550 Maximum depreciation is limited to $130,200 which is cost less residual ($150,200 – $20,000) therefore depreciation for 2023 is $17,550 calculated as $130,200 – $112,650 accumulated depreciation recorded to date. c. Units-of-production: (Rate = [($150,200 – $20,000)/186,000] = $0.70/unit) $26,880 ($0.70 × 38,400) $28,910 ($0.70 × 41,300) $36,890 ($0.70 × 52,700) Maximum depreciation is limited to $130,200 which is cost less residual ($150,200 – $20,000) therefore depreciation for 2024 is $37,520 calculated as $130,200 – $92,680 accumulated depreciation recorded to date.

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Exercise 9-7 (15 minutes) a.

($305,200 – $52,400)/5 = $50,560

Rate = 2/5 = .40 or 40%

40% × $305,200 = $122,080

c. Rate = ($305,200 – $52,400)/320,000 km = $0.79/km $0.79/km × 30,000 km = $23,700 Analysis component: The units-of-production method will produce the highest profit in 2023 because it is the lowest depreciation expense for 2023.

Exercise 9-8 (30 minutes) Straight-Line1 Depreciatio Year n Expense

2023 2024 2025 2026 2027

21,250 21,250 21,250 21,250 21,250

Book Value at December 31 104,000 82,750 61,500 40,250 19,000

Double-DecliningUnits-of-Production3 Balance2 Depreciatio Book Value Depreciatio Book n Expense at n Expense Value at December December 31 31 50,100 75,150 16,875 108,375 30,060 45,090 22,250 86,125 18,036 27,054 30,000 56,125 8,054 19,000 37,125 19,000 0 19,000 0 19,000

Calculations: 1. 125,250 – 19,000 = 106,250/5 = 21,250 2. 2/5 = .4 or 40%; .4 x 125,250 = 50,100; .4 x (125,250 – 50,100) = 30,060; .4 x (125,250 – 50,100 – 30,060) = 18,036; .4 x (125,250 – 50,100 – 30,060 – 18,036) = 10,822; maximum = 8,054 calculated as cost less residual = 125,250 – 19,000 = 106,250 less total deprec. taken of 98,196 = 8,054. 3. 125,250 – 19,000 = 106,250/8,500 = $12.50/hour; 2023– 12.50 x 1,350 = 16,875; 2024– 12.50 x 1,780 = 22,250; 2025– 12.50 x 2,400 = 30,000; 2026– 12.50 x 2,980 = 37,250; maximum = 37,125; calculated as cost less residual = 125,250 – 19,000 = 106,250 less total deprec. taken of 69,125 = 37,125. Analysis component: a. 2023– Units-of-production; 2026– Straight-line b. 2023– Double-declining-balance; 2026– Units-of-production

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Exercise 9-9 (30 minutes) (a) PPE Asset Land Building Equipment Tools Totals 1. 2. 3. 4.

Appraised Values $ 700,000 1,120,000 210,000 70,000 $ 2,100,000

(b) Ratio of Individual Appraised Value to Total Appraised Value (a)  Total Appraised Value 700,000  2,100,000 = .33 or 33.33% 1,120,000 2,100,000 = .533 or 53.33% 210,000  2,100,000 = .10 or 10% 70,000  2,100,000 = .033 or 3.33%

$ 840,000 1,344,0002 3 252,000 84,0004 $ 2,520,000

33.33% x 2,520,000 = 840,000 53.33% x 2,520,000 = 1,344,000 10.00% x 2,520,000 = 252,000 3.33% x 2,520,000 = 84,000 PPE Asset Land Building Equipment Tools

Cost $ 840,000 1,344,000 252,000 84,000

2023 Depreciation 5 N/A 1,344,000 × 2/10 = 268,800 252,000 × 2/5 = 100,800 84,000 × 2/3 = 56,000

2024 Depreciation 5 N/A (1,344,000 – 268,800) × 2/10 = 215,040 (252,000 – 100,800) × 2/5 = 60,480 (84,000 – 56,000) × 2/3 = 18,667

5. Land is not depreciated as it has an unlimited life and is not consumed when used. Analysis component: We do not depreciate the cost of land as it has an unlimited life and is not consumed when used.

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Exercise 9-10 (20 minutes) Cost Information

Depreciation

Description

Date of Purchase

Depreciation Method

Cost

Residual

Life

Building

2 May 2017

S/L

$650,000

$250,000

10 yr.

Balance of Accum. Deprec. Dec. 31, 2022 $226,667

Modular Furniture

2 May 2017

S/L

72,000

6 yr.

68,000

4,0003

72,0004

25 Jan 2020

DDB

80,000

10,000

8 yr.

45,313

8,6725

53,9856

Truck

Depreciation Expense for 2023 $40,000

Balance of Accum. Deprec. Dec. 31, 2023 2 $266,667

1. (650,000 – 250,000)/10 = 40,000/year 2. 226,667 + 40,000 = 266,667 3. (72,000 – 0)/6 = 12,000 per year; however, the maximum accumulated depreciation = 72,000; 72,000 less total depreciation taken of 68,000(8,000 in 2017 [(72,000 – 0)/6 = $12,000 per year X 8/12] plus 12,000 in years 2018 – 2022) = 4,000 4. 68,000 + 4,000 = 72,000 5. Rate = 2/8 = .25 or 25% 25% × (80,000 – 45,313) = 8,672 6. 45,313 + 8,672 = 53,985 Analysis component: Depreciation is the process of allocating an asset‘s cost to expense over its useful life. It should be done using a rational and systematic manner. Dynamic uses the straight-line method and the double-declining balance method for its assets, which are both acceptable under GAAP. Dynamic has likely chosen different methods for depreciating its assets to better reflect the usage pattern of each asset, which is acceptable under GAAP.

9-919

Exercise 9-11 (15 minutes) DYNAMIC EXPLORATION Partial Balance Sheet December 31, 2022 Assets Current assets ............................................................. Property, plant and equipment: Furniture ................................................................. Less: Accumulated depreciation ....................... Building ................................................................... Less: Accumulated depreciation ....................... Truck ....................................................................... Less: Accumulated depreciation ....................... Total property, plant and equipment ........................ Total assets .................................................................

$338,000

$72,000 68,000 $650,000 226,667 $ 80,000 45,313

$4,000 423,333

34,687 462,020 $800,020

9-920

Exercise 9-12 (15 minutes) a. Straight-line depreciation: Year 1

Year 2

Year 3

Year 4

Year 5

5-Year Totals

Profit before depreciation ............ Depreciation expense1 Profit ...........................

$180,000 73,980 $106,020

$900,000 369,900 $530,100

b. Double-declining-balance depreciation: Year 1 Year 2

Year 3

Year 4

Year 5

5-Year Totals

Profit before depreciation ............ 2 Depreciation expense ..................................... Profit (loss) .................

$180,000 73,980 $106,020

$180,000 193,560

$180,000 116,136

$180,000 60,204

$180,000 0

$900,000 369,900

$(13,560)

$63,864

$119,796

$180,000

$530,100

a. ($483,900 – $114,000)/5 = $73,980 b. Rate = 2/5 = .40 or 40% Depreciation expenses: Year 1: $483,900 × 40% = $193,560 Year 2: ($483,900 – $193,560) × 40% = $116,136 Year 3: $60,204 max. depreciation expense (calculated as $483,900 – $114,000 – $193,560 – $116,136 = $60,204) Analysis component: Kenartha Oil will choose straight-line depreciation to depreciate the equipment if its goal is to show the highest value possible for the equipment on the Year 1 balance sheet. Straight-line will result in lower depreciation than double declining balance in Year 1. The lower the depreciation, the greater the net book value of the asset (cost less accumulated depreciation appearing in the balance sheet).

9-921

Exercise 9-13 (15 minutes)

Year

Depreciation Straight-Line1 Units-of-Production3

2021 7,800 23,220 2022 23,400 42,660 2023 23,400 34,560 1. Straight-Line: $168,000 – $27,600 = $140,400/6 = $23,400 × 4/12 = $7,800 2. Units-of-Production: $168,000 – $27,600 = $140,400/260,000 = $0.540/unit; $0.540 × 43,000 = $23,220; $0.540 × 79,000 = $42,660; $0.540 × 64,000 = $34,560. Analysis component: If depreciation is not recorded, expenses are understated and net income is overstated on the income statement and on the balance sheet, assets and equity would be overstated. Exercise 9-14 (25 minutes)

Year 2022 2023 2024

Depreciation Double-DecliningStraight-Line1 Balance2 11,000 22,000 22,000 35,200 22,000

21,120

Calculations: 1. 110,000/5 = 22,000 x 6/12 =11,000 2. 2/5 = .4 or 40%; .4 x 110,000 x 6/12 = 22,000; .4 x (110,000 – 22,000) = 35,200; .4 x (110,000 – 22,000 – 35,200) = 21,120 Analysis component: If the furniture had been debited to an expense account in 2022 when purchased instead of being recorded as a PPE asset, expenses would have been overstated and net income would have been understated on the income statement in 2022 while assets and equity would have been understated on the balance sheet for the same year. Exercise 9-15 (10 minutes) (a)

(b)

Year

Straight-Line

Double-Declining-Balance

2023

(125,000 – 12,500)/5 = 22,500 x 9/12 = 16,875

Rate = 2/5 = .40 or 40% 125,000 × 40% × 9/12 = 37,500

2024

(125,000 – 12,500)/5 = 22,500

(125,000 – 37,500) × 40% =35,000

9-922

Dec. 31

Depletion Expense—Mineral Deposit ....................................... 405,528 Accumulated Depletion—Mineral Deposit ........................... Record depletion [$3,721,000/1,525,000 tons = $2.44 per ton; 166,200 tons x $2.44 = $405,528]. Depreciation Expense—Machinery .......................................... 23,268 Accumulated Depreciation—Machinery ............................... Record depreciation [$213,500/1,525,000 tons= $0.14 per ton; 166,200 tons x $0.14 = $23,268].

405,528

23,268

Exercise 9-17 (10 minutes) Part 1 Jan.1

Iron Ore Mine .............................................................................. 760,000 Cash ........................................................................................ Record purchase of iron ore mine Iron Ore Mine .............................................................................. 60,000 Cash ........................................................................................ Record purchase of iron ore mine access costs

760,000

Jan.1

60,000

Part 2 Dec. 31

Depletion Expense—iron ore mine……….144,000 Iron Ore Inventory…………………………… 16,000 Accumulated Depletion – Iron Ore mine……..160,000

Record depletion [$(820,000-$20,000)/100,000 tons= $8 per ton; 18,000 tons x $8 = $144,000]. Record inventory not yet sold [(20,000 – 18,000) tons x $8 per ton = $16,000]

Exercise 9-18 (10 minutes) 1. (43,500 – 5,000)/4 = 9,625/year × 2 years = 19,250 accumulated depreciation Book value = 43,500 – 19,250 = 24,250 2. [(43,500 – 19,250) – 3,850]/3 = 6,800

9-923

Exercise 9-19 (15 minutes) 2026 Dec. 31 Depreciation Expense, Machine ................................... Accumulated Depreciation, Machine ...................... To record depreciation. Calculations: Revised depreciation = (71,200 – 30,800*) – 8,000 7 – 2 9/12 = 4.25 yrs

7,624 7,624

= 7,624/year

*2023 depreciation = 8,400 (71,200 – 15,200)/5 = 11,200 × 9/12 2024 depreciation = 11,200 2025 depreciation = 11,200 Accumulated depreciation 30,800 Exercise 9-20 (20 minutes)

Part 1 2023 Jan. 5 Warehouse – Door……………………… 25,500 Accounts Payable……………………… To record addition of door on East wall of warehouse.

25,500

Part 2 2023 Dec. 31 Depreciation Expense, Warehouse ……………… 14,700 Accumulated Depreciation, Warehouse…. 14,700 To record revised depreciation on warehouse; $292,500 – $90,000 = $202,500; $202,500 ÷ 15 yrs = $13,500 PLUS $25,500 - $7,500 = $18,000; $18,000 ÷ 15 yrs = $1,200; Total depreciation on the warehouse = $13,500 + $1,200 = $14,700. Exercise 9-21 (15 minutes) 1.

Original cost of machine ............................................................................. $ 23,860 Less two years' accumulated depreciation [($23,860 - $2,400) / 4 years] x 2 years ..................................................... (10,730) Book value at end of second year ............................................................... $ 13,130

Book value at end of second year ............................................................... $ 13,130 Less revised salvage value ......................................................................... (2,000) Remaining depreciable cost ........................................................................ $ 11,130 Revised annual depreciation = $11,130 / 3 years = $3,710

9-924

2023 Dec. 31 Impairment Loss Equipment Office Building To record impairment loss on equipment and office building.

13,500 12,000 1,500

Part 2 2024 Dec. 31 Depreciation Expense, Equipment Accumulated Depreciation, Equipment To record revised depreciation on equipment. 31 Depreciation Expense, Furniture Accumulated Depreciation, Furniture To record depreciation on furniture.

1,800 1,800

491 491

31 Depreciation Expense, Office Building Accumulated Depreciation, Office Building To record depreciation on office building

3,838

31 Depreciation Expense, Warehouse Accumulated Depreciation, Warehouse To record depreciation on warehouse.

2,250

3,838

2,250

Calculations: Asset Equipment Furniture Land Office Building Warehouse

Cost $40,000 12,000 85,000 77,000 55,000

Accum. Deprec. $20,000 9,509 N/A 23,000 12,938

Book Value $20,000 2,491 85,000 54,000 42,062

Recoverable Amount $ 8,000 2,950 101,800 52,500 45,100

Impairmen 2024 t Loss Dep. Exp. $12,000 1,8001 N/A 4912 N/A N/A 1,500 3,8383 N/A 2,2504

1. [40,000 – 5,000)/7,000] = $5.00/unit; 20,000 accum. dep. ÷ $5.00/unit = 4,000 units; 7,000 units in original useful life less 4,000 units depreciated to date equals 3,000 remaining units; 40,000 – 12,000 = 28,000 revised cost; 28,000 – 20,000 accum. dep. = 8,000 revised book value; 8,000 – 5,000 residual value = 3,000; 3,000 ÷ 3,000 remaining units = $1.00/unit revised depreciation rate; 1.00/unit × 1,800 units = 1,800 2. 12,000 – 9,509 = 2,491; 2,491 × 2/8 = 623 which exceeds maximum allowable; maximum allowable = 2,491 remaining book value – 2,000 residual = 491 3. 77,000 – 1,500 = 75,500 revised cost of office building; 75,500 – 23,000 = 52,500 remaining book value; (52,500 – 17,000) ÷ 9.25 yrs remaining useful life = 3,838 4. 55,000 – 10,000 = 45,000; 45,000 ÷ 20 yrs = 2,250

9-925

Mar. 1 Accumulated Depreciation, Truck .............................................. 21,850 Cash ............................................................................................. 20,150 Truck ....................................................................................... To record the sale of the truck for $20,150.

42,000

b. Mar. 1 Accumulated Depreciation, Truck .............................................. 21,850 Cash ............................................................................................. 21,600 Truck ....................................................................................... Gain on Disposal .................................................................... To record the sale of the truck for $21,600.

42,000 1,450

c. Mar. 1 Accumulated Depreciation, Truck .............................................. 21,850 Cash ............................................................................................. 19,200 Loss on Disposal .........................................................................950 Truck ....................................................................................... To record the sale of the truck for $19,200.

42,000

d. Mar. 1 Accumulated Depreciation, Truck .............................................. 21,850 Loss on Disposal ......................................................................... 20,150 Truck ....................................................................................... To record the sale of the truck for $0; it was scrapped.

42,000

9-926

Exercise 9-24 (15 minutes) To record partial year‘s depreciation in 2021: 2024 July 1

Depreciation Expense ................................................... Accumulated Depreciation, Machine ...................... To record partial year depreciation in year of disposal; (296,800/7) × 6/12 = 21,200.

21,200 21,200

(a) July 1 Accumulated Depreciation, Machine ......................................... 190,800* Cash ............................................................................................. 112,000 Machine .................................................................................. Gain on Disposal ................................................................... To record sale of machine for 112,000. (b) 1 Accumulated Depreciation, Machine ......................................... 190,800* Cash ............................................................................................. 96,000 Loss on Disposal ........................................................................ 10,000 Machine .................................................................................. To record receipt of $96,000 from insurance settlement.

296,800 6,000

296,800

*(296,800/7) × 4.5 years = 190,800

Exercise 9-25 (10 minutes) a. $202,000 − $111,000 = $91,000 book value b. Book value of the assets given up = ($91,000 + $170,000) .......... = Less: Fair value of assets given up ($68,000 + $170,000) ........... = Loss on exchange ........................................................................... c. & d. Tractor (new) = $68,000 + $170,000 = $238,000 d. 2023 Oct. 6

$261,000 $238,000 $23,000

Tractor (new)* .............................................................................. 238,000 Accumulated Depreciation, Tractor (old) .................................. 111,000 Loss on Exchange ...................................................................... 23,000 Cash ....................................................................................... Tractor (old) ........................................................................... To record exchange of old tractor for a new one.

170,000 202,000

9-927

Exercise 9-26 (20 minutes) a. 2023 Nov. 3 Accumulated Depreciation, Computer (old) .................... 65,000 1 Computer (new) ................................................................ 175,000 Computer (old)................................................................... Cash ......................................................................... To record exchange of computers.

150,000 90,000

1. Computer (new) = Cash paid + Book Value of asset given up = $90,000 + $85,000 = $175,000 b. 2023 Nov. 3 Accumulated Depreciation, Computer (old) .................... 65,000 Computer (new)1 ................................................................ 174,000 2 Loss on Disposal ............................................................. 1,000 Computer (old)................................................................... Cash ......................................................................... To record exchange of computers.

150,000 90,000

1. Computer (new) = Fair Value of Assets Received = $174,000 2. Loss on Disposal = Proceeds – Book Value of assets given up = $174,000 – [($150,000 – $65,000) + $90,000] = $1,000 Analysis component: The dollar value that will be used to depreciate the new computer is $174,000 because the Cost Principle requires that all transactions are to be recorded at their original cost. $174,000 was determined to be the cost.

9-928

Exercise 9-27 (25 minutes) (a) Jan. 2

Jan. 2

Accumulated Depreciation, Machine ............................ Cash ................................................................................ Loss on Disposal ........................................................... Machine ..................................................................... To record sale of machine; 44,500 – (96,000 – 50,450) = 1,050 loss. (b) Accumulated Depreciation, Machine ............................ Tools ............................................................................... Cash .......................................................................... Machine ..................................................................... To record exchange of machine; Value of assets given up = $89,000 cash + $45,550 book value of the old machine = $134,550. (c) Accumulated Depreciation, Machine ............................ Van .................................................................................. Loss on Disposal ........................................................... Cash .......................................................................... Machine ..................................................................... To record exchange of machine; 116,000 – (80,000 + 45,550) = 9,550 loss. (d) Accumulated Depreciation, Machine ............................ Land ................................................................................ Machine ..................................................................... Cash .......................................................................... Gain on Disposal ...................................................... To record exchange; 87,000 – (37,000 + 45,550) = 4,450 gain.

50,450 44,500 1,050 96,000

50,450 134,550 89,000 96,000

50,450 116,000 9,550 80,000 96,000

50,450 87,000 96,000 37,000 4,450

9-929

Exercise 9-28 (15 minutes) 1.

Equipment ................................................................................... Cash ..................................................................................... Record betterment.

22,000

Repairs Expense......................................................................... Cash ..................................................................................... Record ordinary repairs.

6,250

22,000

6,250

14,870 Equipment ................................................................................... Cash ..................................................................................... Record extraordinary repairs.

14,870

Exercise 9-29 (25 minutes) 1. Annual depreciation = $572,000 / 20 years = $28,600 per year Age of the building = Accumulated depreciation / Annual depreciation = $429,000 / $28,600 = 15 years 2. Entry to record the extraordinary repairs 68,350

Building ........................................................................................ Cash ..................................................................................... Record extraordinary repairs. 3.

68,350

Cost of building Before repairs ................................................................................ $572,000 Add cost of repairs ........................................................................68,350 Less accumulated depreciation ....................................................... Revised book value of building .......................................................

$640,350 429,000 $211,350

Revised book value of building (part 3) .......................................... New estimate of useful life (20 - 15 + 5) .......................................... Revised annual depreciation ...........................................................

$211,350 10 years $ 21,135

1. Journal entry Depreciation Expense .................................................................. 21,135 Accumulated Depreciation–Building ................................... Record depreciation.

21,135

9-930

Exercise 9-30 (10 minutes) 2023 Jan. 1 Copyrights ....................................................................... Cash ......................................................................... To record purchase of copyright. Dec.

31 Amortization Expense, Copyrights ................................ Accumulated Amortization, Copyrights .................. To record amortization of copyright; 177,480/12 = 14,790

177,480 177,480

14,790 14,790

Exercise 9-31 (15 minutes) Part 1 2023 Sept. 5 Timber Rights .................................................................. 432,000 Cash .......................................................................... Long-Term Notes Payable ....................................... To record purchase of timber rights. 27 Patent ............................................................................... 148,000 Accounts Payable .................................................... To record purchase of patent. Part 2 2023 Dec. 31 Amortization Expense, Timber Rights........................... Accumulated Amort., Timber Rights ................... To record amortization of timber rights; $432,000 ÷ 3 yrs = $144,000/year × 4/12 = $48,000.

148,000

48,000 48,000

31 Amortization Expense, Patent ....................................... 3,700 Accumulated Amortization, Patent ...................... To record amortization of patent; $148,000 ÷ 10 yrs = $14,800/year × 3/12 = $3,700. 2024 Dec. 31 Amortization Expense, Timber Rights........................... 144,000 Accumulated Amortization, Timber Rights ......... To record amortization of timber rights; $432,000 ÷ 3 yrs = $144,000/year. 31 Amortization Expense, Patent ....................................... Accumulated Amortization, Patent ...................... To record amortization of patent; $148,000 ÷ 10 yrs = $14,800/year.

96,000 336,000

3,700

144,000

14,800 14,800

9-931

Exercise 9-32 (20 minutes) Note: Book value of machine = $250,000 - $182,000 = $68,000 1. Disposed at no value Jan. 1

Loss on Disposal of Machine ....................................................68,000 Accumulated Depreciation—Machine ....................................... 182,000 Machine ................................................................................... Record disposal of machine.

250,000

2. Sold for $35,000 cash Jan. 1

Cash .............................................................................................35,000 Loss on Sale of Machine ............................................................33,000 Accumulated Depreciation—Machine ....................................... 182,000 Machine ................................................................................... Record cash sale of machine. 3.

Jan. 1

Sold for $68,000 cash Cash .............................................................................................68,000 Accumulated Depreciation—Machine ....................................... 182,000 Machine ................................................................................... Record cash sale of machine.

250,000

Sold for $80,000 cash Cash .............................................................................................80,000 Accumulated Depreciation—Machine ....................................... 182,000 Gain on Sale of Machine ........................................................ Machine ................................................................................... Record cash sale of machine.

12,000 250,000

9-932

Exercise 9-33 (25 minutes) Huang Resources Balance Sheet October 31, 2023 Assets Current assets: Cash ........................................................................................... Accounts receivable .................................................................. $ 27,200 Less: Allowance for doubtful accounts .................................. 1,920 Total current assets .................................................................. Property, plant and equipment: Land........................................................................................... Building ..................................................................................... $ 147,200 Less: Accumulated depreciation .......................................... 81,600 Equipment .................................................................................. $184,000 Less: Accumulated depreciation............................................ 110,400 Total property, plant and equipment ...................................... Intangible assets: Mineral rights ........................................................................... $ 57,600 Less: Accumulated amortization......................................... 30,400 Trademark ................................................................................ $ 33,600 Less: Accumulated amortization......................................... 22,400 Total intangible assets ............................................................ Total assets ................................................................................... Liabilities Current liabilities: Accounts payable .................................................................. $18,400 Current portion of long-term note ........................................ 34,000 Total current liabilities .......................................................... Non-current liabilities: Note payable, less current portion ....................................... Total liabilities ............................................................................... Equity Sally Huang, capital ...................................................................... Total liabilities and equity ................................................................

$ 9,600 25,280 $ 34,880 $ 89,600 65,600 73,600 228,800

$ 27,200 11,200 38,400 $302,080

$ 52,400 38,000 $ 90,400 1

211,680 $302,080

Calculations: 1. 221,280 adjusted capital balance + 1,433,600 revenues – 1,443,200 expenses = 211,680 post-closing capital balance

9-933

Exercise 9-34 (35 minutes) Montalvo Bionics Balance Sheet April 30, 2023 Assets Current assets: Cash ........................................................................................... $ 10,100 Accounts receivable .................................................................. $17,300 Less: Allowance for doubtful accounts .................................. 1,010 16,290 Prepaid rent ............................................................................... 1,3551 Total current assets .................................................................. Property, plant and equipment: Furniture ................................................................................... $22,700 Less: Accumulated depreciation .......................................... 14,7302 $ 7,970 Machinery .................................................................................. $50,800 3 Less: Accumulated depreciation............................................ 22,700 28,100 Total property, plant and equipment ...................................... Intangible assets: Patent ....................................................................................... $24,900 Less: Accumulated amortization......................................... 8304 Total assets ................................................................................... Liabilities Current liabilities: Accounts payable .................................................................. $5,080 Unearned revenues ............................................................... 5,870 Current portion of long-term note ........................................ 6,500 Total current liabilities .......................................................... $ 17,450 Non-current liabilities: Note payable, less current portion ....................................... 8,100 Total liabilities ............................................................................... Equity Josh Montalvo, capital ................................................................. Total liabilities and equity ................................................................

$ 27,745

36,070

24,070 $87,885

$25,550 5

62,335 $87,885

Calculations: 1. $16,260 ×11/12 = $14,905 rent used; $16,260 – $14,905 = $1,355 remaining in Prepaid Rent. 2. $22,700 ÷ 5 = $4,540; $4,540 + $10,190 = $14,730 accum. dep. 3. $50,800 – $20,200 = $30,600; $30,600 × 2/10 = $6,120; maximum depreciation is $50,800 – $28,100 = $22,700 therefore 2023 depreciation expense is $2,500 and accum. dep. is $20,200 + $2,500 = $22,700. 4. $24,900 ÷ 15 = $1,660/year; $1,660 × 6/12 = $830. 5. $32,910 unadjusted capital + $225,400 revenues – $83,900 withdrawals – $89,300 expenses – $4,540 dep. furniture – $2,500 dep. machinery – $830 amort. patent – $14,905 rent expense = $62,335 post-closing capital.

9-934

Exercise 9-35 (30 minutes) 2021 April 1 Food Truck ......................................................................

52,000

Oven.................................................................................

6,000

Prepaid Insurance ..........................................................

3,600

Cash

61,600

To record the purchase of food truck, oven and insurance.

Oct 1 Repairs Expense .............................................................

1,800

Cash .......................................................................

1,800

To record repairs for truck

Dec 31 Insurance Expense .........................................................

2,700

Prepaid Insurance ........................................................

2,700

To record 9 months of insurance expense

Dec 31 Depreciation Expense, Truck .........................................

6,300

Accumulated Depreciation, Truck .......................

6,300

To record depreciation of truck; Calculation: [(48,000 + 4,000) – 10,000] / 5 years = 8,400 × 9/12 = $6,300.

31 Depreciation Expense, Oven.......................................... Accumulated Depreciation, Oven ........................

750 750

To record depreciation of oven; ($6,000-1000) ÷ 5 yrs = $1,000/year × 9/12 = $750. 2022

9-935

April 1 Repair Expense ...............................................................

2,100

Prepaid Insurance ..........................................................

3,600

Cash .........................................................................

5,700

To record purchase of tires and insurance for year

Dec 31 Insurance Expense ........................................................

3,600

Prepaid Insurance ....................................................

3,600

To record 1 year of insurance expense.

Dec 31 Depreciation Expense, Truck........................................

8,400

Accumulated Depreciation, Truck ......................

8,400

To record depreciation of truck; Calculation: [(48,000 + 4,000) – 10,000] / 5 years = 8,400

31 Depreciation Expense, Oven ........................................

1,000

Accumulated Depreciation, Oven .......................

1,000

To record depreciation of oven; ($6,000-1000) ÷ 5 yrs = $1,000/year

2023 Mar 31

Depreciation Expense, Truck ........................................

2,100

Accumulated Depreciation, Truck ...........................

2,100

To record partial year depreciation in year of disposal; 8,400 × 3/12 = 2,100.

Mar 31

Depreciation Expense, Oven ......................................... Accumulated Depreciation, Oven ............................

250 250

To record partial year depreciation in year of disposal; 1000 × 3/12 = 250.

9-936

Mar 31

Accumulated Depreciation, Truck ................................

16,800

Accumulated Depreciation, Oven .................................

2,000

Cash ................................................................................

21,000

Loss on Disposal ...........................................................

18,200

Truck .........................................................................

52,000

Oven ..........................................................................

6,000

To record loss on sale of truck; 16,800+2,000+21,000-52,000-6,000=18,200

9-937

*Exercise 9-36 (30 minutes) Part 1 2023 Jul. 3 Truck – Tool Carrier........................................................ 9,600 Cash....................................................................... To record installation of new component to truck. Part 2 Truck: Accum. Date of Est. Est. Dep. at Component Purchase Cost Resid. Life Dec 31/22 Truck body Jul 7/21 $ 28,000 -0- 10 yr $ 4,200 Motor Jul 7/21 8,000 -0- 10 yr 1,200 Tool Carrier Jul 3/23 9,600 -0- 8 yr -0$ 45,600 $ 5,400

9,600

Dep. Exp. Dec 31/23

Dep. Exp. Dec 31/24

$ 2,8001 8002 6003 $4,200

$ 2,8001 8002 1,2003 $4,800

Calculations: 1. 28,000 ÷ 10 yrs = 2,800/yr 2. 8,000 ÷ 10 yrs = 800/yr 3. 9,600 ÷ 8 yrs = 1,200/yr × 6/12 = 600 for partial period in 2023 Part 3 Book value of truck at December 31, 2023: $45,600 total cost – ($5,400 + $4,200 = $9,600) = $36,000 Book value of truck at December 31, 2024: $36,000 - $4,800 = $31,200

9-938

PROBLEMS Problem 9-1A (25 minutes) Part 1

Land Purchase price* ...............$2,924,800 Demolition ........................ 703,160 Landscaping .................... 272,020 New building .................... New improvements ......... Totals................................$3,899,980

Building Two $1,051,100

Building Three

Land Land Impmnts. Impmnts. One Two $594,100

$2,476,000 $1,051,100

$2,476,000

$594,100

$254,600 $254,600

*Allocation of purchase price:

Land.......................................... Building Two ............................ Land Improvements One......... Totals........................................

Appraised Value $2,990,720 1,074,790 607,490 $4,673,000

Percent of Total 64% 23 13 100%

Apportioned Cost $2,924,800 1,051,100 594,100 $4,570,000

Part 2 Mar. 31

Land ................................................................. Building Two ................................................... Building Three ................................................. Land Improvements One ................................ Land Improvements Two ................................ Cash .......................................................... To record costs of plant assets.

3,899,980 1,051,100 2,476,000 594,100 254,600 8,275,780

9-939

Problem 9-2A (25 minutes) Derlak Enterprises Balance Sheet December 31 2023 Assets Current assets: Cash .................................................................................................. $ 12,000 Prepaid rent ...................................................................................... 40,000 Office supplies.................................................................................. 2,400 Total current assets .................................................................. $ 54,400 Property, plant and equipment: Equipment .................................................................................... $184,000 Less: Accumulated depreciation .......................................... 72,800 111,200 Tools............................................................................................. $143,920 Less: Accumulated depreciation ......................................... 44,800 99,120 Vehicles ....................................................................................... $252,800 Less: Accumulated depreciation .......................................... 108,800 144,000 Total property, plant and equipment 354,320 Intangible assets: Franchise .................................................................................... $ 41,600 Less: Accumulated amortization.......................................... 19,200 22,400 Patent ........................................................................................... $ 16,000 Less: Accumulated amortization.......................................... 4,000 12,000 Total intangible assets ................................................................. 34,400 Total assets....................................................................................... $443,120 Liabilities Current liabilities: Accounts payable ................................................................... $ 56,800 Salaries payable ..................................................................... 32,800 Total current liabilities .............................................................. $ 89,600 Non-current liabilities: Notes payable, due in 2023 ..................................................... 240,000 Total liabilities .................................................................................. $329,600 Equity Lee Derlak, capital ................................................................... 113,520 * Total liabilities and equity ................................................................ $443,120 *206,320 – 32,000 – 780,800 + 720,000 = 113,520

2022

$ 28,800 48,000 2,320 $ 79,120 $100,000 64,800 $100,800 42,400 $252,800 97,600

$ 41,600 11,200 $ 16,000 2,400

35,200 58,400 155,200 248,800

30,400 13,600 44,000 $371,920

$ 9,600 26,400 $ 36,000 129,600 $165,600 206,320 $371,920

Analysis component: Derlak‘s assets are financed mainly by equity in 2022. In 2023, the assets are financed largely by debt. The change from 2022 to 2023 in how assets were mainly financed (from equity to debt) is unfavourable because the greater the debt the greater the risk associated with debt (is/will Derlak be in a position to pay the interest and principal as it comes due).

9-940

Problem 9-3A (25 minutes)

Year

a. Straight-Line

b. Double-DecliningBalance

c. Units-ofProduction

2021

$33,250

$84,000

$27,930

2022

$33,250

$42,000

$30,485

2023

$33,250

$7,000

$37,940

2024

$33,250

Total

$133,000

$36,645 $133,000

$133,000

Explanation: a. ($168,000 – $35,000)/4 = $33,250/year b. Double-declining-balance (Rate = 2/4 = 0.50 or 50%): 50% × $168,000 = $84,000 50% × ($168,000 – $84,000) = $42,000 Maximum depreciation is limited to $133,000 which is cost less residual ($168,000 – $35,000) therefore depreciation for 2023 is $7,000 calculated as $133,000 – $126,000 accumulated depreciation recorded to date. c. Units-of-production: (Rate = [($168,000 – $35,000)/190,000] = $0.70/unit) $27,930 ($0.70 × 39,900) $30,485 ($0.70 × 43,550) $37,940 ($0.70 × 54,200) Maximum depreciation is limited to $133,000 which is cost less residual ($168,000 – $35,000) therefore depreciation for 2024 is $36,645 calculated as $133,000 – $96,355 accumulated depreciation recorded to date.

9-941

Problem 9-4A (25 minutes) 1. Purchased January 1, 2023 A. Double-declining-balance method

2023

2024

2025

Equipment ..................................................

$415,000

Less: Accumulated depreciation .............

83,000

149,400

202,520

Year-end book value ..................................

$332,000

$265,600

$212,480

$83,000

$66,400

$53,120

Equipment ..................................................

$415,000

Less: Accumulated depreciation .............

39,000

78,000

117,000

Year-end book value ..................................

$376,000

$337,000

$298,000

Depreciation expense for the year............

$39,000

2023

2024

2025

Equipment ..................................................

$415,000

Less: Accumulated depreciation .............

41,500

116,200

175,960

Year-end book value ..................................

$373,500

$298,800

$239,040

$41,500

$74,700

$59,760

Equipment ..................................................

$415,000

Less: Accumulated depreciation .............

19,500

58,500

97,500

Year-end book value ..................................

$395,500

$356,500

$317,500

Depreciation expense for the year............

$39,000

Depreciation expense for the year .......... B. Straight-line method

$39,000

1. Rate = 2/10 = 0.20 or 20% 2023: 0.20 × 415,000 = 83,000 2024: 0.20 × (415,000 – 83,000) = 66,400 2025: 0.20 × (415,000 – 83,000 – 66,400) = 53,120 2. (415,000 – 25,000)/10 = 39,000 2. Purchased July 1, 2023 A. Double-declining-balance method

Depreciation expense for the year .......... B. Straight-line method

$19,500

3. Rate = 2/10 = 0.20 or 20% 2023: 0.20 × 415,000 × 6/12 = 41,500 2024: 0.20 × (415,000 – 41,500) = 74,700 2025: 0.20 × (415,000 – 41,500 – 74,700) = 59,760 4. (415,000 – 25,000)/10 = 39,000 × 6/12 = 19,500

9-942

Problem 9-5A (25 minutes) Depreciation Method1: Year Straight-line 2023 (828,000 – 192,000)/10 = 63,600/year × 10/12 = 53,000 2024 63,600

Double-declining balance Rate = 2/10 = .20 or 20% 828,000 × 20% × 10/12 = 138,000

Units-of-production2 Rate = (828,000 – 192,000)/13,250 = 48/hour 48 × 720 = 34,560 48 × 1,780 = 85,440 48 × 1,535 = 73,680

(828,000 – 138,000) × 20% = 138,000 2025 63,600 (828,000 – 138,000 – 138,000) × 20% = 110,400 1. Depreciation is calculated to the nearest month. 2. Assume actual hours of service were: 2023: 720; 2024: 1,780; 2025: 1,535.

Analysis component: If you could ignore the matching principle, you might record the purchase of the boats as boat expense which means the entire cost of $828,000 would have been expensed in 2023, the year of purchase. This would have resulted in the net income being understated in 2023 and, because of depreciation expense not being recorded, net income would be overstated in the remaining years of the asset‘s useful life as well. On the balance sheet, recording the purchase of the boats as boat expense would have caused assets and equity to be understated in each year of the asset‘s life. It is interesting to note that the error would self-correct by the end of the asset‘s life if it would have gone undetected. Problem 9-6A (25 minutes) Depreciation Method1: Year 2023

Straight-line (828,000 – 192,000)/10 = 63,600/year × 6/12 = 31,800

Double-declining balance Rate = 2/10 = .20 or 20% 828,000 × 20% × 6/12 = 82,800

Units-of-production Same as Problem 9-4A; Units-of-production is usage based and not affected by time 34,560

(828,000 – 82,800) × 20% = 63,600 149,040 85,440 2025 (828,000 – 82,800 – 149,040) × 63,600 20% = 73,680 119,232 1. Depreciation is calculated using the half-year convention. 2. Assume actual hours of service were: 2023: 720; 2024: 1,780; 2025: 1,535. 2024

9-943

Problem 9-7A (15 minutes) 1. 2024 Apr. 30 Depreciation Expense, Building ................................... Accumulated Depreciation, Building ...................... To record annual depreciation; 742,000/14 = 53,000. 30 Depreciation Expense, Equipment ............................... Accumulated Depreciation, Equipment.................. To record annual depreciation; Rate = 2/10 = .20 or 20%; 385,920 × 20% = 77,184.

53,000 53,000

77,184 77,184

2. Big Sky Farms Partial Balance Sheet April 30, 2024 Property, plant and equipment: Land ....................................................................

$730,000

Building .............................................................. Less: Accumulated depreciation ..................

$742,000 636,000

Equipment .......................................................... Less: Accumulated depreciation .................. Total property, plant and equipment ................

670,000 361,264

106,000 308,736 $1,144,736

9-944

Problem 9-8A (50 minutes) Part 1

Building ..................................... Land ........................................... Land improvements .................. Vehicles ..................................... Total ........................................... 2023 Mar. 1

Market Value $652,800 462,400 68,000 176,800 $1,360,000

Percentage of Total 48% 34 5 13 100%

Apportioned Cost $604,800 428,400 63,000 163,800 $1,260,000

Building ........................................................................................... 604,800 Land ............................................................................................... 428,400 Land Improvements ...................................................................... 63,000 Vehicles ......................................................................................... 163,800 Cash ....................................................................................... To record asset purchases.

1,260,000

Part 2 2023 straight-line depreciation on building: ($604,800 – $41,040)/15 × 10/12 = $31,320 Part 3 2023 double-declining-balance depreciation on land improvements: Rate = 2/5 = .40 or 40% $63,000 × 40% × 10/12 = $21,000

Analysis component: If the assets purchased on March 1, 2023 were put into service on May 23, 2023 the depreciation expense calculated in parts 2 and 3 above would be based on 7 months instead of 10 months because straight-line and double-declining-balance depreciation are both based on the time the assets are actually USED during the period.

9-945

Problem 9-9A (30 minutes)

Year 2023 2024 2025 2026 2027 Totals

Straighta Line $ 38,000 114,000 114,000 114,000 76,000 $456,000

Units-ofb Production $ 20,544 117,504 114,816 113,472 89,664 $456,000

aStraight-line: Cost per year = (504,000 – 48,000)/4 years

DoubleDecliningc Balance $ 84,000 210,000 105,000 52,500 4,500 $456,000

= $114,000 per year × 4/12 = 38,000

bUnits-of-production: Cost per unit = (504,000 – 48,000)/475,000 units = $0.96 per unit Year Units Unit Cost Depreciation 2023 21,400 $0.96 $ 20,544 2024 122,400 0.96 117,504 2025 119,600 0.96 114,816 2026 118,200 0.96 113,472 2027 102,000 0.96 89,664* Total $456,000 *Take only enough depreciation in Year 2027 to reach the maximum accumulated depreciation of $456,000 (which is cost less residual). cDouble-declining-balance: Rate = 2/4 = .50 or 50% 2023: 50% × 504,000 × 4/12 = 84,000 2024: 50% × (504,000 – 84,000) = 210,000 2025: 50% × (504,000 – 84,000 – 210,000) = 105,000 2026: 50% × (504,000 – 84,000 – 210,000 – 105,000) = 52,500 2027: 456,000 – 451,500* = 4,500 *Take only enough depreciation in Year 2027 to reach the maximum accumulated depreciation of $456,000 (which is cost less residual).

9-946

Problem 9-10A (30 minutes) Cost Information

Depreciation Balance of Accum. Deprec. Dec. 31, 2023

Deprec. Expense for 2024

Balance of Accum. Deprec. Dec. 31, 2024

Description

Date of Purchase

Depreciation Method

Cost

Office Equipment

March 27/20

Straight-line

$52,000

$14,000

10 yr.

14,250

3,800

18,050

Machinery

June 4/20

Doubledeclining balance

$275,000

$46,000

6 yr.

209,3624

19,6385

229,0006

Truck

Nov. 13/23

Units-ofproduction

$113,000

$26,000

250,000 km.

4,8727

23,6648

28,5369

1. 2. 3. 4.

5. 6. 7. 8. 9.

Residual

Life

[($52,000 − $14,000)/10 = $3,800/year × 3] + [(($52,000 − $14,000)/10)*9/12] = $14,250 (52,000 – 14,000)/10 = 3,800/year 14,250 + 3,800 = 18,050 Rate = 2/6 = .3333 or 33.33% 2020: 33.33% × 275,000 × 7/12 = 53,472 2021: 33.33% × (275,000 – 53,472) = 73,843 2022: 33.33% × (275,000 – 53,472 – 73,843) = 49,228 2023: 33.33% × (275,000 – 53,472 – 73,843 – 49,228) = 32,819 Accumulated depreciation at Dec. 31, 2023= $209,362 2024: (275,000 – 46,000) 209,362 = $19,638 $209,362 + $19,638 = 229,000 Rate = (113,000 – 26,000)/250,000 = $0.348/km; 14,000 × 0.348 = 4,872 68,000 × 0.348 = 23,664 4,872 + 23,664 = 28,536

9-947

Problem 9-11A (20 minutes) 2023 Mar. 26

Dec. 31

2024 Dec. 31

Delivery Truck .............................................................. Cash ........................................................................ To record purchase of new truck; $92,000 plus $4,200 freight costs.

96,200

Depreciation Expense, Delivery Truck1 ...................... Accumulated Depreciation, Delivery Truck .......... To record depreciation from Mar. 26 to Dec. 31, 2023.

12,930

Depreciation Expense, Delivery Truck2 ...................... Accumulated Depreciation, Delivery Truck .......... To record depreciation.

21,160

1. (96,200 – 10,000)/5 × 9/12 2.

96,200 – 12,930 – 14,500 4 – 9/12 = 3.25

12,930

21,160

96,200

12,930

21,160

Problem 9-12A (30 minutes) 2024 Dec. 31 Depreciation Expense, Machinery1 ................................. Accumulated Depreciation, Machinery .................... To record annual depreciation. 31 Depreciation Expense, Office Furniture2........................ Accumulated Depreciation, Office Furniture ........... To record annual depreciation.

95,200 95,200

11,733 11,733

Calculations:

Cost 556,800 –

Cost

Accumulated Depreciation 246,400 – 2 Accumulated Depreciation

2. 89,600 –

49,600 – 5–2=3 Problem 9-13A (20 minutes)

Residual 120,000 = 95,200

Residual (11,200 – 6,400) = 11,733

9-948

Part 1 2023 Jan. 7 Machine #5027 – Blade (new) .......................................... Accumulated Depreciation, Machine #5027 – Blade ....... Loss on Disposal ............................................................... Machine #5027 – Blade (old) ................................. Cash ......................................................................... To record installation of replacement blade.

10,400 2,6881 5,032 7,720 10,400

Calculations: 1. 7,720 – 1,000 = 6,720; 6,720 ÷ 5 yrs = 1,344 deprec. for 2021; 1,344 + 1,344 deprec. for 2022= 2,688 accum. deprec. at Dec. 31, 2022. Part 2 Metal Housing

44,000 – 8,000 = 36,000; 36,000 ÷ 15 yrs = 2,400 for 2021 PLUS 2,400 for 2022= 4,800 accum. deprec. at Dec. 31/2022; Revised deprec. = 44,000 – 4,800 = 39,200 book value; 39,200 – 8,600 residual = 30,600 depreciable cost; 30,600 ÷ 18 years* =

$1,700

*20 years – 2 yrs already depreciated = 18 yr remaining life Motor

Blade

2021: 26,000 × 2/10 = 5,200 2022: 26,000 – 5,200 = 20,800 × 2/10 = 4,160 2023: 20,800 – 4,160 = 16,640 × 2/10 =

3,328

10,400 – 1,000 = 9,400; 9,400 ÷ 5 yrs =

1,880

Total depreciation expense to be recorded on Machine #5027 for 2023=

$6,908

9-949

Problem 9-14A (40 minutes) Part 1 2023 Oct. 31 Impairment Loss ................................................. Equipment ....................................................

24,200 24,20 0

To record impairment loss on equipment. 31 Impairment Loss .................................................... Furniture .......................................................

14,300 14,30 0

To record impairment loss on furniture. *Calculations: Book Value

Recoverable Value

Impairment Loss

$105,600

$136,400

Building

57,200

105,600

Equipment

52,800

28,600

$24,200

Furniture

29,700

15,400

14,300

Land

9-950

Problem 9-14A (concluded) Part 2 Safety-First Company Balance Sheet October 31, 2023 Assets Current assets: Cash ........................................................................................... $ 11,000 Accounts receivable ................................................................. $ 19,800 Less: Allowance for doubtful accounts ................................. 880 18,920 Merchandise inventory ........................................................... 35,200 Total current assets .................................................................. Property, plant and equipment: Land .......................................................................................... $105,600 Building .................................................................................... $136,400 Less: Accumulated depreciation ......................................... 79,200 57,200 Equipment ................................................................................. $66,0001 Less: Accumulated depreciation ........................................... 37,400 28,600 2 Furniture .................................................................................. $36,300 Less: Accumulated depreciation ........................................... 20,900 15,400 Total property, plant and equipment ..................................... Total assets .................................................................................. Liabilities Current liabilities: Accounts payable .................................................................. $ 11,220 Unearned revenues ............................................................... 7,920 Current portion of long-term note ....................................... 26,400 Total current liabilities.......................................................... $ 45,540 Non-current liabilities: Note payable, less current portion ....................................... 59,400 Total liabilities .............................................................................. Equity Tarifa Sharma, capital .................................................................. Total liabilities and equity ...............................................................

$ 65,120

206,800 $271,920

$104,940 3

166,980 $271,920

Calculations: 1. 90,200 cost – 24,200 impairment loss = 66,000 2. 50,600 cost – 14,300 impairment loss = 36,300 3. 62,480 adjusted capital balance + 904,200 sales – 761,200 expenses – 24,200 impairment loss, equip. – 14,300 impairment loss, furn. = 166,980 post-closing capital balance Analysis component: An impairment loss causes net income to decrease on the income statement. On the balance sheet, an impairment loss causes total assets to decrease because of the decrease in property, plant and equipment. Equity also decreases on the balance sheet as a result of the decreased net income.

9-951

Problem 9-15A (30 minutes) 1. 2024 Sept. 27 Depreciation Expense, Building ................................... Accumulated Depreciation, Building1.................. To record building depreciation for 2024.

2. Nov.

4,950 4,950

27 Cash ............................................................................... Accumulated Depreciation, Building2 .......................... Gain on Disposal................................................... Land ....................................................................... Building ................................................................. To record sale of land and building.

592,000 398,550

2 Depreciation Expense, Equipment ............................... 3 Accumulated Depreciation, Equipment ............. To record equipment depreciation for 2024.

16,133

2 Cash ............................................................................... Accumulated Depreciation, Equipment4 ...................... Loss on Disposal ........................................................... Equipment ............................................................. To record sale of equipment.

56,800 90,533 23,867

67,350 396,800 526,400

16,133

171,200

1. Depreciation from Jan. 1, 2021 to Sept. 27, 2024 [(526,400 – 393,600) – 80,000]/8 = 6,600/year × 9/12 = 4,950 2.

Accumulated Depreciation, Building = 4,950 + 393,600 = 398,550

Depreciation from Jan. 1, 2021 to Nov. 2, 2024 Rate = 2/10 = .20 or 20% 171,200 – 74,400 = 96,800 × 20% = 19,360 × 10/12 = 16,133

Accumulated Depreciation, Equipment = 16,133 + 74,400 = 90,533

9-952

Problem 9-16A (45 minutes) 1. 2023 Jan. 2 Machine .......................................................................... Cash ......................................................................... To record purchase of machine.

116,900 116,900

3 Machine .......................................................................... Cash ......................................................................... To record capital repairs on machine.

4,788

3 Machine .......................................................................... Cash ......................................................................... To record installation of machine.

1,512

4,788

1,512

2. 2023 Dec. 31 Depreciation Expense, Machine ................................... Accumulated Depreciation, Machine ..................... To record depreciation; (123,200 – 20,720)/6 = 17,080. 2028 Sept. 30 Depreciation Expense, Machine ................................... Accumulated Depreciation, Machine ..................... To record partial year’s depreciation; 17,080 × 9/12 = 12,810. 3(a). 3 Accumulated Depreciation, Machine1........................... 0 Cash ................................................................................ 2 Loss on Disposal .......................................................... Machine ................................................................... Sold machine for $21,000. 3(b). 3 Accumulated Depreciation, Machine ............................ 0 Cash ................................................................................ Machine ................................................................... Gain on Disposal3 ................................................... Sold machine for $27,300. 3(c). 3 Accumulated Depreciation, Machine ............................ 0 Cash ................................................................................ Machine ................................................................... 4 Gain on Disposal ................................................... Received insurance settlement.

17,080 17,080

12,810 12,810

98,210 21,000 3,990 123,200

98,210 27,300 123,200 2,310

98,210 25,760 123,200 770

9-953

Problem 9-16A (continued) Deprec. for 2023, Accum. 2024, Deprec. 2025, 2026, and 2027. for 2028. 1. Accumulated depreciation = (17,080 × 5 years) + 12,810 = 98,210 2. Gain (Loss)

= Cash Proceeds – Book Value = 21,000 – (123,200 – 98,210) = (3,990)

3. Gain (Loss)

= Cash Proceeds – Book Value = 27,300 – (123,200 – 98,210) = 2,310

4. Gain (Loss)

= Cash Proceeds – Book Value = 25,760 – (123,200 – 98,210) = 770

Problem 9-17A (15 minutes) 2023 July Accumulated Depreciation, Truck .....................................

6,000

5 Loss on Disposal* ............................................................. Furniture ........................................................................... Truck........................................................................ Cash ........................................................................ To record exchange.

10,500 45,100

Dec. Depreciation Expense, Furniture .......................................

3,236

36,000 25,600

31 Accumulated Depreciation, Furniture ....................... To record depreciation; (45,100 – 6,268)/6 × 6/12 = 3,236.

3,236

* Gain (Loss) = Proceeds – Book Value of Assets Given Up = 45,100 – [25,600 + (36,000 – 6,000)] = 45,100 – 55,600 = (10,500)

9-954

Problem 9-18A (45 minutes) a. Depreciation expense on first December 31 of each machine‘s life 2023 Dec. 31 Depreciation Expense, Machine 15501 .......................... Accumulated Depreciation, Machine 1550 To record depreciation. 2026 Dec. 31 Depreciation Expense, Machine 17953 .......................... Accumulated Depreciation, Machine 1795 To record depreciation. 2027 Dec. 31 Depreciation Expense, Machine BT-3115 ...................... Accum Depreciation, Machine BT-311 ...................

6,075 6,075

22,646 22,646

77,810 77,810

To record depreciation. b. Purchase/exchange/disposal of each machine. 2023 Apr. 1 Machine 1550 ................................................................... Cash .......................................................................... To record purchase of Machine 1550. 2026 Mar. 29 Machine 1795 (= assets given up) .................................. Accumulated Depreciation, Machine 15502.................... Machine 1550 ............................................................ Cash .......................................................................... To record exchange of Machine 1550. 2027 Oct. 2 Machine BT-311 ............................................................... Accumulated Depreciation, Machine 17954.................... Loss on Disposal ............................................................. Machine 1795 ............................................................ Cash .......................................................................... To record exchange of Machine 1795. 2030 Aug. 21 Cash .................................................................................. Accumulated Depreciation, Machine BT-3116 ................ Loss on Disposal ............................................................. Machine BT-311 ........................................................ To record sale of Machine BT-311.

52,900 52,900

60,390 24,300 52,900 31,790

537,000 36,800 3,590 60,390 517,000

81,200 348,890 106,910 537,000

9-955

Problem 9-18A (continued) Calculations: 1. 52,900 – 4,300 = 8,100/year × 9/12 = 6,075 6 2. Depreciation

2023: 6,075 2024: 8,100 2025: 8,100 2026: 2,025 (8,100× 3/12) Accum. Deprec. 24,300

Book Value 52,900 – 24,300= 28,600 Cash Paid 62,000 – 30,210 = 31,790 Book Value 28,600 plus cash paid 31,790 = 60,390 3. Rate = 2/4 = .50 or 50% 50% × 60,390 × 9/12 = 22,646 (deprec. for 2026) 4. 50% × (60,390 – 22,646) × 9/12 =

14,154 (deprec. for 2027) + 22,646 (deprec. for 2026) 36,800 (accum. deprec.)

5. (537,000 – 35,000)/200,000 = 2.51/unit 2027: 31,000 units × 2.51/unit = 77,810 6. Depreciation for Jan. 1/2028 to August 21/2030 = 108,000 units × 2.51/unit = 271,080 +77,810 (2027) 348,890 (accum. deprec.)

Problem 9-19A (10 minutes) (a) 2023 Oct. 1 Copyright ............................................................................ 288,000 Cash ........................................................................... To record purchase of copyright.

Dec.

(b) 31 Amortization Expense .......................................................... Accumulated Amortization, Copyright ..................... To record amortization of copyright; 288,000/3 × 3/12 = 24,000.

288,000

24,000

9-956

Problem 9-20A (30 minutes) Part 1 2023 Dec. 31 Amortization Expense, Mineral Rights ............................ 13,000 Accumulated Amortization, Mineral Rights ......... To record amortization on the mineral rights; $62,400 ÷ 4 years = $15,600/year × 10/12 = $13,000. 31 Depreciation Expense, Equipment ................................... 51,000 Accumulated Depreciation, Equipment ................. To record depreciation on the equipment; $244,800 ÷ 4 years = $61,200/year × 10/12 = $51,000. 31 Depreciation Expense, Truck ........................................... 19,875 Accumulated Depreciation, Truck .......................... To record depreciation on the truck; $95,400 ÷ 4 years = $23,850/year × 10/12 = $19,875. Part 2 2026 Oct. 31 Accumulated Amortization, Mineral Rights ..................... 57,200 Loss on Disposal............................................................... 5,200 Mineral Rights ......................................................... To record disposal of the mineral rights; $13,000 + $15,600 + $15,600 + 13,000 = $57,200 accum. amortization. 31 Accumulated Depreciation, Equipment ........................... 224,400 Loss on Disposal............................................................... 20,400 Equipment................................................................ To record disposal of the equipment; $51,000 + $61,200 + $61,200 + $51,000 = $224,400 accum. depreciation. 31 Accumulated Depreciation, Truck .................................... 87,450 Loss on Disposal............................................................... 7,950 Truck ........................................................................ To record disposal of the truck; $19,875+ $23,850 + $23,850 + $19,875 = $87,450 accum. depreciation.

13,000

51,000

19,875

62,400

244,800

95,400

Problem 9-21A (40 minutes) Year 1 Jan.

1 Trucks ......................................................................................... 22,000

9-957

Cash ...................................................................................... Record cost of truck ($20,515 + $1,485). Dec. 31 Depreciation Expense—Trucks ................................................. 4,000 Accumulated Depreciation—Trucks ................................... Record depreciation [($22,000 - $2,000)/5]. Year 2 Dec. 31 Depreciation Expense—Trucks ................................................. 5,200* Accumulated Depreciation—Trucks ................................... Record depreciation. *

22,000

4,000

5,200

Year 2 depreciation Total cost .......................................................................................................... $ 22,000 Less accumulated depreciation (from Year 1) ............................................... 4,000 Book value ........................................................................................................ 18,000 Less revised salvage value .............................................................................. 2,400 Remaining cost to be depreciated .................................................................. $ 15,600 Revised useful life ............................................................................................ 4 yrs. Less one year used in Year 1........................................................................... 1 yrs. Revised remaining useful life .......................................................................... 3 yrs. Total depreciation for Year 2 ($15,600/3) ........................................................ $ 5,200

Year 3 Dec. 31 Depreciation Expense—Trucks ................................................. 5,200 Accumulated Depreciation—Trucks ................................... Record annual depreciation. Dec. 31 Cash ............................................................................................ 5,300 Accumulated Depreciation—Trucks ......................................... 14,400** *** Loss on Disposal of Trucks ....................................................... 2,300 Trucks ...................................................................................

5,200

22,000

Record sale of truck. **

Accumulated depreciation on truck at 12/31/Year 3 Year 1 .............................................................................. $ 4,000 Year 2 .............................................................................. 5,200 Year 3 .............................................................................. 5,200 Total ................................................................................ $14,400 *** Book value of truck at 12/31/Year 3 Total cost ........................................................................ $22,000 Less accumulated depreciation .................................... (14,400) Book value ..................................................................... $ 7,600 Loss ($5,300 cash received - $7,600 book value) ........ $ 2,300

9-958

*Problem 9-22A (30 minutes) Part 1 a. 2023 Jun. 27 Depreciation Expense, Boat – Motor ...................... 2,660 Accumulated Depreciation, Boat – Motor .............. To update depreciation in 2023 regarding motor being replaced. 27 Boat – Motor (new) ............................................................ 63,000 1 Accumulated Depreciation, Boat – Motor ........................ 43,890 Loss on Disposal ...............................................................9,310 Boat – Motor (old).................................................... Cash ......................................................................... To record replacement of motor.

2,660

53,200 63,000

b. Dec. 31 Depreciation Expense, Boat ............................................. 3,1132 Accumulated Depreciation, Boat............................ 3,113 To record revised depreciation for 2023 on the boat (boat body plus motor). Calculations: 1. 53,200 ÷ 10 years = 5,320/year; 5,320 × 9/12 = 3,990 depreciation for 2015; 5,320 × 7 years for 2016 thru 2022= 37,240; 5,320/ year × 6/12 = 2,660 deprec. from Jan. 1/23 to June 27/23; 37,240 + 3,990 + 2,660 = 43,890 accumulated depreciation at June 27, 2023; 2.

Body:

Accumulated depreciation at Dec. 31, 2022: 23,800 – 7,000 = 16,800; 16,800 ÷ 15 years = 1,120/year; 1,120 × 9/12 = 840 depreciation for 2015; 1,120 × 7 years (2016 thru 2022) = 7,840; 7,840 + 840 = 8,680 Revised depreciation at Dec. 31, 2023 (rounded): 23,800 – 8,680 – 7,000 = 8,120 remaining depreciable cost; 8,120 ÷ 12.251 years = 1

Motor:

$ 663*

20 – 7 9/12 = 12 3/12 or 12.25 years remaining useful life

63,000 – 4,200 = 58,800; 58,800 ÷ 12 years = 4,900/yr × 6/12 =

2,450 $3,113

*rounded to the nearest whole dollar since depreciation is based on estimates. Part 2 Total 2023 depreciation = $2,660 + $3,113 = $5,773

9-959

ALTERNATE PROBLEMS Problem 9-1B (25 minutes) Part 1

Purchase price*............. Demolition ................... Landscaping ................ New building ............... New improvements ..... Totals ...........................

Building Land B $307,800 $183,600 46,800 69,000

Building C

Land Land Imprmnts. Imprmnts. B C $48,600

$542,400 $423,600

$183,600

$542,400

$48,600

$40,500 $40,500

*Allocation of purchase price:

Land ......................................... Building B ................................ Land Improvements B ............ Totals .......................................

Appraised Percent Value of Total $317,034 57% 189,108 34 50,058 9 $556,200 100 % %

Apportioned Cost $307,800 183,600 48,600 $540,000

Part 2 June 1

Land................................................................................ 423,600 Building B ...................................................................... 183,600 Building C ...................................................................... 542,400 Land Improvements B ................................................... 48,600 Land Improvements C ................................................... 40,500 Cash ....................................................................... To record costs of plant assets.

1,238,700

9-960

Problem 9-2B (25 minutes) Xentel Interactive Balance Sheet September 30 2023 Assets Current assets: Cash Accounts receivable Prepaid insurance Total current assets Property, plant and equipment: Land Machinery Less: Accumulated depreciation Building Less: Accumulated depreciation Total property, plant and equipment Intangible assets: Copyright Less: Accumulated amortization Total assets Liabilities Current liabilities: Accounts payable Unearned fees Total current liabilities

2022

900 1,800 -0-

$295,200 90,000 $225,000 54,000

$ 7,200 1,080

$ 2,700

$ 8,550

68,400

205,200 171,000 444,600

6,120 $453,420

$ 4,320 82,800

Non-current liabilities: Notes payable, due in 2027 Total liabilities Equity Mason Xentel, capital Total liabilities and equity

2,700 4,320 1,530

$115,200 82,800 $225,000 50,400

$ 7,200 540

32,400 174,600 275,400

6,660 $290,610

$ 3,150 5,580 $ 87,120

$ 8,730

230,220 $317,340

55,800 $ 64,530

136,080* $453,420

226,080 $290,610

*226,080 – 72,000 + 540,000 – 558,000 = 136,080 Analysis component: Xentel‘s assets were mainly financed by equity in 2022. In 2023, Xentel‘s assets were mainly financed by debt. The increase in the debt financing has weakened the balance sheet as opposed to strengthening it.

9-961

Problem 9-3B (25 minutes) (a) Year

Straight-line

2021 2022 2023 2024

36,3001 36,300 36,300 36,300

(b) Double-declining-balance (Rate = 2/4 = .50 or 50%) 50% × 169,200 = 84,600 50% × (169,200 – 84,600) = 42,300 $18,3002 0

(c) Units-of-production (Rate = [(169,200 – 24,000)/181,500] = .80/unit) 30,640 (.80 × 38,300) 32,920 (.80 × 41,150) 42,080 (.80 × 52,600) 3 39,560

1. (169,200 – 24,000)/4 = 36,300/year 2. Maximum depreciation is limited to $145,200 which is cost less residual ($169,200 – $24,000) therefore depreciation for 2023 is $18,300 calculated as $145,200 – $126,900 accumulated depreciation recorded to date. 3. Maximum depreciation is limited to $145,200 which is cost less residual ($169,200 – $24,000) therefore depreciation for 2024 is $39,560 calculated as $145,200 – $105,640 accumulated depreciation recorded to date.

9-962

Problem 9-4B (30 minutes) Part 1. Purchase made on January 1, 2023 A. Double-declining balance method

2023

2024

2025

Machinery ................................................

$588,000

Less: Accumulated depreciation...........

58,800

164,640

249,312

Year-end book value ...............................

$529,200

$423,360

$338,688

$58,800

$105,840

$84,672

Machinery ..................................................

$588,000

Less: Accumulated depreciation...........

26,600

79,800

133,000

Year-end book value ...............................

$561,400

$508,200

$455,000

$26,600

$53,200

Depreciation expense for the year ........ B. Straight-line method

Depreciation expense for the year ........

1. Rate = 2/10 = .20 or 20% 2023: 20% × 588,000 × 6/12 = 58,800 note – using half year rule 2024: 20% × (588,000 – 58,800) = 105,840 2025: 20% × (588,000 – 58,800 – 105,840) = 84,672 2. (588,000 – 56,000)/10 = 53,200 × 6/12 = 26,600

9-963

Problem 9-4B (continued) Part 2. Purchase made on April 1, 2023 A. Double-declining balance method

2023

2024

2025

Machinery ................................................

$588,000

Less: Accumulated depreciation...........

58,800

164,640

249,312

Year-end book value ...............................

$529,200

$423,360

$338,688

$58,800

$105,840

$84,672

Machinery ..................................................

$588,000

Less: Accumulated depreciation...........

26,600

79,800

133,000

Year-end book value ...............................

$561,400

$508,200

$455,000

$26,600

$53,200

Depreciation expense for the year ........ B. Straight-line method

Depreciation expense for the year ........

3. Rate = 2/10 = .20 or 20% 2023: 20% × 588,000 × 6/12 = 58,800 (note – using half year rule) 2024: 20% × (588,000 – 58,800) = 105,840 2025: 20% × (588,000 – 58,800 – 105,840) = 84,672 4. (588,000 – 56,000)/10 = 53,200 × 6/12 = 26,600

9-964

Problem 9-5B (30 minutes) Depreciation Method: Year

2023 2024 2025

Straight-line (145,000 – 25,000)/5 = 24,000/year × 2/12 = 4,000 24,000 24,000 24,000

2026 2027 2028

24,000

Double-declining balance Rate = 2/5 = .40 or 40% 145,000 × 40% × 2/12 = 9,667 (145,000 – 9,667) × 40% = 54,133 (145,000 – 9,667 – 54,133) × 40% = 32,480 (145,000 – 9,667 – 54,133 – 32,480) × 40% = 19,488

Units-of-production Rate = (145,000 – 25,000)/100,000 = 1.20/km 1.20 × 5,800 = 6,960 1.20 × 19,400 = 23,280 1.20 × 22,850 = 27,420 1.20 × 25,700 = 30,840

4,232*

20,000 0 Totals 120,000 120,000 *Maximum allowed = $4,232 [$120,000 – ($9,667 + $54,133 + $32,480 + $19,488)] **Maximum allowed = $7,524 [$120,000 – ($6,960 + $23,280 + $27,420 + $30,840 + $23,976)]

1.20 × 19,980 = 23,976 120,000 – 112,476 = 7,524** 120,000

9-965

Problem 9-6B (30 minutes) Depreciation Method: Year

2023 2024 2025 2026 2027 2028

Straight-line (145,000 – 25,000)/5 = 24,000/year × 6/12 = 12,000 24,000 24,000 24,000

24,000

Double-declining balance Rate = 2/5 = .40 or 40% 145,000 × 40% × 6/12 = 29,000 (145,000 – 29,000) × 40% = 46,400 (145,000 – 29,000 – 46,400) × 40% = 27,840 (145,000 – 29,000 – 46,400 – 27,840) × 40% = 16,704

Units-of-production Same as Problem 9-4B; Units-of-production is usage based and not affected by time 6,960 1.20 × 19,400 = 23,280 1.20 × 22,850 = 27,420 1.20 × 25,700 = 30,840

56*

12,000 0 Totals 120,000 120,000 * Maximum allowed = $56 [$120,000 – ($29,000 + $46,400 + $27,840 + $16,704)] ** Maximum allowed = $7,524 [$120,000 – ($6,960 + $23,280 + $27,420 + $30,840 + $23,976)]

1.20 × 19,980 = 23,976 120,000 – 112,476 = 7,524** 120,000

9-966

Problem 9-7B (15 minutes) Part 1. 2024 Dec. 31

Depreciation Expense, Machinery ................................ Accumulated Depreciation, Machinery ................ To record annual depreciation; (500,000 – 60,000)/8 = 55,000

55,000

Depreciation Expense, Equipment ............................... Accumulated Depreciation, Equipment .............................................................. To record annual depreciation; Rate = 2/4 = .50 or 50%; 50% × (1,280,000 – 1,026,667) = 126,667

126,667

55,000

126,667

Part 2. WESTFAIR FOODS Partial Balance Sheet December 31, 2024 Property, plant and equipment: Machinery .......................................................................... $500,000 Less: Accumulated depreciation ................................. 385,000

$115,000

Equipment ......................................................................... 1,280,000 Less: Accumulated depreciation ................................. 1,153,334 Total property, plant and equipment ........................

126,666 $241,666

9-967

Problem 9-8B (30 minutes) Part 1

Building ....................................... Land ........................................... Land improvements .................. Truck .......................................... Total ...........................................

Market Value $ 663,300 397,980 120,600 24,120 $1,206,000

Percentage of Total 55% 33 10 2 100%

2023 Sept. 30 Building ....................................................................... Land ........................................................................... Land Improvements .................................................. Truck .......................................................................... Cash ................................................................... To record asset purchases. Part 2

Apportioned Cost $574,200 344,520 104,400 20,880 $1,044,000

574,200 344,520 104,400 20,880 1,044,000

2023 straight-line depreciation on building: ($574,200 – 45,000)/15 × 3/12 = $8,820

Part 3

2023 double-declining-balance depreciation on land improvements: Rate = 2/8 = .25 or 25% $104,400 × 25% × 3/12 = $6,525

9-968

Problem 9-9B (45 minutes)

Year 2023 2024 2025 2026 2027 2028 Totals

StraightLinea $ 31,304 46,956 46,956 46,956 46,956 15,652 $234,780

Units-ofProductionb $32,928 51,744 47,040 44,688 37,240 21,140 $234,780

aStraight- line: Cost per year = (273,000 – 38,220)/5 years =

DoubleDecliningBalancec $ 72,800 80,080 48,048 28,829 5,023* 0 $234,780

= $46,956 per year × 8/12 $31,304 for 2023

= $46,956/year × 4/12 = $15,652 for 2028 bUnits-of-production: Cost per unit = (273,000 – 38,220)/168,000 units = $1.40 per unit (rounded) Year Units Unit Cost Depreciation 2023 23,520 $1.40 $32,928 2024 36,960 1.40 51,744 2025 33,600 1.40 47,040 2026 31,920 1.40 44,688 2027 26,600 1.40 37,240 2028 30,940 1.40 21,140* Total $234,780 *Take only enough depreciation in Year 2028 to reach the maximum accumulated depreciation of $234,780. cDouble-declining-balance: Rate = 2/5 = .40 or 40% 2023: 40% × 273,000 × 8/12 = 72,800 2024: 40% × (273,000 – 72,800) = 80,080 2025: 40% × (273,000 – 72,800 – 80,080) = 48,048 2026: 40% × (273,000 – 72,800 – 80,080 – 48,048) = 28,829 2027: 234,780 – 229,757* = 5,023 *Take only enough depreciation in Year 2027 to reach the maximum accumulated depreciation of $234,780.

9-969

Problem 9-10B (40 minutes) Cost Information

Residual

Life

Balance of Accum. Deprec. Apr. 30, 2023

$ 62,400

$ 16,800

20 yr.

$ 5,890

$ 2,280

Units-ofproduction

540,000

180,000

100,000 units

73,3324

38,1245

111,4566

Doubledeclining balance

64,000

15,000

5 yr.

45,5687

3,4328

49,0009

Description

Date of Purchase

Depreciation Method

Cost

Equipment

Oct. 3/20

Straight-line

Machinery

Oct. 28/20

Nov. 3/20

Tools

Depreciation

Depreciation Expense for 2024 2

Balance of Accum. Deprec. Apr. 30, 2024 3

8,170

(62,400 – 16,800)/20 = 2,280/year × 2 7/12 = 5,890 (62,400 – 16,800)/20 = 2,280/year 5,890 + 2,280 = 8,170 Rate = (540,000 – 180,000)/100,000 = 3.60/unit; 2021: 940 × 3.60 = 3,384 2022: 10,150 × 3.60 = 36,540 2023: 9,280 × 3.60 = 33,408 73,332 5. 10,590 × 3.60 = 38,124 6. 73,332 + 38,124 = 111,456 7. Rate = 2/5 = .40 or 40% 2021: 40% × 64,000 × 6/12 = 12,800 2022: 40% × (64,000 – 12,800) = 20,480 2023: 40% × (64,000 – 12,800 – 20,480) = 12,288 Accumulated depreciation at Apr. 30, 2023= $45,568 8. 2024: (64,000 – 15,000) – 45,568 = 3,432 9. 45,568 + 3,432 = 49,000 1. 2. 3. 4.

9-970

Problem 9-11B (20 minutes) 2023 June 26 Truck ............................................................................... Cash ....................................................................... To record purchase of new truck; $68,400 + $3,420 freight costs.

71,820 71,820

27 Truck ............................................................................... Cash ....................................................................... To record installation of special racks.

3,780

Dec. 31 Depreciation Expense, Truck1 ....................................... Accumulated Depreciation, Truck ........................ To record depreciation to nearest whole month.

7,200

2024 Jan. 5 Mar. 15

Dec. 31

3,780

7,200

No entry. Repair and Maintenance Expense ................................ Cash ....................................................................... To record repairs.

660

Depreciation Expense, Truck2 ....................................... Accumulated Depreciation, Truck ........................ To record revised depreciation

10,600

660

10,600

1. [(71,820 + 3,780) – 18,000]/4 × 6/12 = 7,200 2. [(71,820 + 3,780) – 7,200 – 10,100]/(6 – .5 = 5.5) = 10,600

AI-971

Problem 9-12B (40 minutes) 2024 Dec. 31

Depreciation Expense, Building1 .................................. Accumulated Depreciation, Building ....................... To record annual depreciation. 2

Depreciation Expense, Equipment .............................. Accumulated Depreciation, Equipment ................... To record annual depreciation.

Accumulate d Depreciatio Cost n Residual 274,800 – 134,400 – 108,000 20 Accumulated Cost Depreciation Residual 117,600 – 38,400 – 6,000 = 10

1,620 1,620

7,320 7,320

= 1,620

7,320

AI-972

Problem 9-13B (40 minutes) 2023 Jan. 3 Warehouse – Furnace (new) ........................................ 39,000 Accumulated Depreciation, Warehouse – Furnace .... 18,1531 Loss on Disposal ...................................................... 8,847 Warehouse – Furnace (old) ................................ 27,000 Accounts Payable ............................................... 39,000 To record installation of new warehouse furnace. Calculations: 1. 2018 Deprec.: 27,000 × 2/10 = 5,400; 2019 Deprec.: (27,000 – 5,400) × 2/10 = 4,320; 2020 Deprec.: (27,000 – 9,720) × 2/10 = 3,456; 2021 Deprec.: (27,000 – 13,176) × 2/10 = 2,765; 2022 Deprec.: (27,000 – 15,941) × 2/10 = 2,212; Accum. Deprec. Dec. 31, 2022 = 5,400 + 4,320 + 3,456 + 2,765 + 2,212 = 18,153. Part 2 Windows Doors

51,750 ÷ 15 = 105,000 ÷ 20 = 5,250/yr; 5,250/yr × 5 yrs = 26,250 Accum. Dep.; 105,000 – 26,250 = 78,750 book value; 78,750 – 23,100 = 55,650 revised depreciable value; 55,650 ÷ (12 yrs – 5 yrs = 7 yrs) = Roofing 43,500 ÷ 10 = Siding 54,000 ÷ 25 = Framing/Walls 222,000 – 60,000 = 162,000; 162,000 ÷ 30 = Furnace 39,000 × 2/16 = Misc. Maximum allowable depreciation reached1 Total depreciation expense to be recorded on the warehouse for 2023= 1.

$ 3,450

7,950 4,350 2,160 5,400 4,875 -0$28,185

2018: 61,500 × 2/5 = 24,600; 2019: (61,500 – 24,600) × 2/5 = 14,760; 2020: (61,500 – 39,360) × 2/5 = 8,856; 2021: (61,500 – 48,216) × 2/5 = 5,314; 2022: (61,500 – 53,530) × 2/5 = 3,188 which exceeds max. allowable accumulated depreciation of 54,000 therefore the maximum that can be recorded in 2022 is 54,000 – 53,530 = 470 with no depreciation recorded in any subsequent years.

AI-973

Problem 9-14B (40 minutes) Part 1 2023 Mar. 31 Impairment Loss ..................................................... Computer Equipment ................................... To record impairment loss on computer equipment. 31 Impairment Loss ..................................................... Machinery ...................................................... To record impairment loss on machinery.

26,000 26,000

23,750 23,750

*Calculations: Book Value

Recoverable Value

Impairment Loss

Computer equipment

$ 32,250

$6,250

$26,000

Land

145,000

172,500

Machinery

88,750

65,000

23,750

Warehouse

173,500

243,750

AI-974

Problem 9-14B (concluded) Part 2 La Mancha Enterprises Balance Sheet March 31, 2023 Assets Current assets: Cash ........................................................................................... $ 35,000 Accounts receivable ................................................................. $ 57,500 Less: Allowance for doubtful accounts ................................. 6,000 51,500 Office supplies ........................................................................ 4,875 Total current assets .................................................................. Property, plant and equipment: Land .......................................................................................... $145,000 Warehouse ............................................................................... $ 460,000 Less: Accumulated depreciation ......................................... 286,500 173,500 1 Machinery .................................................................................. $217,500 Less: Accumulated depreciation ........................................... 152,500 65,000 2 Computer equipment .............................................................. $46,500 Less: Accumulated depreciation ........................................... 40,250 6,250 Total property, plant and equipment ..................................... Total assets .................................................................................. Liabilities Current liabilities: Accounts payable .................................................................... $ 14,750 Salaries payable ...................................................................... 33,750 Current portion of long-term mortgage ................................. 59,550 Total current liabilities............................................................ $108,050 Non-current liabilities: Mortgage payable, less current portion .................................. 34,200 Total liabilities .............................................................................. Equity Joy La Mancha, capital ................................................................ Total liabilities and equity ...............................................................

$ 91,375

389,750 $481,125

$142,250 338,8753 $481,125

Calculations: 1. 241,250 cost – 23,750 impairment loss = 217,500 2. 72,500 cost – 26,000 impairment loss = 46,500 3. 407,875 adjusted capital balance + 1,227,500 revenues – 1,246,750 expenses – 26,000 impairment loss, computer equip. – 23,750 impairment loss, machinery. = 338,875 post-closing capital balance Analysis component: The recording of an impairment loss causes expenses to increase which in turn causes net income to decrease. Decreases in income cause equity on the balance sheet to decrease.

AI-975

Problem 9-15B (45 minutes) Part 1 2023 Mar.

Aug.

Depreciation Expense, Van ........................................... Accumulated Depreciation, Van1 ........................... To record depreciation on van for 2023.

1,575

2 Cash ................................................................................ 1 Accumulated Depreciation, Van .................................. Loss on Disposal ........................................................... Van ........................................................................... To record sale of van.

17,920 42,175 4,305

June 29

Part 2 Depreciation Expense, Machinery ................................ Accumulated Depreciation, Machinery2 ................ To record depreciation on machinery for 2023. Cash ................................................................................ Accumulated Depreciation, Machinery2 ....................... Machinery ................................................................ To record sale of machinery. Part 3 Depreciation Expense, Equipment ............................... Accumulated Depreciation, Equipment3 ............... To record depreciation on equipment for 2023.

29 Cash ................................................................................ Accumulated Depreciation, Equipment3 ...................... Gain on Disposal..................................................... Equipment ............................................................... To record sale of equipment.

1,575

64,400

12,642 12,642

95,718 33,082 128,800

3,500 3,500

27,720 48,300 420 75,600

Calculations: 1. Depreciation from Feb. 1/23 to Mar. 2/23: 64,400 – 40,600 – 9,800 = $0.35/km × 4,500 km = 40,000

1,575 + 40,600 42,175

(calculations continued on next page)

AI-976

Problem 9-15B (concluded) 2. Depreciation from Feb. 1/23 to Aug. 27/23: 128,800 – 20,440 = 108,360 Book Value Rate = 2/10 = .20 or 20% 108,360 × 20% × 7/12 =

3. Depreciation from Feb. 1/23 to June 29/23: 75,600 – 44,800 – 5,600 × 5/12 = 3

12,642 + 20,440 33,082

3,500 + 44,800 48,300

Problem 9-16B (60 minutes) Part 1 2023 Jan.

1 Machine .......................................................................... Cash ......................................................................... To record purchase of machine.

156,000

2 Machine .......................................................................... Cash ......................................................................... To record capital repairs on machine.

4,068

2 Machine .......................................................................... Cash ......................................................................... To record installation of machine.

5,760

Part 2 Dec. 31 Depreciation Expense, Machine ....................................... Accumulated Depreciation, Machine ..................... To record depreciation; (165,828 – 21,600)/7 = 20,604 2028 Apr.

1 Depreciation Expense, Machine ................................... Accumulated Depreciation, Machine ..................... To record partial year’s depreciation; 20,604 × 3/12 = 5,151.

156,000

4,068

5,760

20,604 20,604

5,151 5,151

AI-977

Problem 9-16B (concluded) Part 3(a) Apr. 30 Accumulated Depreciation, Machine1........................... Cash ................................................................................ Loss on Disposal2 .......................................................... Machine ................................................................... Sold machine for $36,000. Part 3(b) 30 Accumulated Depreciation, Machine ................................ Cash ................................................................................ Machine ................................................................... Gain on Disposal3 ................................................... Sold machine for $60,000. Part 3(c) 30 Accumulated Depreciation, Machine ................................ Cash ................................................................................ Loss on Disposal4 .......................................................... Machine ................................................................... Received insurance settlement.

108,171 36,000 21,657 165,828

108,171 60,000 165,828 2,343

108,171 24,000 33,657 165,828

Calculations:

Deprec Deprec. for . for 2023, 2028 2024, Depreciation 2025, 1. Accumulated depreciation = (20,604 × 5 years) + 5,151 = 2026, 2. Gain (Loss) = Cash Proceeds – Book 2027Value and = 36,000 – (165,828 – 2015. 108,171) = (21,657) 3. Gain (Loss)

= Cash Proceeds – Book Value = 60,000 – (165,828 – 108,171) = 2,343

4. Gain (Loss)

= Cash Proceeds – Book Value = 24,000 – (165,828 – 108,171) = (33,657)

108,171

AI-978

Problem 9-17B (20 minutes) 2023 Aug. 31

Sept. 4

Dec. 31

Accumulated Depreciation, Furniture ................................ 25,800 Computer Equipment .......................................................... 72,600 Furniture ........................................................................ Cash ............................................................................... To record exchange. Computer Equipment ........................................................ Cash ............................................................................. Addition of upgrade, betterment.

11,760

Depreciation Expense, Computer Equipment.................... Accumulated Depreciation, Computer Equipment ............ To record depreciation; [(72,600 + 11,760) – 19,200] /3 × 4/12.

7,240

* Assets Given up

42,000 56,400

11,760

7,240

= Cash Paid+ Book Value of Assets Given Up = 56,400+[42,000–25,800] = 56,400+16,200= 72,600

AI-979

Problem 9-18B (45 minutes) 1. Depreciation expense on first December 31 of each machine‘s life 2023 Dec. 31 Depreciation Expense, Machine 66901 .......................... 10,800 Accumulated Depreciation, Machine 6690 ............ To record depreciation. 2025 3 Dec. 31 Depreciation Expense, Machine 6691 .......................... Accumulated Depreciation, Machine 6691 ............ To record depreciation. 2028 5 Dec. 31 Depreciation Expense, Machine 6711 .......................... Accumulated Depreciation, Machine 6711 ........................................................... To record depreciation. 2. Purchase/exchange/disposal of each machine 2023 May 1 Machine 6690 ................................................................... Cash .......................................................................... To record purchase of Machine 6690. 2025 Aug. 5 Machine 6691 (= to assets given up) .............................. 2 Accumulated Depreciation, Machine 6690 .................... Machine 6690 ............................................................ Cash .......................................................................... To record exchange of Machine 6690. 2028 Feb. 1 Cash .................................................................................. Accumulated Depreciation, Machine 66914.................... Loss on Disposal ............................................................. Machine 6691 ............................................................ To record sale of Machine 6691. 1 Machine 6711 ................................................................... Cash .......................................................................... To record purchase of Machine 6711. 2029 Oct. 3 Cash .................................................................................. Accumulated Depreciation, Machine 67116.................... Loss on Disposal ............................................................. Machine 6711 ............................................................ To record sale of Machine 6711.

10,800

8,325 8,325

7,155 7,155

72,900 72,900

49,950 36,450 72,900 13,500

13,500 35,465 985 49,950 79,650 79,650

54,000 17,888 7,762 79,650

AI-980

Problem 9-18B (continued) Calculations: 1. 72,900 – 8,100 = 16,200/year × 8/12 = 10,800 4 2.

Depreciation

Accum. Deprec.

2023: 2024: 2025:

10,800 16,200 9,450 36,450

(16,200 × 7/12)

Rate = 2/5 = .40 or 40% 40% × 49,950 × 5/12 = 8,325

2025: 2026: 40% × (49,950 – 8,325) = 2027: 40% × (49,950 – 8,325 – 16,650) = 2028: 40% × (49,950 – 8,325 – 16,650 – 9,990) × 1/12 =

(79,650 – 8,100)/75,000 = $0.954/unit

8,325 16,650 9,990 500 35,465

2028: 7,500 units × 0.954/unit = 7,155 6.

Depreciation for Jan. 1/2029 to Oct. 3/2029: = 11,250 units × 0.954/unit = 10,733 7,155 Accum. Deprec. 17,888

AI-981

Problem 9-19B (20 minutes) Part 1 a. 2023 Feb. 3

b. Dec. 31

Patent ......................................................... Cash................................................... To record purchase of patent.

220,800

Amortization Expense, Patent ..................... Accumulated Amortization, Patent ...... To record amortization on patent; 220,800 ÷ 5 = 44,160/year; 44,160 x 11/12 = 40,480.

40,480

220,800

40,480

Part 2 Secure Software Group Partial Balance Sheet December 31, 2023 Assets Current assets: Cash .................................................................... Accounts receivable (net) .................................. Merchandise inventory ...................................... Total current assets ........................................... Property, plant and equipment: Land .................................................................... Building ............................................................... Less: Accumulated depreciation, building Equipment........................................................... Less: Accumulated depreciation, equip. ..... Total property, plant and equipment Intangible assets: Patent .................................................................. Less: Accumulated amortization, patent .... Total assets .................................................................

$103,200 277,200 135,600 $ 516,000 $110,400 $595,200 189,000 $477,600 259,200

406,200 218,400 735,000 $220,800 40,480

180,320 $1,431,32 0

AI-982

Problem 9-20B (30 minutes) Part 1 2023 Dec. 31 Amortization Expense, Patent ......................................... Accumulated Amortization, Patent ....................... To record amortization on the patent; $210,000 ÷ 20 years = $10,500/yr × 11/12 = $9,625.

9,625 9,625

31 Depreciation Expense, Equipment ................................. Accumulated Depreciation, Equipment ................ To record depreciation on the equipment; $320,600 - $56,000 = $264,600; $264,600 ÷ 15 years = $17,640/yr × 11/12 = $16,170.

16,170

31 Depreciation Expense, Computer ................................... Accumulated Depreciation, Computer ................. To record depreciation on the computer; $79,800 ÷ 5 years = $15,960/yr × 11/12 = $14,630.

14,630

16,170

14,630

Part 2 2027 Jan. 27 Accumulated Amortization, Patent ................................. 42,000 Loss on Disposal.............................................................. 168,000 Patent ...................................................................... To record disposal of the patent; 4 yrs × $10,500/yr = $42,000 accum. amort. 27 Accumulated Depreciation, Equipment .......................... 70,560 Cash .................................................................................. 252,000 Gain on Disposal .................................................... Equipment............................................................... To record disposal of the equipment; 4 yrs × $17,640/yr = $70,560 accum. deprec. 27 Accumulated Depreciation, Computer ............................ 63,840 Loss on Disposal.............................................................. 15,960 Computer ................................................................ To record disposal of the computer; 4 yrs × $15,960/yr = $63,840 accum. deprec.

*Problem 9-21B (40 minutes) Year 1 Jan. 1 Machinery.................................................................................... 114,270 Cash ...................................................................................... Record costs of machinery ($107,800 +$6,470).

210,000

1,960 320,600

79,800

114,270

AI-983

Dec. 31 Depreciation Expense—Machinery ...........................................17,425 Accumulated Depreciation—Machinery ............................. Record depreciation [($114,270-$9,720)/6]. Year 2 Dec. 31 Depreciation Expense—Machinery ...........................................27,500* Accum. Depreciation—Machinery ....................................... Record depreciation. *

17,425

27,500

Year 2 depreciation: Total cost ................................................................................... $114,270 Less accumulated depreciation (from Year 1) ........................ 17,425 Book value ................................................................................. 96,845 Less revised salvage value....................................................... 14,345 Remaining cost to be depreciated ........................................... $ 82,500 Revised useful life .....................................................................4 yrs. Less 1 year in Year 1 .................................................................1 yrs. Revised remaining useful life ...................................................3 yrs.

Total depreciation for Year 2 ($82,500/ 3 yrs) ........................... $ 27,500 Year 3 Dec. 31 Depreciation Expense—Machinery ...........................................27,500 Accumulated Depreciation—Machinery ............................. Record depreciation.

27,500

Dec. 31 Cash ............................................................................................25,240 Accumulated Depreciation—Machinery ........................................72,425** *** Loss on Disposal of Machinery .................................................16,605 Machinery.............................................................................. 114,270 Record sale of machine. **

Accumulated depreciation on machine at 12/31/Year 3: Year 1 .............................................................................. $ 17,425 Year 2 .............................................................................. 27,500 Year 3 .............................................................................. 27,500 Total ................................................................................ $ 72,425 *** Book value of machine at 12/31/Year 3: Total cost ........................................................................ $114,270 Less accumulated depreciation .................................... (72,425) Book value ..................................................................... $ 41,845 Loss ($25,240 cash received - $41,845 book value) .... $ 16,605

AI-984

*Problem 9-22B (40 minutes) 1.a.

2023 Oct. 3 Depreciation Expense, Equipment – Fan ............ 4,320 Accum. Deprec., Equipment – Fan ............ 4,320 To update depreciation on replaced fan from Jan 1/23 to Oct 3/23. 3 Cash ....................................................................... 8,400 Accum. Deprec., Equipment – Fan ...................... 29,2801 Equipment – Fan (old) ................................ Gain on Disposal ........................................ To record sale of replaced fan on the equipment. 3 Equipment – Fan (new) ........................................ Cash ............................................................. To record purchase of replacement fan on equipment.

1.b.

32,400 5,280

36,000 36,000

Dec. 31 Depreciation Expense, Equipment - Fan ............. 22,3702 Accum. Deprec., Equipment - Fan ............. 22,370 To record depreciation for 2023 on the equipment (sum of all components).

Calculations: 1. 32,400 – 3,600 = 28,800; 28,800 ÷ 5 yrs = 5,760/yr; 5,760 × 4/12 = 1,920 deprec. for 2018; 5,760/yr × 4 yrs (2019 to 2022 inclusive) = 23,040; 5,760/yr × 9/12 (max depreciation to depreciate 5 years) = 4,320 deprec. from Jan. 1/23 to Oct. 3/23; 1,920 + 23,040 + 4,320 = 29,280 accum. deprec. at Oct. 3/23.

AI-985

*Problem 9-21B (continued) 2.

Metal Frame

Engine

New Fan Conveyor System Misc. Parts

144,000 – 36,000 = 108,000; 108,000 ÷ 20 yrs = 5,400/yr; 5,400/yr × 4/12 = 1,800 deprec. for 2018 ; 5,400/yr × 4 yrs (2019 to 2022 inclusive) = 21,600; 1,800 + 21,600 = 23,400 accum. deprec. at Dec. 31/22; Revised deprec. = 144,000 – 23,400 accum. deprec. = 120,600 remaining book value; 120,600 – (36,000 – 12,000 = 24,000 residual value) = 96,600 remaining depreciable cost; 96,600 ÷ 20 yrs = 2018: 96,000 × 2/10 × 4/12 = 6,400 2019: 96,000 – 6,400 = 89,600 × 2/10 = 17,920 2020: 89,600 – 17,920 = 71,680 × 2/10 = 14,336 2021: 71,680 – 14,336 = 57,344 × 2/10 = 11,469 2022: 57,344 – 11,469 = 45,875 × 2/10 = 9,175 2023: 45,875 – 9,175 = 36,700 × 2/10 = 36,000 – 4,800 = 31,200; 31,200 ÷ 5 yrs = 6,240 × 3/12 = 126,000 – 39,600 = 86,400; 86,400 ÷ 10 yrs = 2018: 27,600 × 2/5 × 4/12 = 3,680 2019: 27,600 – 3,680 = 23,920 × 2/5 = 9,568 2020: 23,920 – 9,568 = 14,352 × 2/5 = 5,741 2021: 14,352 – 5,741 = 8,611 × 2/5 = 3,444 2022: 8,611 – 3,444 = 5,167 × 2/5 = 2,067 which exceeds max.; maximum that can be taken in 2022 is 5,167 – 4,800 = 367; therefore, no depreciation is taken in 2023

$4,830

7,340 1,560 8,640

-0$22,370

Part 2 Total 2023 depreciation = $4,320 + $22,370 = $26,690

AI-986

ANALYTICAL AND REVIEW PROBLEMS A&R Problem 9-1 The following points should be set out in the report: 1. Assets on which depreciation was charged were purchased for use in the business and not for resale. Therefore, the fact that they may be sold for more than cost is not relevant since, in keeping with the cost principle, PPE are maintained in the accounting records at cost. 2. Because these assets are subject to both physical and economic (obsolescence) deterioration, they have a limited useful life span, however long it may be, and their cost, less any residual value, must be allocated over their useful life. 3. Maintenance expenditures maintain these assets in a properly functioning order. They, however, do not eliminate the fact of physical and economic deterioration. 4. Not charging periodic depreciation is in violation of the matching principle and results in an understatement of expenses and overstatement of net income. 5. Depreciation is a process of allocation not of valuation.

ETHICS CHALLENGE

1. When managers acquire new assets a variety of decisions relative to depreciation must be made. The asset must be assigned a useful life and residual value, and a method of depreciation must be chosen.

2. It is true that managers can choose a useful life and residual value based on an estimate. However, the estimated life should be the manager‘s realistic expectation of how long the asset will actually be used in the operations of the business. The estimated residual value should not be arbitrary; it should reflect expectations of the recoverable value of the asset at the end of its useful life to the business, even if it is zero. The depreciation method should reflect a systematic allocation of the asset‘s cost based on how the asset is actually consumed by the business.

3. By selecting a useful life that is significantly greater than what is realistic in combination with an unreasonably high residual value, the profit margin will be overstated since depreciation expense will be greatly understated.

AI-987

FOCUS ON FINANCIAL STATEMENTS FFS 9-1 a.

Descriptio n Land Building Machinery Truck Furniture Patent Office Equip. Furniture

Cost Information Deprec Date of . Original Purchas Metho Cost e d July $280,000 3/20 July S/L 454,000 3/20 Mar Units 150,000 20/20 Mar S/L 298,800 01/20 Feb DDB 24,000 18/20 Nov 7/21 S/L 103,800 11 Apr DDB 65,143 10/23 Apr DDB 48,85711 10/23

Residu al

$40,00 0 30,000

Life

$ 69,0001 3 72,960

$46,0002

30,000

250,00 0 7 yr.

108,800

38,400

3,000

5 yr.

18,2407

5768

$115,0 00 104,16 0 147,20 0 10 -0-

-010,000

5 yr. 4 yr.

24,2209 -0-

20,7609 12 24,429

44,980 24,429

4,000

5 yr.

-0-

14,65713

14,657

Calculations: 1. (454,000 – 40,000)/15 = 27,600/year x 6/12 =

15 yr.

Depreciation/Amortization Accum. Accum Balance Expense . Dec. 31, for 2023 Balanc 2022 e n/a n/a n/a

31,200

13,800 for 2020 27,600 for 2021 27,600 for 2022 69,000 Accum. deprec. at Dec. 31/22

2. (454,000 – 40,000 – 69,000)/(10 – 2.5 = 7.5) = 46,000 for 2023 3. (150,000 – 30,000)/250,000 = $0.48/unit x 45,000 = x 55,000 = x 52,000 =

21,600 for 2020 26,400 for 2021 24,960 for 2022 72,960 Accum. deprec. at Dec. 31/22

4. $0.48/unit x 65,000 = 31,200 for 2023 5. (298,800 – 30,000)/7 = 38,400/year x 10/12 = 32,000 for 2020 38,400 for 2021 38,400 for 2022 108,800 Accum. deprec. Dec. 31/22 6. (298,800 – 30,000)/7 = 38,400/year depreciation for 2023

AI-988

FFS 9-1 (continued) 7.

24,000 x 2/5 x 10/12 = (24,000 – 8,000) x 2/5 = 24,000 – (8,000 + 6,400)] x 2/5 =

8,000 for 2020 6,400 for 2021 3,840 for 2022 18,240 Accum. deprec. Dec. 31/22

[24,000 – (8,000 + 6,400 + 3,840)] x 2/5 x 3/12 = 576 for 2023

(103,800 – 0)/5 = 20,760/year x 2/12 = 3,460 for 2021 20,760 for 2022

24,220 Total dep. taken to Dec. 31/22 10.

This has a -0- balance at December 31, 2023 because the asset was disposed of (donated to charity).

11. Appraised Values

Ratio

Cost Allocation

Office Equipment

96,000

96/168 x 114,000

= 65,143

Furniture

72,000

72/168 x 114,000

= 48,857

Totals

168,000

114,000

12. 65,143 x 2/4 x 9/12 = 24,429 for 2023 13.

48,857 x 2/5 x 9/12 = 14,657 for 2023

AI-989

FFS 9-1 (continued) b. Times TeleCom Income Statement For Year Ended December 31, 2023 Revenues: Revenue earned ............................................................. Expenses: Salaries expense ............................................................ $294,000 Depreciation expense ..................................................... 155,262 Amortization expense ..................................................... 20,760 Insurance expense ......................................................... 30,000 Loss on disposal of furniture ........................................... 5,184 Total expenses ........................................................... Profit

Times TeleCom Statement of Changes in Equity For Year Ended December 31, 2023 Susan Times, capital, January 1, 2023.................................... Add: Profit.............................................................................. Total .................................................................................. Less: Withdrawals by owner .................................................. Susan Times, capital, December 31, 2023 .................................

$950,000

505,206 $444,794

$421,180 444,794 865,974 204,000 $661,974

AI-990

FFS 9-1 (continued)

1. Times TeleCom Balance Sheet December 31, 2023 Assets Current assets: Cash ...................................................................................... Accounts receivable ............................................................. Prepaid insurance ................................................................ Total current assets ......................................................... Property, plant and equipment: Land .................................................................................. Building ............................................................................. $454,000 Less: Accumulated depreciation ............................... 115,000 Machinery ......................................................................... $150,000 Less: Accumulated depreciation ............................... 104,160 Truck ................................................................................. $298,800 Less: Accumulated depreciation ............................... 147,200 Office equipment .............................................................. $ 65,143 Less: Accumulated depreciation ............................... 24,429 Furniture ........................................................................... $ 48,857 Less: Accumulated depreciation ............................... 14,657 Total property, plant and equipment ...................... Intangible assets: Patent ................................................................................ $103,800 Less: Accumulated Amortization ............................... 44,980

$ 30,000 72,000 15,600 $ 117,600

$280,000 339,000 45,840 151,600 40,714 34,200 891,354

58,820

Total assets ............................................................................... Liabilities Current liabilities: Accounts payable ........................................................ $ 68,000 Unearned revenue ........................................................ 53,800 Total current liabilities ............................................ Non-current liabilities: Notes payable, due 2026 .............................................

$1,067,774

$ 121,800 284,000

Total liabilities ..................................................................

$ 405,800

Equity Susan Times, capital ........................................................ Total liabilities and equity ........................................................

661,974 $1,067,774

AI-991

FFS 9-2 Part 1

NOTE: Both Spin Master and Recipe use the term ‘amortization and depreciation’ in the statements referenced in this question. To be consistent with the textbook, the answers use the term ‘depreciation’. a. The $53,400 (thousand) represents the book value of the PPE. The December 31, 2020, book value is the $238,800 (thousand) total cost of the PPE assets less the $185,400 (thousand) total accumulated depreciation of the PPE. (Note to instructor: Point out to students that this additional information — cost and accumulated depreciation — is found in Spin Masters Note 13 of the financial statements.) b. The full disclosure principle requires financial statements to report all relevant information about the operations and financial position of the entity. In conformance with the full disclosure principle, information in addition to the $53,400 (thousand) book value is reported in Note 2(l) (depreciation methods) and Note 13 (cost, accumulated depreciation, and net carrying amount). c. The depreciation expense for the year ended December 31, 2020, was $35,700 (thousand). Although depreciation expense typically appears on the income statement, Spin Master does not detail it there but these amounts do appear on the statement of cash flows and in Notes 7, 13 and 14. Part 2 a. Recipe‘s property, plant and equipment at December 27, 2020 is 25.5% of total assets calculated as ($538,276,000/$2,109,071,000) x 100. b. Indigo‘s property, plant and equipment at March 28, 2020 represent 10.33% of total assets calculated as ($91,215,000/$882,970,000) x 100. c. Recipe and Indigo operate in different industries: Recipe is an food service/production while Indigo operates bookstores. As such, Recipe has relatively little inventory in comparison to Indigo. Recipe‘s inventory at December 27, 2020 is $44,921 thousand or 2.1% of total assets (calculated as $44,921,000/$2,109,071,000 x 100). Indigo‘s inventory for 2020 is $241,821 thousand or 27.4% of total assets (calculated as $241,812,000/$882,970,000 x 100). Indigo needs a large stock of inventory in order to operate. R food service operations require inventory to move quickly through operations as it is perishable. Therefore, it seems logical that the mix of assets would be different for each company.

AI-992

2. CRITICAL THINKING MINI-CASE CT 9-1 Note to instructor: Student responses will vary and therefore the answer here is only suggested and not inclusive of all possibilities; it is presented in point form for brevity. Problem: —

Taking the perspective of both the external and internal auditors, there is a problem with how a number of truck expenditures were recorded to the capital asset account.

Goal:* —

To identify which transactions were recorded incorrectly, correct them, and restate net income on the income statement and restate assets and equity on the balance sheet.

—

Another goal, from the perspective of the auditor, would be to bring these issues to the attention of the board of directors for their action because there may be ethical concerns regarding the behaviour of the business manager (bonus is tied to income so he/she may be manipulating the recording of transactions to maximize income).

Principles: —

The matching principle has been violated; it requires costs to be allocated or matched to the period in which it helped generate revenues.

—

The prudence principle was also violated; it states that assets and income should never be overstated.

—

Another GAAP requires consideration: materiality. If the misstatements are not material in nature (not significant in dollar amount so that the decisions of shareholders would not have been affected), the conclusions are affected. Therefore, we must look at the numbers to determine whether materiality has been violated or not.

AI-993

CT 9-1 (continued) Facts: as stated in the mini case —The insurance was incorrectly debited to the Truck account; it should have been debited to a current asset account: Prepaid Insurance. The result of this error is an overstatement of net income in 2021 of $7,800 (36,000/24 months = 1,500/month insurance used x 10 months = 15,000 for 2021 vs. 36,000/5 yrs useful life = 7,200; 15,000 – 7,200 = 7,800). 2021 net income is not known but if it is assumed that it approximates 2022 net income as reported ($78,000), then the $7,800 overstatement of net income in 2021 is material in nature since it approximates 10%. —The net income in 2022 would also have been materially overstated; by $10,800 (1,500 insurance expense per month x 12 months used = 18,000 – depreciation of 7,200 = 10,800). Net income in 2023 would have been understated by $4,200 (7,200 depreciation– 3,000 insurance used = 4,200). —It is unclear from the information provided how the insurance renewal was treated: as an addition to Truck asset account, or as Prepaid Insurance; this would have affected the impact of the misstatement in 2023. —It is unclear from the information provided whether revised depreciation was calculated when the motors were debited to the truck account (which is correct assuming that the motors enhanced the trucks which is likely). We will assume that this was treated correctly (A betterment with resulting calculation of revised depreciation) given no information to the contrary. The $32,000 and $2,500 costs regarding the tires and brakes were capitalized in error; they should have been expensed when incurred in 2022. Therefore, net income in 2022 is overstated by a potential $34,500 (32,000 + 2,500) — I say potential because it is unclear whether revised depreciation was calculated on the truck; this additional depreciation would affect the amount of any misstatement in 2022 and 2023. —There is also the issue of when the bonus was recorded; these were recorded in the incorrect accounting periods (recorded when paid as opposed to the period which triggered the cost — violation of matching and realization principles). In addition, because the bonuses were based on overstated net income amounts, the bonuses would have been overstated for 2021 and 2022 and potentially in 2023. —It appears that the 2022 net income was overstated by almost 50%. Conclusions/Consequences: —

To do ‗nothing‘ would mean that shareholders/owners are making decisions based on inaccurate information.

—

If the manager did, in fact, engage in unethical actions, a longer-term implication from the perspective of the manager is that he/she may lose their job and future employability prospects in addition to damaging the credibility of the company and its share values assuming it is publicly held.

AI-994

—

The board of directors need to be made aware of the errors made in recording repairs and maintenance expenses and betterments so that they can deal appropriately with the manager responsible and negative repercussions with shareholders/owners.

*The goal is highly dependent on perspective. SOLUTIONS MANUAL to accompany

Fundamental Accounting Principles th

17 Canadian Edition by Larson/Dieckmann/Harris

Revised for the 17th Edition by: John Harris, Seneca College Technical checks by: Rhonda Heninger, SAIT

AI-995

Appendix I

Payroll Liabilities

Appendix Critical Thinking Challenge Questions*

If payroll liabilities are not recorded, what is the effect on the financial statements? - If payroll liabilities are not recorded, expenses on the income statement will be understated causing profit to be overstated. On the balance sheet, unrecorded payroll liabilities will cause liabilities to be understated and equity to be overstated.

*The Appendix I Critical Thinking Challenge questions are asked in the text. Students are reminded at the conclusion of Appendix I, to refer to the Critical Thinking Challenge questions at the beginning of the Appendix. The solutions to the Critical Thinking Challenge questions are available here in the Solutions Manual and accessible to students accessible to students in the print and ebooks.

AI-996

Concept Review Questions 1. Canada Pension Plan deductions are levied on employers, their employees, and the self-employed. Employees and the self-employed under the age of 18 and over the age of 70 are specifically exempt from the plan. 2. Workers‘ Compensation premiums are paid by the employer. 3. Federal employment insurance taxes are paid by nearly all employees and their employers. Employees pay at the rate of 1.58% of insurable earnings and the employers pay 1.4 times the amount deducted from the employees. 4. The employment laws have two main objectives: (1) payment of benefits to unemployed workers; and (2) stabilization of employees‘ incomes. 5. Payroll deductions are remitted to the Receiver General for Canada on the 15th of each month; larger corporations may be required to remit deductions on the 10th and 25th of the month. 6. An employee‘s gross earnings and the amount of his/her exemptions determine the income taxes to be withheld from the pay of employees. 7. Tax withholding tables indicate the tax to be withheld from any amount of wages and with any number of exemptions. 8. Covered self-employed individuals pay Canada Pension Plan deductions of 10.9% of annual pensionable earnings (in 2021). 9. Personal information about the employee plus a record of hours worked, gross pay, deductions, and net pay are accumulated on an employee‘s individual earnings record. The information must be accumulated because payroll laws require its accumulation. The information: (1) serves as a basis for tax returns and reports, (2) tells when an employee‘s earnings have reached the tax-exempt points for C.P.P., and employment insurance taxes, and (3) supplies the data for employees‘ T-4 Forms. 10. An employer must pay Workers‘ Compensation, Canada Pension Plan, and Employment Insurance premiums. The amounts which get deducted from the wages of the employee are CPP, Income taxes, and Employment Insurance. 11. Employee fringe benefits are benefits to employees in addition to wages earned, the cost of which are paid by the employer. Examples are an employer‘s contribution to employee‘s insurance coverage, an employer‘s contribution to retirement income programs of employees, and an employer‘s contribution for prescription and/or dental coverage.

QUICK STUDY Quick Study A1-1 EI Expense ($260 × 1.4) ............................. CPP Expense .............................................. Total ............................................................

$364.00 205.00 $569.00

AI-997

Quick Study A1-2 Mar. 31 Wages Expense .............................................. 18,000.00 CPP Payable [($3,000 – $291.67)* × 5.45% × 6] EI Payable [($3,000 × 1.58%) × 6] ............. Income Taxes Payable .............................. Wages Payable ..........................................

885.62 284.40 3,600.00 13,229.98

$3,500 exemption ÷ 12 months = $291.67 exempt Quick Study A1-3 Mar.

31 Wages Payable ............................................................ Cash ...................................................................... To record payment of wages to employees.

13,229.98 13,229.98

Quick Study A1-4 Gross Pay 1,200.0 0 530.00 675.00 2,405.0 0

EI Premiu m

Income Tax

CPP

Total Deduction s

18.97 8.37 10.67

303.85 123.05 156.75

61.74 25.22 33.12

384.55 156.64 200.54

38.01

583.65

120.08

741.73

Net Pay 815.45 373.36 474.46 1,663.2 7

Office Salaries

Sales Salaries 1,200.0 0

530.00 675.00 530.00 1,875.00

AI-998

Quick Study A1-5 EI Total Gross Premiu Income Deduction Salaries Pay m Tax CPP s Net Pay Expense 2,010.0 1,734.8 2,010.0 0 31.76 149.70 93.65 275.11 9 0 2,115.0 1,806.9 2,115.0 0 33.42 175.25 99.37 308.04 6 0 4,125.0 3,541.8 4,125.0 0 65.18 324.95 193.02 583.15 5 0 Note: Ensure students are using the monthly federal and provincial tax deduction tables.

Quick Study A1-6

Office Gross EI Pay Premium 2,500.0 0 39.50 1,800.0 0 28.44 4,300.0 0 67.94

Income Tax

CPP

750.00

128.91

540.00

90.76

1,290.00

219.67

Sales

Total Deductions

Net Pay Sal Exp Sal Exp 1,581.5 2,500.0 918.41 9 0 1,140.8 1,800.0 659.20 0 0 2,722.3 2,500.0 1,800.0 1,577.61 9 0 0

Income tax at 30%; EI & CPP from Payroll Tables

Quick Study A1-7 Mar. 31

Wages Expense ($3,500 x 8) ................ 28,000.00 CPP Payable [($3,500 – $291.67)* × 5.45% × 8] EI Payable [($3,500 × 1.58%) × 8] Income Tax Payable ($28,000 x 20%) Salaries Payable ...........................

1,398.83 442.40 5,600.00 20,558.77

*$3,500 exemption ÷ 12 months = $291.67 exempt

AI-999

Quick Study A1-8 Feb. 28

Office Salaries Expense ................................................ Sales Salaries Expense................................................. EI Payable............................................................... CPP Payable ........................................................... Salaries Payable ....................................................

EI,CPP & Tax values from Payroll TablesGros s Pay

EI Premiu m

Income Tax

CPP

Total Ded

575.00 1,860.00 38.48 85.01 2,311.51

Net Pay

Office Sal

575.00 840.00

9.09 13.27

0.00 0.00

15.44 29.88

24.53 43.15

550.47 796.85

1,020.00

16.12

0.00

39.69

55.81

964.19

2,435.00

38.48

0.00

85.01

123.49

2,311.51

Sales Sal

575.00

Quick Study A1-9 Feb. 28

EI Expense1 ................................................................... CPP Expense2 ............................................................... EI Payable .............................................................. CPP Payable ..........................................................

53.87 85.01 53.87 85.01

Calculations: 1. $38.48 x 1.4 = $53.87 2. $85.01 x 1 = $85.01

Quick Study A1-10 Mar. 15

EI Payable1 .................................................................... CPP Payable2................................................................. Cash .......................................................................

92.35 170.02 262.37

Calculations: 1. $38.48 (Employees‘ Portion) + $53.87 (Employer‘s Portion) = $92.35 2. $85.01 (Employees‘ Portion) + $85.01 (Employer‘s Portion = $170.02 Quick Study A1-11

AI-1000

840.00 1,020.0 0 1,860.0 0

Mar. 31 Benefits Expense ........................................... 4,120.00 Employees‘ Retirement Payable ($28,000 × 8%) Medical Insurance Payable ($60 × 8) ...... Vacation Pay Payable ($28,000 × 5%) .....

2,240.00 480.00 1,400.00

EXERCISES Exercise AI-1 (15 minutes) Regular pay (172 hours @ $12.50) ............................... Overtime premium pay (12 hours @ $6.25) ................. Gross pay ...................................................................... EI deduction ................................................................. CPP deduction .............................................................. Income tax deduction ($124.35 + $76.50)** ................. Total deductions ........................................................... Net pay ...........................................................................

$2,150.00 75.00 $2,225.00 $ 35.16 105.37* 200.85 341.37 $1,883.63

*Use the monthly CPP tables for 2021.

**Need to use the monthly federal and provincial payroll tables for 2021, using claim code 1.

Exercise AI-2 (30 minutes) Mar. 9

EI,CPP & Tax values from Payroll Tables

Office Salaries Expense ........................................ Employees‘ Income Taxes Payable .. CPP Payable ....................................... Employees‘ Health Insurance Payable EI Payable ........................................... Salaries Payable .................................

3,860.00 973.45 195.70 108.00 60.99 2,521.86

EI Premiu m

CPP Earnings Wkly Previous EI Income GPay Week Premium CPP Payable Payable Tax Hlth Ins 12,510.0 720.00 0 11.38 35.57 197.66 618.06 168.10 24.00 10,320.0 610.00 0 9.64 29.58 163.06 500.38 142.05 24.00 830.00 15,500.0 13.11 41.57 244.90 776.25 194.65 36.00

AI-1001

1,700.0 0 3,860.0 0

0 29,500.0 0 67,830.0 0

26.86

88.98

466.10

60.99

195.70

1,071.71

1,544.0 9 3,438.7 8

468.65

24.00

973.45

108.00

AI-1002

Exercise AI-3 (10 minutes)

EI,CPP & Tax values from Payroll Tables EI Gross Premiu Income Total Pay m Tax Uway CPP Ded Net Pay Adm Sal Sales Sal 1,900.0 1,243.8 1,900.0 0 30.02 449.95 80.00 96.21 656.18 2 0 1,260.0 1,260.0 0 19.91 293.30 50.00 61.33 424.54 835.46 0 1,680.0 1,136.3 1,680.0 0 26.54 392.90 40.00 84.22 543.66 4 0 3,000.0 1,309.0 1,690.9 3,000.0 0 47.40 805.45 300.00 156.16 1 9 0 7,840.0 1,941.6 2,933.3 4,906.6 1,900.0 5,940.0 0 123.87 0 470.00 397.92 9 1 0 0

Exercise AI-4 (25 minutes)

EI,CPP & Tax values from Payroll Tables EI Canada Gross Premiu Income Savings United Total Pay m Tax Bond Way CPP Ded Net Pay Adm Sal Sales Sal 1,995.0 1,499.4 1,995.0 0 31.52 121.45 150.00 99.75 92.83 495.55 5 0 2,040.0 1,652.2 2,040.0 0 32.23 158.20 0.00 102.00 95.28 387.71 9 0

AI-1003

2,000.0 0 2,280.0 0 8,315.0 0

31.60

149.70

0.00

100.00

93.10

374.40

36.02

141.80

200.00

114.00

108.36

131.37

571.15

350.00

415.75

389.57

600.18 1,857.8 4

1,625.6 0 1,679.8 2 6,457.1 6

1,995.0 0

2,000.0 0 2,280.0 0 6,320.0 0

Exercise AI-5 (25 minutes)

EI, & CPP values from Payroll Tables. Income Tax rate of 20% given in the question. Gross Pay 1,200.0 0 950.00 1,150.0 0 875.00 4,175.0 0

EI Premiu m 18.97 15.01

Income Tax

Medical Insuranc e

United Way

240.00 190.00

65.00 65.00

40.00 100.00

CPP 61.73 48.11

Total Deduction s

Net Pay

Adm Salaries

425.70 418.12

774.30 531.88

950.00

18.17 13.83

230.00 175.00

65.00 65.00

0.00 50.00

59.01 44.02

372.18 347.84

65.98

835.00

260.00

190.00

212.86

1,563.84

777.82 527.16 2,611.1 6

950.00

Guide Salaries 1,200.0 0 1,150.0 0 875.00 3,225.0 0

AI-1004

Exercise AI-6 (15 minutes) Monthly salary .............................................. CPP deducted .............................................. EI deducted .................................................. Income tax withheld (99.25 + 60.70) ........... Salary, net of deductions ............................ ...................................................................... Monthly contribution ................................... Feb. 28

$2,050.00 $ 95.83 32.39 159.95 ×

288.17 $1,761.83 0.02 35.24

Salaries Expense ............................................................................ 2,050.00 EI Payable .................................................................................. 32.39 CPP Payable .............................................................................. 95.83 Employees‘ Income Taxes Payable .......................................... 159.95 United Way Payable .................................................................. 35.24 Salaries Payable ........................................................................ 1,726.59

Exercise AI-7 (15 minutes) Mar. 23

Salaries Expense ........................................................................... 65,950.00 EI Payable .................................................................................. CPP Payable .............................................................................. Employees‘ Income Taxes Payable ......................................... Medical Insurance Payable ...................................................... United Way Payable .................................................................. Salaries Payable........................................................................

1,055.60 3,403.40 16,957.20 1,150.00 1,319.00 42,064.80

EI,CPP & Tax values from Payroll Tables

Gross Pay

EI Premium

Income Tax

CPP

65,950.00

1,055.60

16,957.20

3,403.40

Med Ins 1,150.00

United Way 1,319.00

Total Deductions 23,885.20

Net Pay 42,064.80

Exercise AI-8 (10 minutes) Mar. 23

EI Expense...................................................................................... 1,477.84 CPP Expense .................................................................................. 3,403.40 EI Payable ($1,055.60 × 1.4) ...................................................... CPP Payable ..............................................................................

1,477.84 3,403.40

Exercise AI-9 (10 minutes) Apr. 15

EI Payable ($1,055.60 + $1,477.84) ................................................ 2,533.44

AI-1005

CPP Payable ($3,403.40 x 2) .......................................................... 6,806.80 Employees‘ Income Taxes Payable .............................................. 16,957.20 Cash ...........................................................................................

26,297.44

Exercise AI-10 (15 minutes) 1. Mar

EI Expense............................................................... CPP Expense ........................................................... EI Payable ($60.99 × 1.4) ................................. CPP Payable ....................................................

85.38 195.70 85.38 195.70

9Benefits Expense .......................................................... 494.00 Employees‘ Health Insurance Payable .......... Employees‘ Retirement Program Payable ..... $3,860.00 Total Earnings × 10% = $386.00

108.00 386.00

Exercise AI-11 (20 minutes) CPP Contribution EI Contribution Doherty $ 2,643.25* $ 821.60 Fane 3,133.75 889.54 Kahan 3,024.75 889.54 Martin 2,479.75** 774.20*** Leung 3,166.45 889.54 Totals $14,447.95 $4,264.42 *($52,000 – $3,500) × 5.45% = $2,643.25 **($49,000 – $3,500) × 5.45% = $2,479.75 ***$49,000 x 1.58% = $774.20

Retirement Fund Contributions $ 5,200.00 6,100.00 5,900.00 4,900.00 7,600.00 $29,700.00

Health Insurance $1,440.00 1,440.00 1,440.00 1,440.00 1,440.00 $7,200.00

Payroll taxes and fringe benefits as a percentage of salaries: $14,447.95 + ($4,264.42 × 1.4) + $29,700 + $7,200 = 19.30% $297,000

Exercise AI-12 (20 minutes) Mar. 31 Salaries Expense ($2,050 × 12) ........................................ EI Payable ($34.03 × 12)............................................... CPP Payable ($87.04 × 12) ........................................... Employees‘ Income Taxes Payable (190.25 × 12) ...... Salaries Payable...........................................................

24,600.00

408.36 1,044.48 2,283.00 20,864.16

AI-1006

31 EI Expense......................................................................... CPP Expense ..................................................................... Benefits Expense – Retirement Program ........................ Benefits Expense – Medical Insurance ($50 × 12) .......... EI Payable ($408.36 × 1.4) ............................................ CPP Payable ................................................................. Retirement Program Payable ...................................... Medical Insurance Payable .........................................

571.70 1,044.48 1,968.00 600.00 571.70 1,044.48 1,968.00 600.00

Exercise AI-13 (30 minutes) Jan.

Benefits Expense .......................................................... Estimated Vacation Payable .................................

22,507 22,507

$ 96,000 × (2/50) = $ 3,840 224,0001 × (4/48) = 18,667 $320,000 $22,507

1. 320,000 x 70% = 224,000

AI-1007

PROBLEMS Problem Appendix1-1A (55 minutes) Part 1 Payroll Register

Employee Employees No. M Ray Loran 11 8 Kathy Sousa 12 7 Gary Smith 13 8 Nicole Parton 14 8 Diana Wood 15 0

T 8 8 8 8 6

Daily Time W T F 8 8 8 6 7 8 0 8 8 8 8 8 6 6 6

S 4 4 4 0 8

S 0 0 4 0 8

Total Hours 44 40 40 40 40

O.T. Hours 4 0 0 0 0

Reg. Pay Rate 40.00 36.00 32.00 40.00 36.00

Regular Pay 1,760.00 1,440.00 1,280.00 1,600.00 1,440.00 7,520.00

Earnings O.T. Premium Pay 80.00 0.00 0.00 0.00 0.00 80.00

Gross Pay 1,840.00 1,440.00 1,280.00 1,600.00 1,440.00 7,600.00

1 2 3 4 5 6

Week Ended March 23, 2021 Employment Income Hospital Union Total Net Insurance CPP* Tax Insurance Dues Deductions Pay 1 29.07 96.61 368.00 40.00 16.00 549.68 1,290.32 2 22.75 74.81 288.00 40.00 15.00 440.56 999.44 3 20.22 66.09 256.00 40.00 14.00 396.32 883.68 4 25.28 83.53 320.00 40.00 16.00 484.81 1,115.19 5 22.75 74.81 288.00 40.00 16.00 441.56 998.44 120.08 395.86 1,520.00 200.00 77.00 2,312.94 5,287.06

Office Wages Expense

Service Wages Expense 1,840.00

1,440.00

1,280.00 1,600.00 1,440.00 6,160.00

*$3,500 exemption ÷ 52 weeks = $67.31 exempt

AI-1008

Problem AI-1A (concluded) Part 2 Mar. 23

1,440.00 6,160.00

EI Expense............................................................. CPP Expense ......................................................... EI Payable ($120.08 x 1.4) ............................. CPP Payable ..................................................

168.11 395.86

120.08 395.86 1,520.00 200.00 77.00 5,287.06

168.11 395.86

Problem AI-2A (20 minutes) Part 1 Jan.

Sales Salaries Expense ........................................ Office Salaries Expense ....................................... Employees‘ Income Taxes Payable ............. EI Payable ...................................................... CPP Payable .................................................. Employees‘ Hospital Insurance Payable ..... Employees‘ Union Dues ............................... Salaries Payable ............................................

19,570.00 6,230.00

EI Expense............................................................. CPP Expense ......................................................... EI Payable ($407.64 × 1.4) ............................. CPP Payable ..................................................

570.70 1,296.05

5,160.00 407.64 1,296.05 930.00 420.00 17,586.31

Part 2 Jan.

570.70 1,296.05

AI-1009

Problem AI-3A (30 minutes) Part 1 Mar.16

Sales Salaries Expense ........................................ Office Salaries Expense ....................................... Shop Salaries Expense ........................................ EI Payable ...................................................... CPP Payable .................................................. Employees‘ Income Taxes Payable ............. Employees‘ Medical Insurance Payable ...... Employees‘ Union Dues Payable ................. Salaries Payable ............................................

1,200.00 1,050.00 3,100.00

EI Expense............................................................. CPP Expense ......................................................... EI Payable ($84.54 × 1.4) ............................... CPP Payable ..................................................

118.36 276.90

Benefits Expense .................................................. Employees‘ Medical Insurance Payable ...... Employees‘ Retirement Program Payable ($5,350 × 8%) ............................................. Estimated Vacation Pay Liability ($5,350 × 6%) .............................................

909.00

84.54 276.90 1,397.20 160.00 401.25 3,030.11

Part 2 Mar.16

118.36 276.90

Part 3 Mar.16

160.00 428.00 321.00

EI,CPP & Tax values from Payroll Tables

EI Gross Premiu Income Union Total Pay m Tax Med Ins Due CPP Ded Net Pay SalesSal Off.Sal ShopSal 1,200.0 1,200.0 0 18.97 303.85 47.50 90.00 61.73 522.05 677.95 0 1,400.0 1,400.0 0 22.12 369.65 52.50 105.00 72.63 621.90 778.10 0 1,700.0 1,700.0 0 26.86 468.65 25.00 127.50 88.98 736.99 963.01 0 1,050.0 1,050.0 0 16.59 255.05 35.00 78.75 53.56 438.95 611.05 0 5,350.0 84.54 1,397.2 160.00 401.25 276.90 2,319.8 3,030.1 1,200.0 1,050.0 3,100.0

AI-1010

AI-1011

Problem AI-4A (40 minutes) Mar.

Apr.

Employees‘ Income Taxes Payable ..................... EI Payable .............................................................. CPP Payable .......................................................... Cash ...............................................................

1,006.05 310.75 685.56

Office Salaries Expense ....................................... Shop Salaries Expense ........................................ Employees‘ Income Taxes Payable ............. EI Payable ...................................................... CPP Payable .................................................. Employees‘ Medical Insurance Payable ...... Salaries Payable ............................................

2,600.00 5,200.00

2,002.36

1,815.15 123.24 377.40 390.00 5,094.21

Benefits Expense .......................................................... Employees‘ Medical Insurance Payable ...... Estimated Vacation Pay Liability ................. $7,800 x 6% = $468.00.

858.00

EI Expense ..................................................................... CPP Expense ................................................................. EI Payable ($123.24 × 1.4) ............................. CPP Payable ..................................................

172.54 377.40

390.00 468.00

Employees‘ Income Taxes Payable ..................... EI Payable ($123.24 + $172.54) ............................. CPP Payable ($377.40 x 2) .................................... Cash ...............................................................

1,815.15 295.78 754.80

Employees‘ Medical Insurance Payable .............. Cash ($1,560 + $390 + $390) .........................

2,340.00

172.54 377.40

2,865.73

2,340.00

AI-1012

ALTERNATE PROBLEMS Problem AI-1B (55 minutes)

Part 1 Payroll Register

Employee Employees No. M Ben Amoko ........ 31 8 Auleen Carson ... 32 7 Mark Cheng ....... 33 8 Gene Deszca ..... 34 8 Ysong Tan ......... 35 0 Totals

T 8 8 8 8 6

Daily Time W T F 8 8 8 8 7 8 0 8 8 8 8 8 6 6 6

S 0 4 4 0 8

S 0 0 4 0 8

Total Hours 40 42 40 40 40

O.T. Hours 0 2 0 0 0

Reg. Pay Rate 34.00 36.00 36.00 30.00 30.00

Regular Pay 1,360.00 1,512.00 1,440.00 1,200.00 1,200.00 6,712.00

Earnings O.T. Premium Pay 0.00 36.00 0.00 0.00 0.00 36.00

Gross Pay 1,360.00 1,548.00 1,440.00 1,200.00 1,200.00 6,748.00

1 2 3 4 5 6

Week Ended March 23, 2021 Employment Income Hospital Union Total Net Insurance CPP* Tax Insurance Dues Deductions Pay 1 21.49 70.45 272.00 30.00 12.00 405.94 954.06 2 24.46 80.70 309.60 30.00 12.00 456.76 1,091.24 3 22.75 74.81 288.00 30.00 12.00 427.56 1,012.44 4 18.96 61.73 240.00 30.00 12.00 362.69 837.31 5 18.96 61.73 240.00 30.00 12.00 362.69 837.31 6 106.62 349.42 1,349.60 150.00 60.00 2,015.64 4,732.36

Office Wages Expense

Service Wages Expense 1,360.00

1,548.00

1,440.00 1,200.00 1,200.00 5,200.00

*$3,500 exemption ÷ 52 weeks = $67.31 exempt

AI-1013

Problem AI-1B (concluded) Part 2 Mar. 23

Office Wages Expense ......................................... Service Wages Expense ....................................... EI Payable ...................................................... CPP Payable .................................................. Employees‘ Income Taxes Payable ............. Employees‘ Hospital Insurance Payable ..... Employees‘ Union Dues Payable ................. Wages Payable .............................................. EI Expense............................................................. CPP Expense ......................................................... EI Payable ($106.62 x 1.4) ............................. CPP Payable ..................................................

1,548.00 5,200.00 106.62 349.42 1,349.60 150.00 60.00 4,732.36 149.27 349.42 149.27 349.42

Problem A1-2B (20 minutes)

Part 1 Jan.

23,400.00 5,820.00

EI Expense............................................................. CPP Expense ......................................................... EI Payable ($461.68 × 1.4) ............................. CPP Payable ..................................................

646.35 1,427.41

5,844.00 461.68 1,427.41 920.00 490.00 20,076.91

Part 2 Jan.

646.35 1,427.41

AI-1014

Problem AI-3B (30 minutes) Part 1 Mar. 16

1,450.00 1,720.00 3,520.00

EI Expense............................................................. CPP Expense ......................................................... EI Payable ($105.72 × 1.4) ............................. CPP Payable ..................................................

148.00 349.75

Benefits Expense .................................................. Employees‘ Medical Insurance Payable ...... Employees‘ Retirement Program Payable ($6,690.00 × 8%)......................................... Estimated Vacation Pay Liability ($6,690.00 × 6%).........................................

1,096.60

105.72 349.75 1,835.60 160.00 401.25 3,837.68

Part 2 Mar. 16

148.00 349.75

Part 3 Mar. 16

Gross Pay 1,450.0 0 1,760.0 0 1,760.0 0 1,720.0 0 6,690.0 0

EI Premiu m

Income Tax

Med Ins

22.92

387.00

47.50

90.00

75.36

622.78

27.81

487.25

52.50

105.00

92.16

764.72

27.81

487.25

25.00

127.50

92.16

759.72

27.18 105.72

474.10 1,835.6 0

35.00 160.00

Union Due

78.75 401.25

CPP

90.07 349.75

Total Ded

705.10 2,852.3 2

160.00 535.20 401.40

Net Pay

SalesSal Off.Sal 1,450.0 827.22 0

995.28 1,000.2 8 1,014.9 0 3,837.6 8

ShopSal

1,760.0 0 1,760.0 0

1,450.0 0

1,720.0 0 1,720.0 0

AI-1015

3,520.0 0

Problem AI-4B (40 minutes) Mar.

Apr.

Employees‘ Income Taxes Payable ............................. EI Payable ...................................................................... CPP Payable .................................................................. Cash .......................................................................

1,298.25 358.56 804.36 2,461.17

Office Salaries Expense ............................................... 3,000 Shop Salaries Expense ........................................ 6,000 Employees‘ Income Taxes Payable ............. 2,107.05 EI Payable ...................................................... 142.20 CPP Payable .................................................. 442.80 Employees‘ Medical Insurance Payable ...... 345.00 Salaries Payable ............................................ 5,962.95 Benefits Expense .......................................................... Employees‘ Medical Insurance Payable ...... Estimated Vacation Pay Liability (9,000 × 6%) ....................................

885.00

EI Expense ..................................................................... CPP Expense ................................................................. EI Payable ($142.20 × 1.4) ............................. CPP Payable ..................................................

199.08 442.80

345.00 540.00

Employees‘ Income Taxes Payable ..................... EI Payable (142.20 + 199.08) ................................. CPP Payable (442.80 × 2) ...................................... Cash ...............................................................

2,107.05 341.28 885.60

Employees‘ Medical Insurance Payable .............. Cash (1,380 + 345 + 345) ...............................

2,070.00

199.08 442.80

3,333.93

2,070.00

ANALYTICAL AND REVIEW PROBLEMS A&R Problem AI-1 No answer given as it is dependent on the payroll deduction rates of the particular year.

A&R Appendix I-2 Date Salary Expense ...............................................................................

XXX

AI-1016

Employees‘ Income Tax Payable ............................................. EI Payable .................................................................................. CPP Payable .............................................................................. Hospital Insurance Payable ...................................................... Union Dues Payable .................................................................. Salaries Payable ........................................................................

XXX XXX XXX XXX XXX XXX

EI Expense....................................................................................... CPP Expense ................................................................................... EI Payable .................................................................................. CPP Payable ..............................................................................

XXX XXX

Benefits Expense ............................................................................ Hospital Insurance Payable ...................................................... Retirement Plan Payable...........................................................

XXX

Salaries Payable.............................................................................. Cash ...........................................................................................

XXX

EI Payable ......................................................................................... CPP Payable ..................................................................................... Employees‘ Income Tax Payable .................................................... Cash ............................................................................................

XXX XXX XXX

Hospital Insurance Payable............................................................. Cash ............................................................................................

XXX

Union Dues Payable......................................................................... Cash ............................................................................................

XXX

Retirement Plan Payable ................................................................. Cash ............................................................................................

XXX

XXX XXX XXX XXX XXX

XXX XXX XXX

XXX

AI-1017

Ethics Challenge EC Appendix I-1 1. Companies withhold amounts from employees‘ wages and salaries and hold the amounts ―in trust‖ for the government and others. The amounts belong to the government and others and not the company. The amounts withheld must be sent to the government and others on a regular basis. 2. The ethical factor in this case revolves around the ownership of the amounts withheld. The owner of the company is suggesting that the amounts belonging to the government and others be used for his company rather than be sent to the rightful owner(s). 3. I would not recommend that Moe follow the owner‘s ―suggestions.‖ If Moe were a professional accountant (CPA), the rules of ethics of his professional association would prohibit him from acting in such a manner. In addition, Moe may be putting himself in legal jeopardy because he would be misusing trust funds. 4. Moe should explain the nature of withholding amounts to the owner (i.e., they are the government‘s funds, not the company‘s) and that the amounts must be sent to the rightful owner on the due date. Some possibilities to consider: — Put more pressure on the Pacific Rim customers to pay their bills. — Obtain notes from the Pacific Rim customers and discount them with a factor. — Prepare a new cash budget and return to the bank to request the needed loan a second time. — Approach a new bank or other source for the needed loan. — Delay paying accounts payable. This should be done in cooperation with the suppliers. — Discuss the situation with a representative of the government. The government may grant a slight delay.

AI-1018

Critical Thinking Mini Case CT Appendix I-1 Note to instructor: Student responses will vary therefore the answer here is only suggested and not inclusive of all possibilities; it is presented in point form for brevity. This mini-case is based on a real life situation where the CRA was successful in pressing charges, imposing a fine, and collecting unremitted employer and employee taxes, CPP, and EI. Problem(s): — Delta is not recording part-time wages as a wage expense and remitting the appropriate payroll deductions which is unlawful in the eyes of CRA. Goal(s)*: — To correctly record salaries and wages and remit payroll deductions as required by law. Assumption(s)/Principle(s): — That as the new office manager, you will only perform duties for Delta Yard Maintenance that are ethical and lawful. Facts: — as presented Conclusion(s)/Consequence(s): — record and remit payroll deductions in accordance with the law — bring the past transactions to the attention of your supervisor for the purpose of correcting the accounts and payroll remittances which could be costly and impact cashflow in the shortrun for Delta Yard Maintenance — notify affected employees that they will be issued T4s and that remittances will have to be made

*The goal is highly dependent on ‖perspective.‖

AI-1019

SOLUTIONS MANUAL to accompany

Fundamental Accounting Principles th

17 Canadian Edition by Larson/Dieckmann/Harris

Revised for the 17th Edition by:

John Harris, Seneca College Technical checks by: Rhonda Heninger, SAIT APPENDIX II Quick Study AII-1 (10 minutes) 1. 2. 3. 4.

P AR AR AP

AI-1020

1. 2. 3. 4. 5. 6. 7. 8.

I I O O I O O I

Quick Study AII-3(15 minutes) 1.

10.

Quick Study AII-4(10 minutes) a.

Sales Journal

Purchases Journal

Cash Disbursements Journal

Purchases Journal

Cash Receipts Journal

Quick Study AII-5(10 minutes) a.

Subsidiary ledger

General ledger

AI-1021

Quick Study AII-6(10 minutes) Nov.

Automobiles ................................................ Jesse Cooke, Capital .......................... The owner contributed an automobile to the business.

15,000

Sales Returns and Allowances .................. Accounts Receivable—R. Wyder ....... Customer returned merchandise.

150

Merchandise Inventory ................................ Cost of goods sold ............................... Merchandise returned to inventory.

Accounts Payable—The Ringdol Co............. Merchandise Inventory ....................... Returned defective merchandise.

170

15,000

150

170

Quick Study AII-7(10 minutes)

1. 2. 3. 4. 5. 6. 7.

Debit (DR), Credit (CR), or No Effect (NE) NE DR NE CR NE CR NE

Quick Study AII-8(10 minutes)

AI-1022

Account Debited

Date 2023 Mar. 3 Tim Edson 10 Willis Company 11 Ellton Kingston Totals

Suttleton Company Sales Journal Accounts Receivable Invoice Dr. Number PR Sales Cr. 1103 1104 1105

3,000 10,800 7,400 21,200

Cost of Goods Sold Dr. Merchandise Inventory Cr. 2,040 7,344 5,032 14,416

Quick Study AII-9(10 minutes)

1. 2. 3. 4. 5. 6. 7.

Debit (DR), Credit (CR), or No Effect (NE) NE CR NE DR DR NE NE

QS AII.10(10 minutes) CASH RECEIPTS JOURNAL

Date

Account Credited

Explanation

Cost of Sales Accounts Other Goods Cash Discount Recble. Sales Accounts Sold Dr. PR Dr. Dr. Cr. Cr. Cr. Inventory Cr.

AI-1023

May 1

C. Li, Capital............................. Contribution

9,000

15 Notes Payable....................... Note to bank

1,000

Invoice, 5/9 18 E. James..................................

500

24 Sales .......................................... Cash sale

200

500 200

150

QS AII.11(10 minutes)

Date

Account

May 1

PURCHASES JOURNAL Date Accounts of Payable Invoice Terms PR Cr.

Krause, Inc. ............................5/01

n/30

10,100

14 Store Supplies/ Chang Co............................5/14

n/30

240

17 Monder Company ............... 5/17

n/30

260

Inventory Dr.

Office Supplies Dr.

Other Accounts Dr.

10,100 240 260

QS AII.12(10 minutes)

May

Purchases Journal

Sales Journal

Purchases Journal

Cash Receipts Journal

Cash Payments Journal

QS AII.13(10 minutes) a.

Sales Journal

Purchases Journal

Cash Payments Journal

Cash Receipts Journal

AI-1024

Purchases Journal

Cash Payments Journal

QS AII.14 (10 minutes) SALES JOURNAL

Date

Account Debited

Invoice Number

Accounts Receivable Dr. Sales Cr.

Cost of Goods Sold Dr. Inventory Cr.

June 9 R. Allen .............................................. 2080

325

200

27 B. Kraft .............................................. 2082

550

400

QS AII.15(10 minutes) a.

Subsidiary ledger

General ledger

QS AII.16(10 minutes) CASH PAYMENTS JOURNAL

Date

Ck. No.

Payee

Account Debited

Cash Cr.

Inventory Cr.

Other Accounts Accounts Payable Dr. Dr.

AI-1025

June 3 380 Skipp Corp.......................................... Office Supplies........................................................................ 235

235

20 381 Buck Co............................................... Buck Co..................................................................................... 3,200

3,200

23 382 T. Bourne............................................. Salaries Expense.................................................................... 4,800 4,800 26 383 UT Bank............................................... Notes Payable.......................................................................... 2,250 2,250

QS AII.17(10 minutes) General Journal Nov. 2

[In Purchases Journal]

Nov. 12

Automobiles .......................................................................... T. Biloxi, Capital ............................................................. Owner contributed an auto to the business.

Nov. 16

[In Sales Journal]

Nov. 19

Sales Returns and Allowances ............................................ Accounts Receivable—K. Myer ..................................... Customer received an allowance.

17,000 17,000

175 175

EXERCISES Exercise AII-1 (15 minutes) Page 1

Spindle Company Sales Journal Account Date Debited 2023 Feb. 7 J. Eason 12 P. Lathan 25 S. Summers Totals

Invoice Number 5704 5705 5706

Accounts Rec‘ble Dr. Sales Cr.

COGS Dr. Merch. Inventory Cr.

1,150 320 550 2,020

700 170 300 1,170

Exercise AII-2 (20 minutes)

Date

Accounts Credited

StickUps Company Cash Receipts Journal Sales Accounts Discou Receivabl Explanation Cash Dr. nts Dr. e Cr.

AI-1026

Sales Cr.

2023 Sept. 9 Notes payable 13 Dale Trent, Capital 18 Sales 27 J. Namal Totals

Note to bank Owner investment Cash sales Invoice, Sept. 7

5,500 7,000 460 1,764 14,724

460 36 36

1,800 1,800

StickUps Company Cash Receipts Journal Sales Cash Disc. Explanation PR Debit Debit

Accts. Rec. Credit

460

Exercise AII-3 (20 minutes)

Date 2023 Sept. 9 13 18 27

Account Credited Notes payable Dale Trent, Capital Sales J. Namal Totals

Note to bank Owner investment Cash sales Invoice, Sept. 7

5,500 7,000 460 1,764 14,724

Sales Credit

460 36 36

1,800 1,800

460

Exercise AII-4 (20 minutes) Chem Company Purchases Journal

Date Account Credited 2023 July 1 Angler Inc. 14 Store Supplies/ Steck Company 17 Marten Company Totals

Date of Invoice

Terms

Jul Jul Jul

n/30 2/10, n/30 n/30

1 14 17

Accounts Payable Cr.

Merchandise Inventory Dr.

8,100 240 2,600 10,940

8,100

2,600 10,700

Exercise AII-5 (20 minutes)

Date 2023 Mar. 9 17 29 31 31

Ch. No. 210 211 212 213 214

Payee Narlin Corp. City Bank LeBaron E. Brandon Pace Inc. Totals

Xion Supply Cash Disbursements Journal Merchandise Account Debited PR Cash Cr. Inventory Cr. Store Supplies Notes Payable LeBaron Salaries Expense Pace Inc.

900 3,000 6,860 3,400 5,500 19,660

140

Exercise AII-6 (30 minutes)

AI-1027

Oth Accoun

Part 1 – Wilson Purchasing

Date 2023 May 11

Date 2023 May 11 20

Wilson Purchasing Purchases Journal Accounts Date of Payable Account Credited Invoice Terms PR Cr. Hostel Sales

May

Ch. No.

Wilson Purchasing Cash Disbursements Journal Account Merchandise Debited PR Cash Cr. Inventory Cr.

84 85

Payee Express Shipping Service Hostel Sales

3/10, n/90

Merchandise Inventory Dr.

Merchandise Inv. Hostel Sales

General Journal Account Titles and Explanations

Date 2023 May 12 Accounts Payable—Hostel Sales .......................... Merchandise Inventory....................................... To record return of merchandise.

30,000

335 27,9361

864

Page: 1 Debit Credit 1,200 1,200

Calculations: 1. $30,000 – $1,200 = $28,800; $28,800 x 3% = $864; $28,800 – $864 = $27,936.

AI-1028

Other Accounts

Exercise AII-6 (concluded) Part 2 – Hostel Sales Hostel Sales Sales Journal

Date 2023 May 11

Account Debited

Invoice Number

Wilson Purchasing

1601

Accounts Receivable Dr. Sales Cr.

Page 1 Cost of Goods Sold Dr. Merchandise Inventory Cr.

30,000

20,000

Hostel Sales Cash Receipts Journal

Date 2023 May 21

Account Credited Wilson Purchasing

Explanation

Cash Dr.

Sales Discounts Dr.

Invoice, May 11

27,9361

864

General Journal Date Account Titles and Explanations 2023 May 12 Sales Returns and Allowances .............................. Accounts Receivable—Wilson Purchasing ...... To record sales return.

Page: 1 PR Debit

12 Merchandise Inventory........................................... Cost of Goods Sold ........................................... To record cost of merchandise returned to inventory.

800

Accounts Receivable Cr. 28,800

Sales Cr.

Page 1 Cost of Goods Other Sold Dr. Accounts Merchandise Cr. Inventory Cr.

Credit

1,200 1,200

800

Calculations: 1. $30,000 – $1,200 = $28,800; $28,800 x 3% = $864; $28,800 – $864 = $27,936.

AI-1029

Exercise AII-7 (30 minutes) Part 1 – Wilson Purchasing Wilson Purchasing Purchases Journal

Date Account Credited 2023 May 11 Hostel Sales

Date of Invoice

Terms

May 11

3/10,n/90

Accounts Payable Credit

Purchases Debit

30,000

Office Supplies Debit

Wilson Purchasing Cash Disbursements Journal Ch. Date No. 2023 May 11 84 20 85

Payee Express Shipping Service Hostel Sales

Account Debited

Cash Credit

Transportation-In Hostel Sales

General Journal Account Titles and Explanations

Date 2023 May 12 Accounts Payable—Hostel Sales .......................... Purchase Returns and Allowances .................. To record return of merchandise purchased.

Purchase Discount Credit

335 27,9361

Page: 1 PR Debit

Other Accts. Debit

Page 2 Other Accounts Debit

Page 2 Accts. Payable Debit

335 864

28,800

Credit

1,200 1,200

Calculations: 1. $30,000 – $1,200 = $28,800; $28,800 x 3% = $864; $28,800 – $864 = $27,936.

AI-1030

Exercise AII-7 (concluded) Part 2 – Hostel Sales Hostel Sales Sales Journal Invoice Account Debited Number

Date 2023 May 11 Wilson Purchasing

Page 2 A/R Dr. Sales Cr.

1601

30,000

Hostel Sales Cash Receipts Journal Account Date Credited 2023 May 21 Wilson Purchasing

Explanation

Invoice, May 11

General Journal Account Titles and Explanations

Cash Debit 27,936

Date 2023 May 12 Sales Returns and Allowances .............................. Accounts Receivable— Wilson Purchasing ..... To record sales return.

Sales Disc. Debit

Accts. Rec. Credit

864

28,800

Page: 1 PR Debit

Sales Credit

Page 2 Other Accts. Credit

Credit

1,200 1,200

Calculations: 1. $30,000 – $1,200 = $28,800; $28,800 x 3% = $864; $28,800 – $864 = $27,936.

AI-1031

Exercise AII-8 (10 minutes) The June 5 purchase would have been recorded in the Purchases Journal and the June 14 payment would have been recorded in the Cash Disbursements Journal. The error in journalizing the June 14 transaction should be discovered in the process of crossfooting the Cash Disbursements Journal at the end of the month.

Exercise AII-9 (10 minutes) a.

When the schedule of accounts payable is prepared.

When crossfooting the Purchases Journal.

When the trial balance is prepared.

When the schedule of accounts payable is prepared.

Exercise AII-10 (30 minutes) Part 1 Accounts Receivable Subledger Sanders Farrell May 17 1,700 May 20 Bal.

500

1,200

Dan Holland May 10 3,880 25 680 Bal. 4,560

Brad Smithers May 6 5,760

Part 2 General Ledger Accounts Receivable May 31 12,020 May 20 500 Bal. 11,520

Sales May 31 12,020

Sales Returns and Allowances May 20 500

AI-1032

Part 3 VALUE-MART GOODS Schedule of Accounts Receivable May 31, 2023 Sanders Farrell .............................................. Dan Holland ................................................... Brad Smithers ............................................... Total accounts receivable ............................

$ 1,200 4,560 5,760 $11,520

Accounts Receivable Controlling Account Total debit ...................................................... Credit for return ............................................ Balance as of May 31, 2023 ..........................

$12,020 (500) $11,520

Exercise AII-11(15 minutes) (1) Accounts Payable Ledger

Date Jan. 9 19

ACCOUNTS PAYABLE LEDGER Bailey Company Explanation PR Debit P1 D1 10,100

Date Jan. 18 27

Explanation

Date Jan. 22 31

Explanation

Credit 14,000

Balance 14,000 3,900

Johnson Brothers PR Debit P1 D1 6,600

Credit 6,600

Balance 6,600 0

Preston Company PR P1 D1

Credit 6,200

Balance 6,200 800

Credit

Balance

Debit 5,400

(2) General Journal GENERAL LEDGER Date

Accounts Payable Explanation PR

Jan. 31 31

P1 D1

Debit

26,800 22,100

26,800 4,700

AI-1033

Exercise AII-12 *Exercise 4-26 (15 minutes) SALES JOURNAL Accounts Receivable Dr. Sales Cr.

Cost of Goods Sold Dr. Inventory Cr.

May 7 J. Dryer .............................................. 5704

1,250

800

12 R. Lamb ............................................. 5705

340

200

25 T. Taylor ............................................ 5706

750

500

Date

Invoice Number

Account Debited

Exercise AII-13 (20 minutes) CASH RECEIPTS JOURNAL

Date Account Credited

Cost of Sales Accounts Other Goods Cash Discount Recble. Sales Accounts Sold Dr. Explanation PR Dr. Dr. Cr. Cr. Cr. Inventory Cr.

Nov. 9 Notes Payable........................ Note to bank

3,750

13 J. Ali, Capital ......................... Contribution

5,000

Cash sale 18 Sales..........................................

330

27 J. Than..................................... Invoice, 11/7

980

330 20

250

1,000

Exercise AII-14 (20 minutes)

Date of

PURCHASES JOURNAL Accounts Payable

Inventory

Office Supplies

Other Accounts

AI-1034

Date July 1

Account

Invoice Terms

Cr.

Dr. 14,500

Hector Co................................ 7/1

n/15

14,500

8 Zhang Co................................ 7/8

n/30

420

Store Supplies / Staples .................................7/21

n/30

885

25 Alfredo Co...............................7/25

n/30

3,000

Dr.

420 885 3,000

AI-1035

Exercise AII-18 (35 minutes) GENERAL LEDGER Cash 38,878

23,044

Accounts Receivable 26,200 600 23,600

Prepaid Insurance 1,700

Accounts Payable 1,500 23,200 18,300 Notes Payable 9,000

Sales 26,200 5,750

Store Equipment 3,500 1,000

Sales Returns and Allowances 600

Sales Discounts 472

Purchases 23,200

Purchase Returns and Allowance 1,500

Purchase Discounts 456

ACCOUNTS RECEIVABLE SUBLEDGER Jack Hertz 7,400

600 6,800

Trudy Stone 16,800 16,800

Dave Waylon 2,000

ACCOUNTS PAYABLE SUBLEDGER Grass Corp. 1,500 9,300

10,800

McGrew Company 3,400

Sulter Inc. 9,000

9,000

AI-1036

PROBLEMS Problem AII-1A (20 minutes) Date

Special Journal

Subledger

AR/MI

2 Defective merchandise sold on March 1 was returned by the customer. It was scrapped.

3 Purchased office equipment on credit terms n/30.

5 Received payment regarding the March 1 sale.

10 Received a credit memorandum from the supplier regarding defective equipment purchased on March 3.

14 Sold merchandise for cash.

16 Purchased merchandise inventory on credit; terms 1/5, n/30.

AP/MI

17 Paid the balance owing regarding the March 3 transaction.

18 Purchased merchandise inventory for cash.

21 Paid for the merchandise purchased on March 16.

AP/MI

22 Sold old equipment for cash.

30 Paid salaries for the month of March.

30 Accrued utilities for the month of March.

30 Closed the credit balance in the income summary to capital.

Transaction

Mar. 1 Sold merchandise on credit.

AI-1037

Problem AII-2A Parts 1 and 2 (40 minutes) Janish Supplies Sales Journal

Date 2023 Apr. 2 5 16 24

Date 2023 Apr. 3 12 20 27

Account Debited

Invoice No.

Tim Bennett Brian Kennedy Wynne Walsh Brian Kennedy Totals

Account Credited Sales Tim Bennett Brian Kennedy Wynne Walsh Totals

Date Account Credited 2023 Apr. 4 Wallace Brothers 11 McKinley & Sons 23 Zardon Co.—Equip. Totals

306 311 312 313

Page 1 A/R Dr. Sales Cr.

COGS Dr. Merchandise Inventory Cr.

35,000 42,000 14,000 18,000 109,000

22,750 27,300 9,100 11,700 70,850

Janish Supplies Cash Receipts Journal Sales Disc Explanation Cash Dr. Dr. A/R Cr. Cash sales Inv., Apr. 2 Inv., Apr. 5 Inv., Apr. 16

15,000 34,300 42,000 11,000 102,300

700

Sales Cr.

35,000 42,000 11,000 88,000

1/10, n/30 n/30 1/15, n/30

48,000 56,000 3,800 107,800

Page: 1 COGS/Dr. Merchandise Inventory/ Cr.

15,000

9,750

15,000

9,750

Janish Supplies Purchases Journal Date of Merchandise Invoice Terms PR A/P Cr. Inventory Dr. Apr. 4 Apr. 11 Apr. 23

Other Account s Cr.

Office Supplies Dr.

Page 1 Other Accounts Dr.

48,000 56,000 104,000

3,800 3,800

AI-1038

Problem AII-2A (concluded) Janish Supplies Cash Disbursements Journal Date 2023 Apr. 9 13 26 30

Ch # 620 621 622 623

Account Debited

Cash Cr.

Office Supplies Wallace Brothers McKinley & Sons Salaries Expense Totals

Page 1 Merchandise Inventory Cr.

230 1 43,362 56,000 36,000 135,592

Other Accounts Dr.

A/P Dr.

230 438

438

43,800 56,000 36,000 36,230

99,800

Calculation: 1. $48,000 – $4,200 = $43,800 Dr. to A/P; $43,800 x 1% = $438 Cr. to Merchandise Inventory; $43,800 – $438 = $43,362 Cr. to Cash.

General Journal Account Titles and Explanations

Date 2023 Apr. 6 Accounts Payable—Wallace Brothers .................. Merchandise Inventory....................................... To record return of defective merchandise. 19 Sales Returns and Allowances .............................. Accounts Receivable—Wynne Walsh .............. To record allowance granted regarding defective merchandise.

Page: 1 Debit Credit 4,200 4,200

3,000 3,000

AI-1039

Problem AII-3A (40 minutes) Note: Since posting to the General Ledger was not a requirement in this problem, posting references are shown for values posted to the subledgers only. Part 3

Date 2023 Apr. 3 5 11 13

Newton Company Sales Journal Invoice Account Debited No. PR

A/R Dr. Sales Cr.

Page 3 Cost of Goods Sold Dr. Merchandise Inventory Cr.

   

3,200 9,400 10,000 5,200

1,900 5,600 6,000 3,100

Linda Hobart Paul Abrams Kelly Schaefer Linda Hobart

760 761 762 763

Newton Company Cash Receipts Journal

Date Account Credited 2023 Apr. 13 Linda Hobart 14 Paul Abrams 16 Sales

Explanation

Cash Dr.

 Sale of Apr. 3  Sale of Apr. 5 Cash sales

3,136 9,212 54,000

Sales Disc Dr.

A/R Cr.

64 188

3,200 9,400

Sales Cr.

Other Accounts Cr.

Page: 3 COGS Dr. Merchandise Inventory Cr.

54,000

32,400

AI-1040

Problem AII-3A (continued) Newton Company Purchases Journal

Date 2023 Apr. 2 3 9

Account Credited

Date of Invoice

Terms

Baskin Company Eau Claire Inc. Store Equip./Frank‘s Supply

Apr 2 Apr 2 Apr 9

2/10,n/60 n/10 EOM n/10 EOM

Page 3

Accts. Payable Credit

Merchandise Inventory Debit

12,800 1,340 10,500

12,800

  

Office Supplies Debit

1,340 10,500

Newton Company Cash Disbursements Journal Ch. No.

Date 2023 Apr. 4 587 12 588 16 589

Account Debited

The Record Baskin Company Payroll

Advertising Expense Baskin Company Sales Salaries Expense

GENERAL JOURNAL Account Titles and Explanations

Date 2023 Apr.

Payee

Accounts Payable—Eau Claire Inc. ............... Office Supplies ......................................... Returned office supplies.

PR 



Cash Credit 1,020 12,544 9,500

Debit

Other Accts. Debit

Page 3

Merchandise Inventory Credit

Other Accts. Debit

Accts. Payable Debit

1,020 256

12,800 9,500

Page 3 Credit

85 85

AI-1041

Problem AII-3A (concluded) Parts 1, 3 ACCOUNTS RECEIVABLE SUBLEDGER Date 2023 Apr. 5 14

Date 2023 Apr. 3 13 13

Date 2023 Apr. 11

Paul Abrams Explanation

PR S3 CR3

Linda Hobart Explanation

PR S3 CR3 S3

Kelly Schaefer Explanation

Debit

Credit

9,400 9,400

Debit

Credit

3,200 3,200 5,200

Debit

10,000

Credit

Balance 9,400 0

Balance 3,200 0 5,200

Balance 10,000

Parts 2, 3 ACCOUNTS PAYABLE SUBLEDGER Date 2023 Apr. 9

Date 2023 Apr. 2 12

Date 2023

Date 2023 Apr. 3 6

Frank‘s Supply Explanation

Debit

Credit

P3 Baskin Company Explanation PR P3 CD3 Sprocket Company Explanation PR

Explanation

Eau Claire Inc. PR P3 G3

10,500

Debit

Credit 12,800

12,800

Balance 10,500

Balance 12,800 0

Debit

Credit

Balance

Debit

Credit

Balance

1,340 85

1,340 1,255

AI-1042

Problem AII-4A (70 minutes) Parts 2, 3, 4

Date 2023 Apr. 3 5 11 13 27 27

Newton Company Sales Journal Invoice Account Debited No. PR Linda Hobart Paul Abrams Kelly Schaefer Linda Hobart Paul Abrams Kelly Schaefer Totals

760 761 762 763 764 765

     

A/R Dr. Sales Cr.

Page 3 Cost of Goods Sold Dr. Merchandise Inventory Cr.

3,200 9,400 10,000 5,200 3,800 6,200 37,800 (106/413)

1,900 5,600 6,000 3,100 2,300 3,800 22,700 (502/119)

Newton Company Cash Receipts Journal

Date 2023 Apr. 13 14 16 18

Sales Disc Dr.

A/R Cr. 3,200 9,400

Account Credited

Explanation

Cash Dr.

Linda Hobart Paul Abrams Sales Long-Term Notes Payable 20 Kelly Schaefer 23 Linda Hobart 30 Sales Totals

 

Sale of Apr. 3 Sale of Apr. 5 Cash sales Note to bank

3,136 9,212 54,000 50,000

64 188

Sale of Apr. 11 Sale of Apr. 13 Cash sales

9,800 5,096 69,000 200,244 (101)

200 104

251  

Sales Cr.

Other Accounts Cr.

Page: 3 COGS Dr. Merchandise Inventory Cr.

54,000

32,400 50,000

556 (415)

10,000 5,200 27,800 (106)

69,000 123,000 (413)

50,000 (X)

41,400 73,800 (502/119)

AI-1043

Problem AII-4A (continued) Newton Company Purchases Journal

Date 2023 Apr. 2 3 9 17 20 25

Account Credited Baskin Company Eau Claire Inc. Store Equip./Frank‘s Supply Sprocket Company Store Supplies/Frank‘s Supply Baskin Company Totals

Date of Invoice

Terms

Apr 2 Apr 2 Apr 9 Apr 16 Apr 19 Apr 24

2/10,n/60 n/10 EOM n/10 EOM 2/10,n/30 n/10 EOM 2/10,n/60

PR   165/  125/ 

Page 3

Accts. Payable Credit

Merchandise Inventory Debit

12,800 1,340 10,500 12,750 650 10,900 48,940 (201)

12,800

Date 2023 Apr. 4 12 16 26 30

587 588 589 590 591

Payee

Account Debited

The Record Baskin Company Payroll Sprocket Company Payroll Totals

Advertising Expense Baskin Company Sales Salaries Expense Sprocket Company Sales Salaries Expense

655  621  621

Cash Credit 1,020 12,544 9,500 12,1032 9,500 44,667 (101)

Other Accts. Debit

1,340 10,500 12,750 650 10,900 36,450 (119)

Newton Company Cash Disbursements Journal Ch. No.

Office Supplies Debit

1,340 (124)

11,150 (X)

Page 3 Merchandise Inventory Credit

Other Accts. Debit

Accts. Payable Debit

1,020 256

12,800 9,500 12,3501

247 503 (119)

9,500 20,020 (X)

25,150 (201)

Calculation: 1. $12,750 – $400 credit memorandum = $12,350; 2. $12,350 x 2% = $247; $12,350 – $247 = $12,103

AI-1044

Problem AII-4A (continued) GENERAL JOURNAL Account Titles and Explanations

Date 2023 Apr.

Page 3 Credit

Debit

Accounts Payable—Eau Claire Inc. ............... Office Supplies ......................................... Returned office supplies.

201/ 124

Accounts Payable—Sprocket Company ........ Merchandise Inventory ............................ Returned merchandise.

201/ 119

400

Parts 1, 2, 3, 4 GENERAL LEDGER Cash Date Explanation 2023 Mar. 31 Balance Forward Apr. 30 30

Date 2023 Apr. 30 30

Accounts Receivable Explanation

Merchandise Inventory Explanation

Date 2023 Mar. 31 Balance Forward Apr. 23 30 30 30 30

Date 2023 Apr.

Debit

CR3 CD3

200,244

Debit

S3 CR3

37,800

G3 S3 CR3 P3 CD3

Office Supplies Explanation 3 6

44,667

PR P3 G3

Acct. No. 101 Credit Balance

Acct. No. 106 Credit Balance

27,800

Debit

37,800 10,000

Acct. No. 119 Credit Balance

400 22,700 73,800 36,450 503

Debit

167,000 367,244 322,577

105,000 104,600 81,900 8,100 44,550 44,047

Credit

Acct. No. 124 Balance

1,340 1,255

1,340

Problem AII-4A (continued) Store Supplies

Acct. No. 125

AI-1045

Date 2023 Apr. 20

Date 2023 Apr.

Explanation

P3 Store Equipment Explanation

9 Accounts Payable Explanation 6 23 30 30

Long-Term Notes Payable Date Explanation 2023 Mar. 31 Balance Forward Apr. 18 Jeff Newton, Capital Date Explanation 2023 Mar. 31 Balance forward

Date 2023 Apr. 30 30

Date 2023 Apr. 30

Sales Explanation

Debit

10,500

Debit

G3 G3 P3 CD3

25,150

Debit

Credit

Acct. No. 165 Balance 10,500

Acct. No. 201 Credit Balance

48,940

Debit

(85) (485) 48,455 23,305

Acct. No. 251 Credit Balance

50,000

167,000 217,000

Acct. No. 301 Credit Balance 105,000

Debit

S3 CR3 Sales Discounts Explanation

650

85 400

CR3

Balance

650

Credit

PR CR3

Acct. No. 413 Credit Balance 37,800 123,000

Debit

37,800 160,800

Acct. No. 415 Credit Balance

556

AI-1046

Problem AII-4A (continued) Date 2023 Apr. 30 30

Date 2023 Apr. 16 30

Date 2023 Apr.

Cost of Goods Sold Explanation PR S3 CR3 Sales Salaries Expense Explanation PR CD3 CD3 Advertising Expense Explanation

PR CD3

Debit

Acct. No. 502 Credit Balance

22,700 73,800

Debit

22,700 96,500 Acct. No. 621 Credit Balance

9,500 9,500

Debit

9,500 19,000 Acct. No. 655 Credit Balance

1,020

ACCOUNTS RECEIVABLE SUBLEDGER Date 2023 Apr. 5 14 27

Date 2023 Apr. 3 13 13 23

Paul Abrams Explanation

PR S3 CR3 S3

Linda Hobart Explanation

PR S3 CR3 S3 CR3

Kelly Schaefer Date Explanation 2023 Apr. 11 20 27 Problem AII-4A (continued)

Debit

Credit

Balance

9,400

9,400 0 3,800

9,400 3,800

Debit

Credit

Balance

3,200

3,200 0 5,200 0

3,200 5,200 5,200

Debit

S3 CR3 S3

10,000

Credit

10,000 6,200

Balance 10,000 0 6,200

ACCOUNTS PAYABLE SUBLEDGER Date 2023

Frank‘s Supply Explanation

Debit

Credit

Balance

AI-1047

Apr.

9 20

Date 2023 Apr. 2 12 25

Date 2023 Apr. 17 23 26

Date 2023 Apr. 3 6

P3 P3

Explanation

Baskin Company PR P3 CD3 P3

Sprocket Company Explanation PR P3 G3 CD3

Explanation

Eau Claire Inc. PR P3 G3

10,500 650

Debit

Credit 12,800

12,800 10,900

Debit

Credit 12,750

400 12,350

Debit

Credit

10,500 11,150

Balance 12,800 0 10,900

Balance 12,750 12,350 0

Balance

1,340 85

1,340 1,255

AI-1048

Problem AII-4A (continued) Part 5 NEWTON COMPANY Schedule of Accounts Receivable April 30, 2023 Paul Abrams ........................................ Kelly Schaefer ...................................... Total accounts receivable ..................

$ 3,800 6,200 $10,000

NEWTON COMPANY Schedule of Accounts Payable April 30, 2023 Frank‘s Supply ..................................................................... Baskin Company .................................................................. Eau Claire Inc. ...................................................................... Total accounts payable .......................................................

$ 11,150 10,900 1,255 $23,305

NEWTON COMPANY Trial Balance April 30, 2023 Account Cash .............................................................................. Accounts receivable ...................................................... Merchandise inventory ................................................. Office supplies ............................................................. Store supplies ............................................................... Store equipment ........................................................... Accounts payable ......................................................... Long-term notes payable ............................................. Jeff Newton, capital....................................................... Sales ............................................................................... Sales discounts ............................................................. Cost of goods sold ........................................................ Sales salaries expense ................................................ Advertising expense .................................................... Totals .............................................................................

Debit $322,577 10,000 44,047 1,255 650 10,500

Credit

$ 23,305 217,000 105,000 160,800 556 96,500 19,000 1,020 $506,105

$506,105

AI-1049

Problem AII-4A (concluded) Analysis component: To find the error(s),    

first re-add the account balances on the schedule of accounts receivable to confirm that the addition was correct. trace the balances listed on the schedule of accounts receivable back to the subsidiary accounts to confirm that they were listed correctly on the schedule. recalculate the balance of each subsidiary account to confirm that the additions and subtractions were correct. trace the postings from each subsidiary account and from the controlling account back to the appropriate journals.

Since the sales and cash receipts journals were footed and crossfooted before posting, the previous steps should disclose the error.

AI-1050

Problem AII-5A (120 minutes) Parts 1, 2, 3

Date 2023 Oct. 6 12 15 16 24

Saskan Enterprises Sales Journal Invoice Account Debited Number Marge Craig Vickie Foresman Amy Ihrig Vickie Foresman Bill Grigsby Totals

PR     

913 914 915 916 917

A/R. Dr. Sales Cr.

Page 3 Cost of Goods Sold Dr. Merchandise Inventory Cr.

3,300 3,650 3,100 7,500 1,400 18,950 (106/413)

1,600 1,900 1,700 3,750 750 9,700 (502/119)

Saskan Enterprises Cash Receipts Journal

Date 2023 Oct. 2 15 15 22

Account Credited

Bill Grigsby Sales Marge Craig Vickie Foresman 25 Amy Ihrig 29 Office Supplies 31 Sales Totals

Explanation

Invoice Sept 23 Cash sales Invoice Oct 6 Invoice Oct 12



Invoice Oct 15 Sold supplies Cash sales

 124

 

Cash Debit 4,116 38,830 2,401 3,577

Sales Discount Debit

Acct. Rec. Credit

4,200

Sales Credit

Other Accts. Credit

Page 3 Cost of Goods Sold Dr. Merchandise Inventory Cr.

38,830 49 73

21,400

2,450* 3,650

2,548 52 2,600** 50 31,000 82,522 258 12,900 (101) (415) (106) * $3,300 – $850 return = $2,450 ** $3,100 – $500 allowance = $2,600

50 31,000 69,830 (413)

50 (X)

15,500 36,900 (502/119)

AI-1051

Problem AII-5A (continued) Saskan Enterprises Purchases Journal Date 2023 Oct. 2 5 15 15 17 21

Accounts Payable Credit

Merchandise Inventory Debit

Account Credited

Date of Invoice

Terms

Shore Company Brown Supply Co. Shore Company Sunshine Company Brown Supply Co. Store Equip./Brown Supply Co.

Oct 2 Oct 3 Oct 15 Oct 15 Oct 16 Oct 21

2/10, n/60 n/10 EOM 2/10, n/60 2/10, n/60 n/10 EOM n/10 EOM

     165/

3,200 1,300 3,990 2,650 580 7,200

3,200 1,300 3,990 2,650

Oct 25

2/10, n/60



7,900 26,820 (201)

7,900 19,040 (119)

26 Sunshine Company Totals

Office Supplies Debit

Page 2 Other Accts. Debit

580 7,200 580 (124)

7,200 (X)

AI-1052

Problem AII-5A (continued) Page 4 Saskan Enterprises Cash Disbursements Journal Date 2023 Oct. 2 6 12 15 23 24 30 31 31

Ch. No. 619 620 621 622 623 624 625 626 627

Payee

Account Debited

Omni Realty Co. Fireside Company Shore Company Jamie Green Sunshine Company Shore Company Ken Shaw Jamie Green Countrywide Elec. Totals

Rent Expense Fireside Company Shore Company Sales Salaries Expense Sunshine Company Shore Company Ken Shaw, Withdrawals Sales Salaries Expense Utilities Expense

640   621   302 621 690

Cash Credit

2,250 3,724 3,136 2,020 2,597 2,842 2,500 2,200 680 21,949 (101) * $3,990 – $1,090 return = $2,900

Merchandise Inventory Credit

Other Accts. Debit

Accts. Payable Debit

2,250 76 64

3,800 3,200 2,020

53 58

251 (119)

2,650 2,900* 2,500 2,200 680 9,650 (X)

12,550 (201)

AI-1053

Problem AII-5A (continued) Date 2023 Oct.

GENERAL JOURNAL Account Titles and Explanations 4

Debit

Accounts Payable—Fireside Company .................... Merchandise Inventory ....................................... Returned merchandise to supplier.

201/ 119

460

Sales Returns and Allowances.................................. Accounts Receivable—Marge Craig .................. Merchandise Inventory............................................... Cost of Goods Sold ............................................. Customer Marge Craig returned merchandise that was returned to merchandise inventory.

414 106/ 119 502

850

Accounts Payable—Shore Company........................ Merchandise Inventory ....................................... Returned merchandise.

201/ 119

1,090

Accounts Payable—Brown Supply Co. ................... Office Supplies .................................................... Returned office supplies.

201/ 124

Sales Returns and Allowances.................................. Accounts Receivable—Amy Ihrig ...................... Customer Amy Ihrig returned defective merchandise.

414 106/

500

Page 2 Credit

460

850 430 430

1,090

500

AI-1054

Problem AII-5A (continued) ACCOUNTS RECEIVABLE SUBLEDGER

Date 2023 Oct. 6 9 15

Date 2023 Oct. 12 16 22

Explanation

Marge Craig PR S3 G2 CR3

Vickie Foresman Explanation PR S3 S3 CR3

Date 2023 Sept 23 Oct. 2 24

Explanation

Date 2023 Oct. 15 20 25

Explanation

Bill Grigsby PR S2 CR3 S3 Amy Ihrig PR S3 G2 CR3

Debit

Credit

3,300 850 2,450

Debit

Balance

3,650

3,650 11,150 7,500

Credit

Balance

4,200 4,200 1,400

Debit

3,300 2,450 0

Credit

3,650 7,500

Debit

Balance

Credit

3,100 500 2,600

4,200 0 1,400

Balance 3,100 2,600 0

Part 2 ACCOUNTS PAYABLE SUBLEDGER

Date 2023 Sept 28 Oct. 4 6

Explanation

Fireside Company PR P1 G2 CD4

Debit

Credit 4,260

460 3, 800

Balance 4,260 3,800 0

AI-1055

Problem AII-5A (continued) Part 2 Date 2023 Oct. 5 17 18 21

Brown Supply Company Explanation PR Debit P2 P2 G2 P2

Date 2023 Oct. 15 23 26

Explanation

Date 2023 Oct. 2 12 15 17 24

Explanation

Credit 1,300 580 40 7,200

Sunshine Company PR Debit P2 CD4 P2

Shore Company PR P2 CD4 P2 G2 CD4

Credit 2,650

2,650 7,900

Debit

Credit 3,200

3,200 3,990 1,090 2,900

Balance 1,300 1,880 1,840 9,040

Balance 2,650 0 7,900

Balance 3,200 0 3,990 2,900 0

Parts 2, 3 GENERAL LEDGER Cash Date 2023 Sept 30 Balance Oct. 31 31

Date 2023 Sept 30 Balance Oct. 9 20 31 31

Explanation

CR3 CD4 Accounts Receivable Explanation PR

G2 G2 S3 CR3

Debit

Acct. No. 101 Credit Balance

82,522 21,949

Debit

5,361 87,883 65,934

Acct. No. 106 Credit Balance

850 500 18,950 12,900

4,200 3,350 2,850 21,800 8,900

AI-1056

Problem AII-5A (continued) Parts 2, 3 Date 2023 Sept 30 Balance Oct. 4 9 17 31 31 31 31

Date 2023 Sept 30 Balance Oct. 18 29 31

Date 2023 Sept 30 Balance

Date 2023 Sept 30 Balance Oct. 21

Merchandise Inventory Explanation PR

G2 G2 G2 S3 P2 CR3 CD4 Office Supplies Explanation PR

G2 CR3 P2 Store Supplies Explanation PR

Debit

Acct. No. 119 Credit Balance

460 430 1,090 9,700 19,040 36,900 251

Debit

Acct. No. 124 Credit Balance

40 50 580

Debit

66,970 66,510 66,940 65,850 56,150 75,190 38,290 38,039

607 567 517 1,097

Acct. No. 125 Credit Balance 346

Store Equipment Explanation PR

Debit

Acct. No. 165 Credit Balance 42,129 49,329

7,200

Accumulated Depreciation, Store Equipment Date Explanation PR Debit 2023 Sept 30 Balance

Acct. No. 166 Credit Balance

9,153

AI-1057

Problem AII-5A (continued) Parts 2, 3 Date 2023 Sept 30 Balance Oct. 4 17 18 31 31

Date 2023 Sept 30 Balance

Date 2023 Oct. 30

Accounts Payable Explanation PR

G2 G2 G2 P2 CD4 Ken Shaw, Capital Explanation PR

Debit

460 1,090 40 26,820 12,550

Debit

Date 2023 Oct. 9 20

Date 2023 Oct. 31

4,260 3,800 2,710 2,670 29,490 16,940

Acct. No. 301 Credit Balance 106,200

Ken Shaw, Withdrawals Explanation PR CD4

Debit

Explanation

Debit

S3 CR3

Sales Discounts Explanation PR CR3

2,500 Acct. No. 413 Credit Balance 18,950 69,830

Sales Returns and Allowances Explanation PR Debit G2 G2

Acct. No. 302 Credit Balance

2,500

Sales Date 2023 Oct. 31 31

Acct. No. 201 Credit Balance

Acct. No. 414 Credit Balance

850 500

Debit

18,950 88,780

850 1,350 Acct. No. 415 Credit Balance

258

AI-1058

Problem AII-5A (continued) Parts 2, 3 Date 2023 Oct. 9 31 31

Date 2023 Oct. 15 31

Date 2023 Oct. 2

Date 2023 Oct. 31

Cost of Goods Sold Explanation PR G2 S3 CR3 Sales Salaries Expense Explanation PR CD4 CD4 Rent Expense Explanation PR CD4 Utilities Expense Explanation PR CD4

Debit

Acct. No. 502 Credit Balance 430

9,700 36,900

Debit

Acct. No. 621 Credit Balance

2,020 2,200

Debit

2,020 4,220 Acct. No. 640 Credit Balance

2,250

Debit

(430) 9,270 46,170

2,250 Acct. No. 690 Credit Balance

680

AI-1059

Problem AII-5A (concluded) Part 4 SASKAN ENTERPRISES Trial Balance October 31, 2023 Account Cash ........................................................................................... Accounts receivable ................................................................. Merchandise inventory ............................................................ Office supplies .......................................................................... Store supplies ........................................................................... Store equipment ....................................................................... Accumulated depreciation, store equipment.............................................................................. Accounts payable ..................................................................... Ken Shaw, capital ..................................................................... Ken Shaw, withdrawals ........................................................... Sales .......................................................................................... Sales returns and allowances ................................................. Sales discounts ........................................................................ Cost of goods sold ................................................................... Sales salaries expense ............................................................ Rent expense ............................................................................ Utilities expense ....................................................................... Totals .........................................................................................

Debit $ 65,934 8,900 38,039 1,097 346 49,329

Credit

9,153 16,940 106,200

2,500 88,780 1,350 258 46,170 4,220 2,250 680 $221,073

$221,073

SASKAN ENTERPRISES Schedule of Accounts Receivable October 31, 2023 Vickie Foresman ................................................. Bill Grigsby ......................................................... Total accounts receivable..................................

$7,500 1,400 $8,900

SASKAN ENTERPRISES Schedule of Accounts Payable October 31, 2023 Brown Supply Company .................................... Sunshine Company ............................................ Total accounts payable ......................................

$ 9,040 7,900 $16,940

AI-1060

Problem AII-6A (30 minutes)

Date 2023 Jan. 7 19 24 29

Account Debited G. Little B. Moore C. Woudstra D. Isla Totals

Turner Company Sales Journal Invoice A/R Dr. No. PR Sales Cr. 103 104 105 106

500 375 375 800 2,050

Page 1 COGS Dr. Merchandise Inventory Cr.

   

160 130 135 302 727

Turner Company Purchases Journal

Date Account Credited 2023 Jan. 3 Curtis & Sons 20 Norton Industries Totals NOTE:

Date of Invoice

Terms

Jan. 3 Jan. 20

n/30 n/30

A/P Cr.

450 330 780

 

Page 1 Merchandise Inventory Dr.

Office Supplies Dr.

Other Accounts Dr.

450 330 780

An additional PR column has been added to facilitate the referencing of inventory entries into the inventory subledger.

AI-1061

Problem AII-6A (concluded) Inventory Subledger Record — FIFO perpetual Date PR Jan. 1

3 P1 7 S1

Purchases Units Unit Cost Beginning inventory 25 @ $8.00 = 50 @

$9.00 =

Sales (at cost) Total Cost

30 @

$11.00 =

Total Cost Units

$450 20 @

$ 8.00 =

$ 160

5 @ 10 @

$ 8.00 = 9.00 =

15 @

$ 9.00 =

$ 135

25 @ $ 9.00 = 7 @ 11.00 = 82 Cost of goods sold

$ 225 77 $727 +

40 90

$330

29 S1 Total

Unit Cost

$200

19 S1

20 P1 24 S1

Units

Inventory Balance

105 $980 Cost of goods available for sale =

Unit Cost

Total Cost

25 @ 25 @ 50 @ 5 @ 50 @

$ 8.00 = $ 8.00 = 9.00 = $ 8.00 = 9.00 =

$ 200 $ 200 450 $ 40 450

40 @ 40 @ 30 @ 25 @ 30 @

$ 9.00 = $ 9.00 = 11.00 = $ 9.00 = 11.00 =

$ 360 $ 360 330 $ 225 330

23 @ $11.00 = 23 Ending inventory

$ 253 $253

Note: An additional PR column has been added to the Inventory Subledger Record to facilitate referencing of inventory entries.

AI-1062

Problem AII-7A (40 minutes) Note: Since posting to the General Ledger was not a requirement in this problem, posting references are shown for values posted to the subledgers only.

Date 2023 Apr.

3 5 11 13

Date 2023 Apr. 13 14 16

Newton Company Sales Journal Invoice Account Debited Number PR

Page 3 A/R Dr. Sales Cr.

   

3,200 9,400 10,000 5,200

Linda Hobart Paul Abrams Kelly Schaefer Linda Hobart

760 761 762 763

Account Credited

Newton Company Cash Receipts Journal Sales Cash Disc. Explanation PR Debit Debit

Accts. Rec. Credit

Linda Hobart Paul Abrams Sales

Sale of Apr. 3 Sale of Apr. 5 Cash sales

 

3,200 9,400

3,136 9,212 54,000

64 188

Sales Credit

Page 3 Other Accts. Credit

54,000

AI-1063

Problem AII-7A (Continued) Newton Company Purchases Journal

Date Account Credited 2023 Apr. 2 Baskin Company 3 Eau Claire Inc. 9 Store Equip./Frank‘s Supply

Date of Invoice

Terms

Accounts Payable Credit

Apr. 2 Apr. 2 Apr. 9

2/10,n/60 n/10 EOM n/10 EOM

  

12,800 1,340 10,500

Purchases Debit

Date 2023 Apr. 4 587 12 588 16 589

Payee The Record Baskin Company Payroll

Account Debited

Advertising Expense Baskin Company Sales Salaries Expense



Cash Credit 1,020 12,544 9,500

Page 3 Other Accounts Debit

12,800 1,340 10,500

Newton Company Cash Disbursements Journal Ch. No.

Office Supplies Debit

Purchase Discount Credit

Other Accts. Debit

Page 3 Accts. Payable Debit

1,020 256

12,800 9,500

AI-1064

Problem AII-7A (continued)

Date 2023 Apr.

GENERAL JOURNAL Account Titles and Explanations 6

Accounts Payable—Eau Claire Inc. ..................... Office Supplies .............................................. Returned office supplies.

Debit



Page 3 Credit

ACCOUNTS RECEIVABLE SUBLEDGER Date 2023 Apr. 5 14

Date 2023 Apr. 3 13 13

Date 2023 Apr. 11

Paul Abrams Explanation

PR S3 CR3

Linda Hobart Explanation

PR S3 CR3 S3

Kelly Schaefer Explanation

Debit

Credit

9,400 9,400

Debit

Credit

3,200 3,200 5,200

Debit

10,000

Credit

Balance 9,400 0

Balance 3,200 0 5,200

Balance 10,000

AI-1065

Problem AII-7A (concluded) Parts 2, 3 ACCOUNTS PAYABLE SUBLEDGER Date 2023 Apr. 9

Frank‘s Supply Explanation

Debit

Credit

P3 Baskin Company PR

10,500

Explanation

Date 2023

Explanation

Sprocket Company PR

Debit

Credit

Balance

Explanation

Eau Claire Inc. PR

Debit

Credit

Balance

Date 2023 Apr. 3 6

P3 G3

Credit

10,500

Date 2023 Apr. 2 12

P3 CD3

Debit

Balance

12,800 12,800

1,340 85

Balance 12,800 0

1,340 1,255

AI-1066

Problem AII-7A (continued)

Date 2023 Apr.

3 5 11 13 27 27

Date 2023 Apr. 13 14 16 18

Newton Company Sales Journal Invoice Account Debited Number PR

Page 3 A/R Dr. Sales Cr.

     

3,200 9,400 10,000 5,200 3,800 6,200 37,800 (106/413)

Linda Hobart Paul Abrams Kelly Schaefer Linda Hobart Paul Abrams Kelly Schaefer Total

Account Credited

Linda Hobart Paul Abrams Sales Long-Term Notes Payable 20 Kelly Schaefer 23 Linda Hobart 30 Sales Totals

760 761 762 763 764 765

Newton Company Cash Receipts Journal Sales Cash Disc. Explanation PR Debit Debit

Accts. Rec. Credit

 

3,200 9,400

Sale of Apr. 3 Sale of Apr. 5 Cash sales Note to bank Sale of Apr. 11 Sale of Apr. 13 Cash sales

251  

3,136 9,212 54,000 50,000

64 188

9,800 5,096 69,000 200,244 (101)

200 104

10,000 5,200

556 (415)

27,800 (106)

Sales Credit

Page 3 Other Accts. Credit

54,000 50,000

69,000 123,000 (413)

50,000 (X)

AI-1067

Problem AII-7A (continued) Newton Company Purchases Journal

Date 2023 Apr. 2 3 9 17 20 25

Account Credited Baskin Company Eau Claire Inc. Store Equip./Frank‘s Supply Sprocket Company Store Supplies/Frank‘s Supply Baskin Company Totals

Date of Invoice

Terms

Apr. 2 Apr. 2 Apr. 9 Apr. 16 Apr. 19 Apr. 24

2/10,n/60 n/10 EOM n/10 EOM 2/10,n/30 n/10 EOM 2/10,n/60

  165/  125/ 

Accounts Payable Credit

Purchases Debit

12,800 1,340 10,500 12,750 650 10,900 48,940 (201)

Office Supplies Debit

12,800 1,340 10,500 12,750 650 10,900 36,450 (505)

1,340 (124)

Newton Company Cash Disbursements Journal Date 2023 Apr. 4 12 16 26 30

Ch. No. 587 588 589 590 591

Payee The Record Baskin Company Payroll Sprocket Company Payroll Totals

Account Debited

Advertising Expense Baskin Company Sales Salaries Expense Sprocket Company Sales Salaries Expense

655  621  621

Cash Credit 1,020 12,544 9,500 12,1032 9,500 44,667 (101)

Page 3 Other Accounts Debit

Purchase Discount Credit

Other Accts. Debit

11,150 (X)

Page 3 Accts. Payable Debit

1,020 256

12,800 9,500

247 503 (506)

9,500 20,020 (X)

12,3501 25,150 (201)

Calculations: 1. $12,750 – $400 credit memorandum = $12,350; 2. $12,350 x 2% = $247; $12,350 - $247 = $12,103.

AI-1068

Problem AII-7A (continued) GENERAL JOURNAL Account Titles and Explanations

Date 2023 Apr.

Page 3 Credit

Debit

Accounts Payable—Eau Claire Inc. ............... Office Supplies ......................................... Returned office supplies.

201/ 124

Accounts Payable—Sprocket Company ........ Purchase Returns and Allowances ......... Returned merchandise.

201/ 507

400

Parts 1, 2, 3, 4 GENERAL LEDGER Cash Date Explanation 2023 Mar. 31 Balance Forward Apr. 30 30

Date 2023 Apr. 30 30

Accounts Receivable Explanation

Merchandise Inventory Explanation

Date 2023 Mar. 31 Balance Forward

Date 2023 Apr.

Office Supplies Explanation 3 6

Debit

CR3 CD3

200,244 44,667

Debit

S3 CR3

37,800

Acct. No. 101 Credit Balance 167,000 367,244 322,577

Acct. No. 106 Credit Balance 37,800 10,000

27,800

Debit

Acct. No. 119 Credit Balance 105,000

PR P3 G3

Debit

Credit

Acct. No. 124 Balance

1,340 1,255

1,340

AI-1069

Problem AII-7A (continued) Date 2023 Apr. 20

Date 2023 Apr.

Store Supplies Explanation

P3 Store Equipment Explanation

9 Accounts Payable Explanation 6 23 30 30

Date 2023 Mar. 31 Balance Forward Apr. 18

Jeff Newton, Capital Date Explanation 2023 Mar. 31 Balance forward

Date 2023 Apr. 30

Sales Explanation

Sales Discounts Explanation

Debit

10,500

Debit

650 Acct. No. 165 Credit Balance 10,500

Credit

Acct. No. 201 Balance

85 400

(85) (485) 48,455 23,305

48,940 25,150

Debit

CR3

Credit

650

G3 G3 P3 CD3 Long-Term Notes Payable Explanation

Date 2023 Apr. 30 30

Acct. No. 125 Balance

Acct. No. 251 Credit Balance

50,000

Debit

167,000 217,000

Acct. No. 301 Credit Balance 105,000

Debit

Acct. No. 413 Credit Balance

S3 CR3

37,800 123,000

Acct. No. 415 Credit Balance

CR3

Debit

37,800 160,800

556

AI-1070

Problem AII-7A (continued) Date 2023 Apr. 30

Date 2023 Apr. 30

Date 2023 Apr. 16 30

Date 2023 Apr.

Purchases Explanation

Debit

36,450

Purchase Discounts Explanation PR

Debit

CD3 Purchase Returns and Allowances Explanation PR

Sales Salaries Expense Explanation PR CD3 CD3

PR CD3

36,450 Acct. No. 506 Credit Balance 503

Debit

Advertising Expense Explanation 4

Acct. No. 505 Credit Balance

Acct. No. 507 Credit Balance 400

Debit

Credit

400

Acct. No. 621 Balance

9,500 9,500

Debit

503

9,500 19,000

Credit

Acct. No. 655 Balance

1,020

AI-1071

Problem AII-7A (continued) ACCOUNTS RECEIVABLE SUBLEDGER Date 2023 Apr. 5 14 27

Date 2023 Apr. 3 13 13 23

Date 2023 Apr. 11 20 27

Paul Abrams Explanation

PR S3 CR3 S3

Linda Hobart Explanation

PR S3 CR3 S3 CR3

Kelly Schaefer Explanation

Debit

Credit

Balance

9,400

9,400 0 3,800

9,400 3,800

Debit

Credit

Balance

3,200

3,200 0 5,200 0

3,200 5,200 5,200

Debit

S3 CR3 S3

10,000

Credit

Balance

10,000 6,200

10,000 0 6,200

AI-1072

Problem AII-7A (continued) ACCOUNTS PAYABLE SUBLEDGER Date 2023 Apr. 9 20

Frank‘s Supply Explanation

Debit

Credit

P3 P3

Date 2023 Apr. 2 12 25

Explanation

Date 2023 Apr. 17 23 26

Explanation

Date 2023 Apr. 3 6

Baskin Company PR P3 CD3 P3 Sprocket Company PR P3 G3 CD3

Explanation

Eau Claire Inc. PR P3 G3

Balance

10,500 650

Debit

Credit

10,500 11,150

Balance

12,800

12,800 0 10,900

12,800 10,900

Debit

Credit

Balance

12,750

12,750 12,350 0

400 12,350

Debit

Credit

Balance

1,340 85

1,340 1,255

AI-1073

Problem AII-7A (concluded) Part 5

NEWTON COMPANY Schedule of Accounts Receivable April 30, 2023 Paul Abrams ......................................................................... Kelly Schaefer ....................................................................... Total accounts receivable ...................................................

$ 3,800 6,200 $10,000

$ 11,150 10,900 1,255 $23,305

NEWTON COMPANY Trial Balance April 30, 2023 Account Cash .............................................................................. Accounts receivable ...................................................... Merchandise inventory ................................................. Office supplies ............................................................. Store supplies ............................................................... Store equipment ........................................................... Accounts payable ......................................................... Long-term notes payable ............................................. Jeff Newton, capital....................................................... Sales ............................................................................... Sales discounts ............................................................. Purchases ...................................................................... Purchase discounts ...................................................... Purchase returns and allowances................................ Sales salaries expense ................................................ Advertising expense .................................................... Totals .............................................................................

Debit $322,577 10,000 105,000 1,255 650 10,500

Credit

$ 23,305 217,000 105,000 160,800 556 36,450 503 400 19,000 1,020 $507,008

$507,008

AI-1074

Problem AII-8A (100 minutes) Parts 1 and 2

Date

Account Debited

SALES JOURNAL Invoice Accounts Receivable Dr. Number PR Sales Cr.

Page 2 Cost of Goods Sold Dr. Inventory Cr.

Mar. 2 Min Cho............................................................. 854



16,800

8,400

3 Linda Witt ......................................................... 855



10,200

5,800

10 Jovita Albany ................................................... 856



5,600

2,900

27 Jovita Albany ................................................... 857



14,910

7,220

28 Linda Witt ......................................................... 858



4,315

3,280

51,825

27,600

(106/413)

(502/119)

31 Totals.................................................................

PURCHASES JOURNAL

Date

Account

Date of Invoice

Inventory Dr.

43,600

Office Supplies Dr.

Page 2 Other Accounts Dr.

Mar. 1 Van Industries ................................................. 3/1

2/15, n/30

PR 

3 Gabel Company .............................................. 3/3

n/30



1,230

9 Office Equip./Spell Supply ............................ 3/9

n/30

163/

21,850

14 The CD Company ........................................... 3/14

2/10, n/30



32,625

16 Store Supplies/Gabel Company .................. 3/16

n/30

125/

1,770

_____

____

1,770

101,075

76,225

1,230

23,620

(201)

(119)

(124)

()

31 Totals ................................................................

Terms

Accounts Payable Cr.

1,230 21,850

AI-1075

Problem AII-8A (Continued) Parts 1 and 2—continued

Account Credited Date

CASH RECEIPTS JOURNAL Sales Cash Discoun Explanation PR Dr. t Dr.

Accounts Receivable Cr.

Other Accts. Cr.

Sales Cr.

Mar. 6 L.T. Notes Pay. ................................................ Note to bank ........................................................................................... 251 82,000

Page 2 Cost of Goods Sold Dr. Inventory Cr.

82,000

 12 Min Cho ............................................................ Invoice, 3/2.............................................................................................. 16,464 336 16,800  13 Linda Witt ......................................................... Invoice 3/3............................................................................................... 9,996 204 10,200  15 Sales.................................................................. Cash sales .............................................................................................. 34,680 34,680

20,210

 20 Jovita Albany ................................................... Invoice, 3/10............................................................................................ 5,488 112 5,600  31 Sales.................................................................. Cash sales .............................................................................................. 30,180 ___ _____ 30,180

_____

16,820

31 Totals ................................................................

178,808

652

32,600

64,860

82,000

37,030

(101)

(415)

(106)

(413)

()

(502/119)

CASH PAYMENTS JOURNAL

Date

Ck. No.

Mar. 13 416

Payee

Account Debited

Cash Cr.

Inventory Cr.

Other Accounts Dr.

 Van Industries ................................................. Van Industries ....................................................................................... 42,728 872

Page 2 Accounts Payable Dr. 43,600

15 417

Payroll ............................................................... Sales Salaries Expense....................................................................... 621 18,300 18,300

23 418

 The CD Co. ....................................................... The CD Company ................................................................................. 29,596 604

30,200

31 419

Payroll ............................................................... Sales Salaries Expense....................................................................... 621 18,300 ____ 18,300

_____

Totals ................................................................

108,924

1,476

36,600

73,800

(101)

(119)

()

(201)

AI-1076

Problem AII-8A (Continued) Parts 1 and 2—continued GENERAL JOURNAL

Page 2

Mar. 17 Accounts Payable—CD Co. ..................................................... 201/ 2,425 Inventory .............................................................................. 119 Received a refund for returns.

2,425

19 Accounts Payable—Spell Supply............................................ 201/ Office Equipment ................................................................ 163 Received a refund for returns.

630

GENERAL LEDGER

Date Mar. 31 31

Date Mar. 1 17 31 31 31 31

Date Mar. 3

Date Mar. 16

Debit 178,808

Acct. No. 101 Credit Balance 178,808 108,924 69,884

Accounts Receivable Explanation PR Debit S2 51,825 R2

Acct. No. 106 Credit Balance 51,825 32,600 19,225

Explanation

Cash PR R2 D2

Inventory PR G2 P2 D2 S2 R2

Debit

76,225

Office Supplies Explanation PR P2

Debit 1,230

Store Supplies PR P2

Debit 1,770

Explanation

Acct. No. 119 Credit Balance 10,000 2,425 7,575 83,800 1,476 82,324 27,600 54,724 37,030 17,694 Acct. No. 124 Credit Balance 1,230

Credit

Acct. No. 125 Balance 1,770

AI-1077

Problem AII-8A (Continued)

Date Mar. 9 19

Explanation

Office Equipment PR P2 G2

Debit 21,850

Acct. No. 163 Balance 21,850 630 21,220

Credit

Date Mar. 17 19 31 31

Accounts Payable Explanation PR Debit G2 2,425 G2 630 P2 D2 73,800

Acct. No. 201 Credit Balance (2,425) (3,055) 101,075 98,020 24,220

Date Mar. 6

Long-Term Notes Payable Explanation PR Debit R2

Acct. No. 251 Credit Balance 82,000 82,000

Z. Church, Capital Explanation PR Debit

Acct. No. 301 Credit Balance 10,000

Date Mar. 1

Date Mar. 31 31

Explanation

Sales PR S2 R2

Debit

Acct. No. 413 Credit Balance 51,825 51,825 64,860 116,685

Date Mar. 31

Sales Discounts Explanation PR R2

Debit 652

Acct. No. 415 Credit Balance 652

Date Mar. 31 Mar. 31

Cost of Goods Sold Explanation PR Debit R2 37,030 S2 27,600

Acct. No. 502 Credit Balance 37,030 64,630

Date Mar. 15 31

Sales Salaries Expense PR Debit D2 18,300 D2 18,300

Acct. No. 621 Credit Balance 18,300 36,600

Explanation

AI-1078

Problem AII-8A (Continued) ACCOUNTS RECEIVABLE LEDGER Date Mar. 10 20 27

Date Mar. 2 12

Date Mar. 3 13 28

Explanation

Jovita Albany PR Debit S2 5,600 R2 S2 14,910 Min Cho PR S2 R2 Linda Witt PR S2 R2 S2

Debit 16,800

Credit 5,600

Credit 16,800

Debit 10,200

Credit 10,200

4,315

Balance 5,600 0 14,910

Balance 16,800 0

Balance 10,200 0 4,315

ACCOUNTS PAYABLE LEDGER

Date Mar. 14 17 23

Date Mar. 3 16

Date Mar. 9 19

Date Mar. 1 13

Explanation

CD Company PR Debit P2 G2 2,425 D2 30,200

Credit 32,625

Balance 32,625 30,200 0

Credit 1,230 1,770

Balance 1,230 3,000

Spell Supply PR Debit P2 G2 630

Credit 21,850

Balance 21,850 21,220

Van Industries PR Debit P2 D2 43,600

Credit 43,600

Balance 43,600 0

Gabel Company PR Debit P2 P2

AI-1079

Problem AII-8A (Concluded) Part 3 CHURCH COMPANY Trial Balance March 31 Debit Cash .................................................................................. $ 69,884 Accounts receivable ........................................................19,225 Inventory ...........................................................................17,694 Office supplies ................................................................. 1,230 Store supplies .................................................................. 1,770 Office equipment ..............................................................21,220 Accounts payable ............................................................. Long-term notes payable ................................................. Z. Church, Capital ............................................................ Sales .................................................................................. Sales discounts ................................................................ 652 Cost of goods sold ...........................................................64,630 Sales salaries expense ....................................................36,600 Totals ................................................................................ $232,905

Credit

$ 24,220 82,000 10,000 116,685

________ $232,905

CHURCH COMPANY Schedule of Accounts Receivable March 31 Jovita Albany ...................................................................... $14,910 Linda Witt ............................................................................ 4,315 Total accounts receivable .................................................. $19,225

CHURCH COMPANY Schedule of Accounts Payable March 31 Gabel Company .................................................................. $ 3,000 Spell Supply ........................................................................ 21,220 Total accounts payable ...................................................... $24,220

AI-1080

ALTERNATE PROBLEMS Problem AII-1B (20 minutes) Special Journal G

Subledger NE

2 Sold merchandise and received cash.

3 Purchased merchandise inventory on credit, terms 1/5, n/30.

AP/MI

4 Sold merchandise on credit; terms 2/15, n30.

AR/MI

5 The customer of May 4 returned defective merchandise; the merchandise was scrapped.

6 Regarding the May 3 purchase, received a credit memorandum from the supplier granting an allowance.

AP/MI

15 Paid mid-month salaries.

17 Purchased office supplies on credit; terms n/30.

19 Paid for the balance owing regarding the May 3 purchase.

22 Received payment regarding the May 4 sale.

25 Borrowed money from the bank.

29 Purchased merchandise inventory; paid cash.

30 Accrued interest income.

30 Closed all revenue accounts to the Income Summary account.

Date Transaction May 1 The owner invested an automobile into the business.

AI-1081

Problem AII-2B (40 minutes)

Date 2023 June 5 6 18 25

Fraser Antiques Sales Journal Invoice A/R Dr. Account Debited No. PR Sales Cr.

Martha Stohart Carol Larson Lars Wilson Nathan Blythe Totals

Date Account Credited 2023 June 12 Carol Larson 24 Martha Stohart 27 Lars Wilson Totals

Date

347 348 349 350

Account Credited

2023 June 1 Exeter Equip./Equipment 4 Whitby Co. 8 Suppliers Unlimited Totals

Page: S1 COGS Dr. Merchandise Inventory Cr.

51,000 4,100 3,000 12,000 70,100

25,500 2,850 2,450 7,250 38,050

Fraser Antiques Cash Receipts Journal Sales Disc Explanation Cash Dr. Dr A/R Cr. Inv., June 6 Inv., June 5 Inv., June 18

4,018 51,000 2,940 57,958

82 60 142

Fraser Antiques Purchases Journal Date of Invoice Terms PR A/P Cr.

June 1 June 4 June 8

n/30 1/5, n/15 2/10, n/30

22,500 42,500 900 65,900

Sales Cr.

Other Accounts Cr.

Page: CR1 COGS/Dr. Merchandise Inventory/ Cr.

4,100 51,000 3,000 58,100

Merchandise Inventory Dr.

Office Supplies Dr.

Page: P1 Other Accounts Dr.

22,500 42,500 42,500

900 900

22,500

AI-1082

Problem AII-2B (concluded)

Date 2023 June 11 14 28 29

Ch #

Fraser Antiques Cash Disbursements Merchandise Account Debited PR Cash Cr. Inventory Cr.

101 102 103 104

Whitby Co.* Salaries Expense Exeter Equipment Salaries Expense Totals *42,500 – 2,400 = 40,100 General Journal Date Account Titles and Explanations 2023 June 7 Accounts Payable – Whitby Co. ....................... Merchandise Inventory .............................. To record allowance received for damages that occurred during delivery.

40,100 7,500 22,500 7,500 77,600

Page: CD1 Other Accounts Dr.

A/P Dr. 40,100

7,500 22,500 7,500 15,000

Debit

62,600

Page: G1 Credit

2,400 2,400

26 Sales Returns and Allowances ......................... Accounts Receivable – Nathan Blythe .... To record unsatisfactory goods returned by customer.

1,400

26 Merchandise Inventory...................................... Cost of Goods Sold .................................. Goods returned to inventory.

1,100

1,400

1,100

AI-1083

Problem AII-3B (40 minutes) Note: Since posting to the General Ledger was not a requirement in this problem, posting references are shown for values posted to the subledgers only. Part 3

Date 2023 July 5 6 13 14

Date

Account Debited

A/R Dr. Sales. Cr.

Page 3 Cost of Goods Sold Dr. Merchandise Inventory Cr.

   

35,000 16,000 17,200 8,200

19,250 8,800 9,460 4,500

Karen Harden Paul Kane Kelly Grody Karen Harden

918 919 920 921

CASH RECEIPTS JOURNAL Sales Cash Discounts Explanation Debit Debit PR

Account Credited

2023 July 15 Karen Harden 15 Sales

Date 2023 July 1 7 9

SALES JOURNAL Invoice Number PR

Sale of Jul 5 Cash sales



34,300 242,740

700

Page 3 Accts. Rec. Credit

Other Accts. Credit

242,740

Account Credited Beech Company Blackwater Inc. /Store Supp. Poppe‘s Supply /Store Equip.

Jun 30 Jul 7 Jul 8

  

Cost of Goods Sold Dr. Merchandise Inventory Cr.

35,000

PURCHASES JOURNAL Accounts Date of Payable Invoice Terms PR Credit 2/10, n/30 n/10 EOM n/10 EOM

Sales Credit

14,500 2,300 72,500

133,500

Merchandise Inventory Debit

Office Supplies Debit

Page 3 Other Accts. Debit

14,500

2,300 72,500

AI-1084

Problem AII-3B (continued) CASH DISBURSEMENTS JOURNAL Date 2023 July

Date 2023 July

Ch. No. 3 300 10 301 15 302

Payee

Account Debited

The Weekly Journal Beech Company Payroll

Advertising Expense Beech Company Sales Salaries Expense

GENERAL JOURNAL Account Titles and Explanations 8

Accounts Payable—Blackwater Inc. ............. Store Supplies ........................................... Returned supplies to supplier.

Cash Credit 1,075 14,210 60,400



Merchandise Inventory Credit

Debit

Other Accts. Debit

Page 3 Accts. Payable Debit

1,075 290

14,500 60,400

Page 3 Credit

300 300

AI-1085

Problem AII-3B (concluded) Parts 1, 2, 3 ACCOUNTS RECEIVABLE SUBLEDGER

Date 2023 July 5 14 15

Date 2023 July 13

Date 2023 July 6

Karen Harden Explanation PR S3 S3 CR3

Explanation

Kelly Grody PR S3

Explanation

Paul Kane PR S3

Debit

Credit

35,000 8,200 35,000

Debit

Credit

17,200

Debit

Balance 35,000 43,200 8,200

Balance 17,200

Credit

16,000

Balance 16,000

ACCOUNTS PAYABLE SUBLEDGER

Date 2023 July 1 10

Date 2023 July 7 8

Date 2023 July 9

Date 2023

Beech Company Explanation PR P3 CD3 Blackwater Inc. Explanation PR P3 G3 Poppe‘s Supply Explanation PR

Debit

14,500 14,500

Debit

Credit 2,300

300

Debit

P3 Sprague Company Explanation PR

Credit

Credit 72,500

Debit

Credit

Balance 14,500 0

Balance 2,300 2,000

Balance 72,500

Balance

AI-1086

Problem AII-4B (70 minutes) Parts 2, 3, 4

Date 2023 July 5 6 13 14 29 30

Account Debited

SALES JOURNAL Invoice PR Number

Karen Harden Paul Kane Kelly Grody Karen Harden Paul Kane Kelly Grody Totals

     

918 919 920 921 922 923

Page 3 Cost of Goods Sold Dr. Merchandise Inventory Cr.

A/R Dr. Sales. Cr.

35,000 16,000 17,200 8,200 52,000 33,000 161,400 (106/413)

19,250 8,800 9,460 4,500 28,600 18,150 88,760 (502/119)

CASH RECEIPTS JOURNAL Account Credited

Date

Sales Discounts Debit

Accts. Rec. Credit

34,300 242,740 15,680 40,000

700

35,000

320

16,000

16,856 8,036 158,040 515,652 (101)

344 164

Cash Debit

Explanation

Page 3 Sales Credit

Other Accts. Credit

PR 2023 July 15 15 16 21

Karen Harden Sales Paul Kane Long-term Notes Payable 23 Kelly Grody 24 Karen Harden 31 Sales Totals

Sale of Jul 5 Cash sales Sale of Jul 6 Note to bank Sale of Jul 13 Sale of Jul 14 Cash sales

  251  

242,740

Cost of Goods Sold Dr. Merchandise Inventory Cr.

133,500 40,000

1,528 (415)

17,200 8,200 76,400 (106)

158,040 400,780 (413)

40,000 (X)

86,900 220,400 (502/119)

AI-1087

Problem AII-4B (continued)

Date 2023 July

PURCHASES JOURNAL Accounts Date of Payable Invoice Terms PR Credit

Account Credited 1 7 9 17 20 26

Beech Company Blackwater Inc. /Store Supp. Poppe‘s Supply /Store Equip. Sprague Company Poppe‘s Supply Beech Company Totals

Jun 30 Jul 7 Jul 8 Jul 17 Jul 19 Jul 26

2/10, n/30 n/10 EOM n/10 EOM 2/10, n/30 n/10 EOM 2/10, n/30

 125/ 165/  124/ 

14,500 2,300 72,500 17,600 1,500 21,300 129,700 (201)

Merchandise Inventory Debit

Page 3 Other Accts. Debit

Office Supplies Debit

14,500 2,300 72,500 17,600 21,300 53,400 (119)

1,500 __ 1,500 (124)

74,800 (X)

CASH DISBURSEMENTS JOURNAL Date 2023 July

Ch. No. 3 10 15 27 31

300 301 302 303 304

Payee

Account Debited

The Weekly Journal Beech Company Payroll Sprague Company Payroll Totals

Advertising Expense Beech Company Sales Salaries Expense Sprague Company Sales Salaries Expense

655  621  621

Cash Credit

1,075 14,210 60,400 12,544 _60,400 148,629 (101) * $17,600 – $4,800 return = $12,800

Merchandise Inventory Credit

Other Accts. Debit

Page 3 Accts. Payable Debit

1,075 290

14,500 60,400

256 546 (119)

12,800* _60,400 121,875 (X)

AI-1088

27,300 (201)

Problem AII-4B (continued) Date 2023 July

GENERAL JOURNAL Account Titles and Explanations 8

Debit

Accounts Payable—Blackwater Inc. ............. Store Supplies ........................................... Returned supplies to supplier.

201/ 125

300

Accounts Payable—Sprague Company.......... Merchandise Inventory ............................. Returned defective inventory to merchandise supplier.

201/ 119

4,800

Page 3 Credit

300

4,800

Parts 1, 2, 3, 4 GENERAL LEDGER Cash Date 2023 June 30 July 31 31

Date 2023 July 31 31

Date 2023 Jun. 30 Jul. 24 31 31 31 31

Date 2023 July 31

Explanation

Debit

Credit

Acct. No. 101 Balance

Balance Forward CR3 CD3 Accounts Receivable Explanation PR S3 CR3 Merchandise Inventory Explanation PR

515,652 148,629

Debit

Acct. No. 106 Credit Balance

161,400 76,400

Debit

Explanation

Office Supplies PR P3

4,800 88,760 220,400 53,400 546

Debit

161,400 85,000

Acct. No. 119 Credit Balance

Balance Forward G3 S3 CR3 P3 CD3

190,000 705,652 557,023

Credit

334,000 329,200 240,440 20,040 73,440 72,894

Acct. No. 124 Balance

1,500

Problem AII-4B (continued) Store Supplies

Acct. No. 125

AI-1089

Date 2023 July 7 8

Date 2023 July 9

Date 2023 July

Explanation

PR P3 G3

Store Equipment Explanation PR P3 Accounts Payable Explanation PR

8 24 31 31

Date 2023 June 30 July 21

Date 2023 Jun. 30

G3 G3 P3 CD3

Debit

Date 2023 July 31

Balance

2,300

2,300 2,000

300

Debit

Credit

Acct. No. 165 Balance

72,500

Debit

72,500

Credit

Acct. No. 201 Balance

300 4,800 129,700 27,300

Long-Term Notes Payable Explanation PR Debit

CR3 Gene Duncan, Capital Explanation PR

40,000

Debit

334,000 374,000

Acct. No. 301 Credit Balance

Balance Forward

Explanation

(300) (5,100) 124,600 97,300

Acct. No. 251 Credit Balance

Balance Forward

190,000 Sales

Date 2023 July 31 31

Credit

Debit

S3 CR3 Sales Discounts Explanation PR CR3

Acct. No. 413 Credit Balance 161,400 400,780

Debit

161,400 562,180

Acct. No. 415 Credit Balance

1,528

AI-1090

Problem AII-4B (continued) Date 2023 July 31 31

Cost of Goods Sold Explanation PR S3 CR3 Sales Salaries Expense Explanation PR

Date 2023 July 15 31

CD3 CD3 Advertising Expense Explanation PR

Date 2023 July 3

CD3

Debit

Acct. No. 502 Credit Balance

88,760 220,400

88,760 309,160

Debit

Acct. No. 621 Credit Balance

60,400 60,400

Debit

60,400 120,800 Acct. No. 655 Credit Balance

1,075

ACCOUNTS RECEIVABLE SUBLEDGER

Date 2023 July 5 14 15 24

Explanation

Karen Harden PR S3 S3 CR3 CR3

Date 2023 July 13 23 30

Explanation

Date 2023 July 6 16 29

Explanation

Kelly Grody PR S3 CR3 S3 Paul Kane PR S3 CR3 S3

Debit

Credit

35,000 8,200 35,000 8,200

Debit

Credit

17,200 17,200 33,000

Debit

Credit

16,000 16,000 52,000

Balance 35,000 43,200 8,200 0

Balance 17,200 0 33,000

Balance 16,000 0 52,000

Problem AII-4B (continued) ACCOUNTS PAYABLE SUBLEDGER

AI-1091

Date 2023 July 1 10 26

Date 2023 July 7 8

Date 2023 July 9 20

Date 2023 July 17 24 27

Beech Company Explanation PR P3 CD3 P3 Blackwater Inc. Explanation PR P3 G3 Poppe‘s Supply Explanation PR

Debit

14,500 14,500 21,300

Debit

P3 G3 CD3

Credit 2,300

300

Debit

P3 P3 Sprague Company Explanation PR

Credit

Credit 72,500 1,500

Debit

Credit 17,600

4,800 12,800

Balance 14,500 0 21,300

Balance 2,300 2,000

Balance 72,500 74,000

Balance 17,600 12,800 0

AI-1092

Problem AII-4B (continued) Part 5 DUNCAN INDUSTRIES Trial Balance July 31, 2023 Account Debit Cash ........................................................................................... $ 557,023 Accounts receivable ................................................................. 85,000 Merchandise inventory ............................................................. 72,894 Office supplies .......................................................................... 1,500 Store supplies ........................................................................... 2,000 Store equipment ........................................................................ 72,500 Accounts payable ...................................................................... Long-term notes payable .......................................................... Gene Duncan, capital ................................................................ Sales .......................................................................................... Sales discounts ......................................................................... 1,528 Cost of goods sold .................................................................... 309,160 Sales salaries expense ............................................................. 120,800 Advertising expense ................................................................. 1,075 Totals ......................................................................................... $1,223,480

Credit

97,300 374,000 190,000 562,180

$1,223,480

DUNCAN INDUSTRIES Schedule of Accounts Receivable July 31, 2023 Kelly Grody.................................................................................... Paul Kane ...................................................................................... Total accounts receivable ............................................................

$33,000 52,000 $85,000

DUNCAN INDUSTRIES Schedule of Accounts Payable July 31, 2023 Beech Company ........................................................................ Blackwater Inc. ......................................................................... Poppe‘s Supply ......................................................................... Total accounts payable .............................................................

$21,300 2,000 74,000 $97,300

AI-1093

Problem AII-4B (concluded) Analysis component: To find the error(s),  re-add the account balances on the schedule of accounts payable to confirm that the addition was correct.  trace the balances listed on the schedule of accounts payable back to the subsidiary accounts to confirm that they were listed correctly on the schedule.  recalculate the balance of each subsidiary account to confirm that the additions and subtractions were correct.  trace the postings from each subsidiary account and from the controlling account back to the appropriate journals. Since the purchases and cash disbursements journals were footed and crossfooted before posting, the previous steps should disclose the error.

AI-1094

Problem AII-5B (120 minutes) Parts 1, 2, 3

Date

Account Debited

2023 Oct. 6 12 15 16 21

SALES JOURNAL Invoice PR Number

Marge Craig Heather Flatt Amy Izon Heather Flatt Jan Wildman Totals

913 914 915 916 917

A/R Dr. Sales. Cr.

Page 3 Cost of Goods Sold Dr. Merchandise Inventory Cr.

6,600 7,300 6,200 9,100 10,900 40,100 (106/413)

3,600 4,000 3,400 5,270 6,320 22,590 (502/119)

    

CASH RECEIPTS JOURNAL

Date 2023 Oct. 2 15 15 22 25 28 31

Account Credited Jan Wildman Sales Marge Craig Heather Flatt Amy Izon Store Supplies Sales Totals

Explanation

Invoice Sept 23 Cash sales Invoice, Oct 6 Invoice, Oct 12 Invoice, Oct 15 Sold supplies Cash sales



Cash Debit

Sales Discount Debit

Acct. Rec. Credit

8,232 168 8,400 77,660 4,802 98 4,900*  7,154 146 7,300  5,684 116 5,800**  125 116 132,256 235,904 528 26,400 (101) (415) (106) * $6,600 – $1,700 return = $4,900 ** $6,200 – $400 return = $5,800

Page 3

Sales Credit

Other Acct. Credit

Cost of Goods Sold Dr. Merchandise Inventory Cr.

77,660

42,800

116 132,256 209,916 (413)

116 (X)

76,700 119,500 (502/119)

AI-1095

Problem AII-5B (continued)

Date 2023 Oct. 2 5 15 15 16 20 28

PURCHASES JOURNAL Accounts Date of Payable Invoice Terms PR Credit

Account Credited Walters Company Green Supply Co. Walters Company Sunshine Company Green Supply Co. Green Supply Co. /Store Equip. Sunshine Company Totals

Oct 2 Oct 3 Oct 15 Oct 15 Oct 16 Oct 19 Oct 28

2/10, n/60 n/10 EOM 2/10, n/60 2/10, n/60 n/10 EOM n/10 EOM 2/10, n/60

     165/ 

Merchandise Inventory Debit

6,400 2,600 7,980 5,300 1,470 14,800 12,950 51,500 (201)

6,400 2,600 7,980 5,300 1,470 14,800 12,950 35,230 (119)

1,470 (124)

Merchandise Inventory Credit

Other Accts. Debit

CASH DISBURSEMENTS JOURNAL Date 2023 Oct.

Ch. No. 2 6 12 15 25 25 29 30 30

619 620 621 622 623 624 625 626 627

Cash Credit

Payee

Account Debited

Omni Realty Co. Fireside Company Walters Company Jamie Ford Walters Company* Sunshine Company Marlee Levin Midwest Elec. Co. Jamie Ford. Totals

Rent Expense 640 4,500 Fireside Company 7,448  Walters Company 6,272  Sales Salaries Expense 621 5,240 Walters Company 6,566  Sunshine Company 5,194  Marlee Levin, Withdrawals 302 8,000 Utilities Expense 690 1,240 Sales Salaries Expense ....................................................... 621 3,260 47,720 (101)

Page 2 Other Accts. Debit

Office Supplies Debit

14,800 (X) Page 4 Accts. Payable Debit

4,500 152 128

7,600 6,400 5,240

134 106

520 (119)

6,700* 5,300 8,000 1,240 3,260 22,240 (X)

26,000 (201)

*7,980 – 1,280 return = 6,700

AI-1096

Problem AII-5B (continued) Date 2023 Oct.

GENERAL JOURNAL Account Title and Explanations

Debit

4 Accounts Payable—Fireside Company .......... Merchandise Inventory ............................. Defective merchandise returned.

201/ 119

920

9 Sales Returns and Allowances........................ Accounts Receivable—Marge Craig ....... Returned merchandise was scrapped.

414 106/

1,700

18 Sales Returns and Allowances........................ Accounts Receivable—Amy Izon ............. Returned merchandise was scrapped.

414 106/

400

19 Accounts Payable—Walters Company ........... Merchandise Inventory ............................. Returned merchandise.

201/ 119

1,280

20 Accounts Payable—Green Supply Co. .......... Office Supplies .......................................... Returned office supplies.

201/ 124

286

Page 2 Credit

920

1,700

400

1,280

286

ACCOUNTS RECEIVABLE SUBLEDGER

Date Explanation 2023 Oct. 6 9 15

Date 2023 Oct. 12 16 22

Explanation

Marge Craig PR S3 G2 CR3 Heather Flatt PR S3 S3 CR3

Debit

Credit

6,600 1,700 4,900

Debit

Credit

7,300 9,100 7,300

Balance 6,600 4,900 0

Balance 7,300 16,400 9,100

AI-1097

Problem AII-5B (continued) Amy Izon Date 2023 Oct. 15 18 25

Date 2023 Sept 23 Oct. 2 21

Explanation

Debit

S3 G2 CR3

Explanation

Jan Wildman PR S2 CR3 S3

Credit

6,200 400 5,800

Debit

Credit

8,400 8,400 10,900

Balance 6,200 5,800 0

Balance 8,400 0 10,900

Part 2 ACCOUNTS PAYABLE SUBLEDGER

Date 2023 Sept 28 Oct. 4 6

Date 2023 Oct. 5 16 20 20

Date 2023 Oct. 15 25 28

Fireside Company Explanation PR P1 G2 CD4 Green Supply Company Explanation PR P2 P2 P2 G2 Sunshine Company Explanation PR P2 CD4 P2

Debit

Credit 8,520

920 7,600

Debit

Credit 2,600 1,470 14,800

286

Debit

Credit 5,300

5,300 12,950

Balance 8,520 7,600 0

Balance 2,600 4,070 18,870 18,584

Balance 5,300 0 12,950

AI-1098

Problem AII-5B (continued) Date 2023 Oct. 2 12 15 19 25

Walters Company Explanation PR P2 CD4 P2 G2 CD4

Debit

Credit 6,400

6,400 7,980 1,280 6,700

Balance 6,400 0 7,980 6,700 0

Parts 2, 3 GENERAL LEDGER Cash Date 2023 Sept 30 Balance Oct. 31 31

Date 2023 Sept 30 Balance Oct. 9 18 31 31

Date 2023 Sept 30 Balance Oct. 4 19 31 31 31 31

Explanation

Debit

CR3 CD4

235,904

Accounts Receivable Explanation PR

G2 G2 S3 CR3 Merchandise Inventory Explanation PR

G2 G2 S3 P2 CD4 CR3 Office Supplies Explanation PR

Date 2023 Sept 30 Balance Oct. 20 31 Problem AII-5B (continued)

G2 P2 Store Supplies

Acct. No. 101 Credit Balance

47,720

Debit

Acct. No. 106 Credit Balance

1,700 400 40,100 26,400

Debit

8,400 6,700 6,300 46,400 20,000

Acct. No. 119 Credit Balance

920 1,280 22,590 35,230 520 119,500

Debit

10,722 246,626 198,906

133,940 133,020 131,740 109,150 144,380 143,860 24,360

Acct. No. 124 Credit Balance

286 1,470

1,214 928 2,398

Acct. No. 125

AI-1099

Date 2023 Sept 30 Balance Oct. 28

Date 2023 Sept 30 Balance Oct. 20

Date 2023 Sept 30 Balance

Date 2023 Sept 30 Balance Oct. 4 19 20 31 31

Date 2023 Sept 30 Balance

Date 2023 Oct. 29

Explanation

Debit

CR3 Store Equipment Explanation PR

Balance 692 576

116

Debit

Acct. No. 165 Credit Balance 84,258 99,058

14,800

Accumulated Depreciation, Store Equipment Explanation PR Debit

Acct. No. 166 Credit Balance 18,306

Accounts Payable Explanation PR

G2 G2 G2 P2 CD4 Marlee Levin, Capital Explanation PR

Debit

Acct. No. 201 Credit Balance

920 1,280 286 51,500 26,000

Debit

8,520 7,600 6,320 6,034 57,534 31,534

Acct. No. 301 Credit Balance 212,400

Marlee Levin, Withdrawals Explanation PR CD4

Debit

Explanation

PR S3 CR3

Acct. No. 302 Credit Balance

8,000

Sales Date 2023 Oct. 31 31

Credit

Debit

8,000 Acct. No. 413 Credit Balance 40,100 209,916

40,100 250,016

AI-1100

Problem AII-5B (continued) Date 2023 Oct. 9 18

Date 2023 Oct. 31

Date 2023 Oct. 31 31

Date 2023 Oct. 15 30

Date 2023 Oct. 2

Date 2023 Oct. 30

Sales Returns and Allowances Explanation PR Debit G2 G2 Sales Discounts Explanation PR CR3 Cost of Goods Sold Explanation PR S3 CR3 Sales Salaries Expense Explanation PR CD4 CD4 Rent Expense Explanation PR CD4 Utilities Expense Explanation PR CD4

Acct. No. 414 Credit Balance

1,700 400

Debit

1,700 2,100 Acct. No. 415 Credit Balance

528

Debit

528 Acct. No. 502 Credit Balance

22,590 119,500

Debit

22,590 142,090 Acct. No. 621 Credit Balance

5,240 3,260

Debit

5,240 8,500 Acct. No. 640 Credit Balance

4,500

Debit

4,500 Acct. No. 690 Credit Balance

1,240

AI-1101

Problem AII-5B (concluded) Part 4 CHINA MOON PRODUCTS Trial Balance October 31, 2023 Account Cash ............................................................................. Accounts receivable ................................................... Merchandise inventory............................................... Office supplies ............................................................ Store supplies ............................................................. Store equipment ......................................................... Accumulated depreciation, store equipment ........... Accounts payable ....................................................... Marlee Levin, capital................................................... Marlee Levin, withdrawals ......................................... Sales ............................................................................ Sales returns and allowances ................................... Sales discounts .......................................................... Cost of goods sold ..................................................... Sales salaries expense............................................... Rent expense .............................................................. Utilities expense ......................................................... Totals ...........................................................................

Debit $ 198,906 20,000 24,360 2,398 576 99,058

Credit

$ 18,306 31,534 212,400 8,000 250,016 2,100 528 142,090 8,500 4,500 1,240 $512,256

$512,256

CHINA MOON PRODUCTS Schedule of Accounts Receivable October 31, 2023 Heather Flatt ......................... Jan Wildman. ........................ Total accounts payable ........

$ 9,100 10,900 $20,000

CHINA MOON PRODUCTS Schedule of Accounts Payable October 31, 2023 Green Supply Company ......... Sunshine Company. .............. Total accounts payable ..........

$18,584 12,950 $31,534

AI-1102

Problem AII-6B (30 minutes)

Date 2023 July 9 15 22 30

Account Debited W. Tilden J. Samuelson V. Nels M. Bains

Sales Journal Invoice No. PR 213 214 215 216

A/R Dr. Sales Cr. 150.00 375.00 300.00 405.00

Page 1 COGS Dr. Merchandise Inventory Cr.

   

54.00 135.00 100.20 135.54

Purchases Journal

Date Account Credited 2023 July 4 Tulsco Supply 18 Gentry Holdings

Date of Invoice

Terms

July 4 July 18

n/30 n/30

A/P Cr. 225.00 135.00

Merchandise Inventory Dr.

 

225.00 135.00

Office Supplies Dr.

Page 1 Other Accounts Dr.

NOTE: An additional PR column has been added to facilitate the referencing of inventory entries into the inventory subsidiary ledger.

AI-1103

Problem AII-6B (concluded) Inventory Subledger Record — Weighted-Average Perpetual Inventory Balance Date

July 01

4 P1

Purchases Unit Units Cost Total Cost Units Beginning inventory 30 @ $6.00 = $ 180.00 45

@ $5.00 = $

15 S1

22 S1

30 S1 Totals

@ $4.50 = $

(b)

Unit Cost

Total Average Units Cost/Unit

Total Cost

(a)

Total Cost

$6.00

@ $5.40 = $

$5.40

$ 405.00

$5.40

$ 351.00

$5.40

$ 216.00

$5.01

$ 351.00

$5.02*

$ 250.80

23 23

$5.01*

54.00

@ $5.40 = $ 135.00

135.00

@ $5.01 = $ 100.20

@ $5.02 = $ 135.54

105 $540.00 82 $424.74 Cost of goods available for sale = Cost of goods sold +

Inventory Balance Calculations

$ 180.00

225.00

9 S1

18 P1

(b)  (a)

Sales (at cost)

$ 115.26 $115.26 Ending inventory

30 45 @ 75 75 –10 @ 65 65 –25 @ 40 40 30 @ 70 70 –20 @ 50 50 –27 @ 23

$ 180.00 225.00 $ 405.00 $ 405.00 5.40 = – 54.00 $ 351.00 $ 351.00 5.40 = –135.00 $ 216.00 $ 216.00 5.01 = 135.00 $ 351.00 $ 351.00 5.01 = –100.20 $ 250.80 $ 250.80 5.02 = –135.54 $ 115.26 5.40 =

Note: An additional PR column has been added to the Inventory Subledger Record to facilitate referencing of inventory entries. *The average cost per unit changed due to rounding.

AI-1104

Problem AII-7B (40 minutes) Note: Since posting to the General Ledger was not a requirement in this problem, posting references are shown for values posted to the subledgers only. SALES JOURNAL Date 2023 July

5 6 13 14

Account Debited

Invoice Number

Page 3 A/R Dr. Sales Cr.

Karen Harden Paul Kane Kelly Grody Karen Harden

918 919 920 921

   

35,000 16,000 17,200 8,200

CASH RECEIPTS JOURNAL Account Date Credited 2023 July 15 Karen Harden 15 Sales

Explanation

Sale of July 5 Cash sales



Cash Debit 34,300 242,740

Sales Disc. Debit

Accts. Rec. Credit

700

35,000

Sales Credit 242,740

PURCHASES JOURNAL

Date Account Credited 2023 July 1 Beech Company 7 Blackwater Inc./Store Supplies 9 Poppe‘s Supply/Store Equipment

Page 3 Other Accts. Credit

Date of Invoice

Terms

Accounts Payable Credit

Jun. 30 July 7 July 8

2/10,n/30 n/10 EOM n/10 EOM

  

14,500 2,300 72,500

Purchases Debit

Page 3 Office Other Supplies Accounts Debit Debit

14,500

2,300 72,500

AI-1105

Problem AII-7B (continued) CASH DISBURSEMENTS JOURNAL Ch. No.

Date 2023 July 3 300 10 301 15 302

Date 2023 July

Payee The Weekly Journal Beech Company Payroll

Account Debited

Advertising Expense Beech Company Sales Salaries Expense



GENERAL JOURNAL Account Titles and Explanations 8

Accounts Payable—Blackwater Inc. ............. Store Supplies ........................................... Returned supplies to supplier.

PR 201/ 125

Cash Credit

Purchase Discount Credit

1,075 14,210 60,400

Debit

Page 3 Other Accts. Accts. Payable Debit Debit 1,075

290

14,500 60,400

Page 3 Credit

300 300

AI-1106

Problem AII-7B (concluded) ACCOUNTS RECEIVABLE SUBLEDGER

Date 2023 July 5 14 15

Explanation

Karen Harden PR S3 S3 CR3

Date 2023 July 13

Explanation

Date 2023 July 6

Explanation

Kelly Grody PR S3 Paul Kane PR S3

Debit

Credit

35,000 8,200 35,000

Debit

Credit

17,200

Debit

Balance 35,000 43,200 8,200

Balance 17,200

Credit

16,000

Balance 16,000

ACCOUNTS PAYABLE SUBLEDGER

Date 2023 July 1 10

Date 2023 July 7 8

Date 2023 July 9

Date 2023

Beech Company Explanation PR P3 CD3 Blackwater Inc. Explanation PR P3 G3 Poppe‘s Supply Explanation PR

Debit

14,500 14,500

Debit

Credit 2,300

300

Debit

P3 Sprague Company Explanation PR

Credit

Credit 72,500

Debit

Credit

Balance 14,500 0

Balance 2,300 2,000

Balance 72,500

Balance

AI-1107

Problem AII-7B (70 minutes) SALES JOURNAL Date 2023 July

Account Debited 5 6 13 14 29 30

Karen Harden Paul Kane Kelly Grody Karen Harden Paul Kane Kelly Grody Total

Invoice Number

918 919 920 921 922 923

     

Page 3 A/R Dr. Sales Cr. 35,000 16,000 17,200 8,200 52,000 33,000 161,400 (106/413)

CASH RECEIPTS JOURNAL Date 2023 July 15 15 16 21 23 24 31

Account Credited Karen Harden Sales Paul Kane L.T. Notes P. Kelly Grody Karen Harden Sales Totals

Explanation

Sale of July 5 Cash sales Sale of July 6 Note to bank Sale of July 13 Sale of July 14 Cash sales

  251  

Cash Debit 34,300 242,740 15,680 40,000 16,856 8,036 158,040 515,652 (101)

Sales Disc. Debit

Accts. Rec. Credit

700

35,000

320

16,000

344 164

17,200 8,200

1,528 (415)

76,400 (106)

Sales Credit

Page 3 Other Accts. Credit

242,740 40,000 158,040 400,780 (413)

40,000 (X)

AI-1108

Problem AII-7B (continued) PURCHASES JOURNAL

Date 2023 July 1 7 9 17 20 26

Account Credited Beech Company Blackwater Inc./Store Supplies Poppe‘s Supply/Store Equipment Sprague Company Poppe‘s Supply Beech Company Totals

Date of Invoice

Terms

Jun. 30 July 7 July 8 July 17 July 19 July 26

2/10,n/30 n/10 EOM n/10 EOM 2/10,n/30 n/10 EOM 2/10,n/30

 125/ 165/   

Accounts Payable Credit

Purchases Debit

14,500 2,300 72,500 17,600 1,500 21,300 129,700 (201)

14,500 2,300 72,500 17,600 1,500 21,300 53,400 (505)

CASH DISBURSEMENTS JOURNAL Date 2023 July 3 10 15 27 31

Ch. No. 300 301 302 303 304

Payee The Weekly Journal Beech Company Payroll Sprague Company Payroll Totals

Account Debited

Advertising Expense Beech Company Sales Salaries Expense Sprague Company Sales Salaries Expense

655  621  621

Cash Credit

1,075 14,210 60,400 12,544 60,400 148,629 (101) *$17,600 - $4,800 return = $12,800

Page 3 Office Other Supplies Accounts Debit Debit

Purchase Discount Credit

Other Accts. Debit

1,500 (124)

74,800 (X)

Page 3 Accts. Payable Debit

1,075 290

14,500 60,400

256 546 (506)

12,800* 60,400 121,875 (X)

27,300 (201)

AI-1109

Problem AII-7B (continued) Date 2023 July

GENERAL JOURNAL Account Titles and Explanations 8

Debit

Accounts Payable—Blackwater Inc. ............. Store Supplies ........................................... Returned supplies to supplier.

201/ 125

300

Accounts Payable—Sprague Company.......... Purchase Returns and Allowances ......... Returned defective inventory to merchandise supplier.

201/ 507

4,800

Page 3 Credit

300

4,800

Parts 1, 2, 3, 4 GENERAL LEDGER Cash Date 2023 June 30 July 31 31

Date 2023 July 31 31

Date 2023 Jun. 30

Date 2023 July 20

Explanation

Debit

Credit

Acct. No. 101 Balance

Balance Forward CR3 CD3

515,652 148,629

Accounts Receivable Explanation PR

Debit

S3 CR3

Acct. No. 106 Credit Balance

161,400 76,400

Merchandise Inventory Explanation PR

Debit

190,000 705,652 557,023

161,400 85,000

Acct. No. 119 Credit Balance

Balance Forward

334,000

Office Supplies Explanation PR P3

Debit

Acct. No. 124 Credit Balance

1,500

AI-1110

Problem AII-7B (continued) Date 2023 July 7 8

Date 2023 July 9

Date 2023 July

Store Supplies Explanation PR P3 G3

300

Debit

72,500

8 24 31 31

Date 2023 Jun. 30

2,300

Store Equipment Explanation PR

Accounts Payable Explanation PR

Date 2023 June 30 July 21

Debit

G3 G3 P3 CD3

Acct. No. 125 Credit Balance

Debit

Acct. No. 165 Credit Balance 72,500 Acct. No. 201 Credit Balance

300 4,800 129,700 27,300

Long-Term Notes Payable Explanation PR Debit

Credit

Gene Duncan, Capital Explanation PR

40,000

Debit

Credit

190,000 Sales

Explanation

Date 2023 July 31

Explanation

334,000 374,000

Acct. No. 301 Balance

Balance Forward

Date 2023 July 31 31

(300) (5,100) 124,600 97,300

Acct. No. 251 Balance

Balance Forward CR3

2,300 2,000

Debit

S3 CR3 Sales Discounts PR CR3

Credit

Acct. No. 413 Balance

161,400 400,780

Debit

Credit

161,400 562,180

Acct. No. 415 Balance

1,528

AI-1111

Problem AII-7B (continued) Date 2023 July 31

Date 2023 July 31

Date 2023 July 24

Date 2023 July 15 31

Date 2023 July 3

Explanation

Purchases PR P3

Purchase Discounts Explanation PR

Debit 53,400

Debit

CD3

CD3 CD3 Advertising Expense Explanation PR CD3

53,400 Acct. No. 506 Credit Balance 546

Purchase Returns and Allowances Explanation PR Debit

Sales Salaries Expense Explanation PR

Acct. No. 505 Credit Balance

Credit

Acct. No. 507 Balance

4,800

Debit

4,800

Acct. No. 621 Credit Balance

60,400 60,400

Debit

546

60,400 120,800 Acct. No. 655 Credit Balance

1,075

ACCOUNTS RECEIVABLE SUBLEDGER

Date 2023 July 5 14 15 24

Explanation

Date 2023 July 13 23 30

Explanation

Karen Harden PR S3 S3 CR3 CR3 Kelly Grody PR S3 CR3 S3

Debit

Credit

35,000 8,200 35,000 8,200

Debit

Credit

17,200 17,200 33,000

Balance 35,000 43,200 8,200 0

Balance 17,200 0 33,000

AI-1112

Problem AII-7B (continued) Date 2023 July 6 16 29

Explanation

Paul Kane PR S3 CR3 S3

Debit

Credit

16,000 16,000 52,000

Balance 16,000 0 52,000

ACCOUNTS PAYABLE SUBLEDGER

Date 2023 July 1 10 26

Date 2023 July 7 8

Date 2023 July 9 20

Date 2023 July 17 24 27

Beech Company Explanation PR P3 CD3 P3 Blackwater Inc. Explanation PR P3 G3 Poppe‘s Supply Explanation PR

Debit

14,500 14,500 21,300

Debit

P3 G3 CD3

Credit 2,300

300

Debit

P3 P3 Sprague Company Explanation PR

Credit

Credit 72,500 1,500

Debit

Credit 17,600

4,800 12,800

Balance 14,500 0 21,300

Balance 2,300 2,000

Balance 72,500 74,000

Balance 17,600 12,800 0

AI-1113

Problem AII-7B (concluded) Part 5 DUNCAN INDUSTRIES Trial Balance July 31, 2023 Account Cash ..................................................................................... Accounts receivable ........................................................... Merchandise inventory ....................................................... Office supplies .................................................................... Store supplies ..................................................................... Store equipment .................................................................. Accounts payable ................................................................ Long-term notes payable .................................................... Gene Duncan, capital .......................................................... Sales .................................................................................... Sales discounts ................................................................... Purchases ............................................................................ Purchase discounts ............................................................ Purchase returns and allowances ..................................... Sales salaries expense ....................................................... Advertising expense ........................................................... Totals ...................................................................................

120,800 1,075 $1,228,826

DUNCAN INDUSTRIES Schedule of Accounts Receivable July 31, 2023 Kelly Grody.............................................................................. Paul Kane ................................................................................ Total accounts receivable ......................................................

$33,000 52,000 $85,000

DUNCAN INDUSTRIES Schedule of Accounts Payable July 31, 2023 Beech Company .................................................................. Blackwater Inc. ................................................................... Poppe‘s Supply ................................................................... Total accounts payable .......................................................

$21,300 2,000 74,000 $97,300

Debit $ 557,023 85,000 334,000 1,500 2,000 72,500

Credit

97,300 374,000 190,000 562,180

1,528 53,400 546 4,800

$1,228,826

AI-1114

Problem AII-8B (100 Minutes) Parts 1 and 2

Date

Account Debited

SALES JOURNAL Invoice Accounts Receivable Dr. Number PR Sales Cr.

Page 2 Cost of Goods Sold Dr. Inventory Cr.

Nov. 8 Cyd Rounder.................................................... 439



6,550

3,910

10 Carlos Mantel................................................... 440



13,500

8,500

15 Tori Tripp .......................................................... 441



5,250

2,450

22 Carlos Mantel................................................... 442



3,695

2,060

24 Tori Tripp .......................................................... 443



4,280

2,130

33,275

19,050

(106/413)

(502/119)

30 Totals.................................................................

PURCHASES JOURNAL

Date

Account

Date of Invoice

Terms

Accounts Payable Cr.

Inventory Dr.

Office Supplies Dr.

Page 2 Other Accounts Dr.

Nov. 1 Office Equip./Brun Supply ............................ 11/1

n/30

163/

5,058

4 BLR Industries ............................................... 11/4

2/10, n/30



33,500

5 Store Supplies/Grebe Company...................... 11/5

n/30

125/

1,040

11 Lo Company .................................................... 11/11

2/10, n/30



2,557

16 Grebe Company.............................................. 11/16

n/30



459

_____

459

____

42,614

36,057

459

6,098

(201)

(119)

(124)

()

30 Totals ................................................................

5,058 33,500 1,040

Problem AII-8B (Continued)

Date

Account Credited

Explanation

CASH RECEIPTS JOURNAL Sales Cash Discoun PR Dr. t Dr.

Accounts Receivable Cr.

Other Accts. Cr.

Sales Cr.

Nov. 2 L.T. Notes Pay. ................................................ Note to bank .......................................................................................... 251/ 88,500

Page 2 Cost of Goods Sold Dr. Inventory Cr.

88,500

 15 Sales.................................................................. Cash sales ............................................................................................. 18,170 18,170

9,000

 18 Cyd Rounder ................................................... Invoice, 11/8 ........................................................................................... 6,419 131 6,550  19 Carlos Mantel .................................................. Invoice, 11/10 ......................................................................................... 13,230 270 13,500  25 Tori Tripp .......................................................... Invoice, 11/15 ......................................................................................... 5,145 105 5,250  30 Sales.................................................................. Cash sales ............................................................................................. 16,703 ___ _____ 16,703

_____

10,200

30 Totals ................................................................

148,167

506

25,300

34,873

88,500

19,200

(101)

(415)

(106)

(413)

()

(502/119)

CASH PAYMENTS JOURNAL

Date

Ck. No.

Payee

Account Debited

Cash Cr.

Inventory Cr.

Other Accounts Dr.

Page 2 Accounts Payable Dr.

Nov. 12 633

 BLR Industries ................................................ BLR Industries ...................................................................................... 32,830 670

15 634

Payroll ............................................................... Sales Salaries Expense....................................................................... 621 6,585

19 635

 Lo Co................................................................. Lo Company.......................................................................................... 1,960 40

30 636

Payroll ............................................................... Sales Salaries Expense....................................................................... 621 6,585 ___

6,585

_____

Totals ................................................................

13,170 ()

35,500 (201)

47,960 (101)

710 (119)

33,500 6,585 2,000

Problem AII-8B (Continued) GENERAL JOURNAL

Page 2

Nov. 17 Accounts Payable—Lo Co. .....................................201/ Inventory ............................................................119 Received a refund for returns.

557

26 Accounts Payable—Brun Supply ...........................201/ Office Equipment ................................................163 Received a refund for returns.

922

557

922

GENERAL LEDGER

Date Nov. 30 30

Date Nov. 1 17 30 30 30 30

Date Nov. 30

Date Nov. 5

Explanation

Cash PR R2 D2

Debit 148,167

Acct. No. 101 Credit Balance 148,167 47,960 100,207

Accounts Receivable PR Debit S2 33,275 R2

Acct. No. 106 Credit Balance 33,275 25,300 7,975

Inventory PR G2 P2 D2 S2 R2

Debit

36,057

Acct. No. 119 Credit Balance 40,000 557 39,443 75,500 710 74,790 19,050 55,740 19,200 36,540

Explanation

Office Supplies PR Debit P2 459

Acct. No. 124 Credit Balance 459

Explanation

Store Supplies PR Debit P2 1,040

Acct. No. 125 Credit Balance 1,040

Problem AII-8B (Continued)

Date Nov. 1 26

Date Nov. 17 26 30 30

Date Nov. 2 Date Nov. 1

Date Nov. 30 30

Date Nov. 30

Date Nov. 30 30

Date Nov. 15 30

Explanation

Office Equipment PR Debit P2 5,058 G2

Acct. No. 163 Credit Balance 5,058 922 4,136

Accounts Payable PR Debit G2 557 G2 922 P2 D2 35,500

Acct. No. 201 Credit Balance (557) (1,479) 42,614 41,135 5,635

Long-Term Notes Payable Explanation PR Debit R2

Acct. No. 251 Credit Balance 88,500 88,500

C. Grassley, Capital PR Debit

Acct. No. 301 Credit Balance 40,000

Sales PR S2 R2

Acct. No. 413 Credit Balance 33,275 33,275 34,873 68,148

Explanation

Debit

Sales Discounts PR Debit R2 506

Acct. No. 415 Credit Balance 506

Costs of Goods Sold PR Debit S2 19,050 R2 19,200

Acct. No. 502 Credit Balance 19,050 38,250

Sales Salaries Expense Explanation PR Debit D2 6,585 D2 6,585

Acct. No. 621 Credit Balance 6,585 13,170

Explanation

Problem AII-8B (Continued) ACCOUNTS RECEIVABLE LEDGER

Date Nov. 10 19 22

Date Nov. 8 18

Explanation

Carlos Mantel PR Debit S2 13,500 R2 S2 3,695 Cyd Rounder PR Debit S2 6,550 R2

Credit 13,500

Credit 6,550

Balance 13,500 0 3,695

Balance 6,550 0

Tori Tripp Date Nov. 15 24 25

Explanation

PR S2 S2 R2

Debit 5,250 4,280

Credit

5,250

Balance 5,250 9,530 4,280

ACCOUNTS PAYABLE LEDGER

Date Nov. 4 12

Explanation

Date Nov. 1 26

Explanation

Date Nov. 5 16

Explanation

Date Nov. 11 17 19

Explanation

BLR Industries PR Debit P2 D2 33,500

Credit 33,500

Balance 33,500 0

Brun Supply PR Debit P2 G2 922

Credit 5,058

Balance 5,058 4,136

Credit 1,040 459

Balance 1,040 1,499

Credit 2,557

Balance 2,557 2,000 0

Grebe Company PR Debit P2 P2 Lo Company PR Debit P2 G2 557 D2 2,000

Problem AII-8B (Concluded) Part 3 GRASSLEY COMPANY Trial Balance November 30 Debit Cash .................................................................................. $100,207 Accounts receivable ........................................................ 7,975 Inventory ...........................................................................36,540 Office supplies ................................................................. 459 Store supplies .................................................................. 1,040 Office equipment .............................................................. 4,136 Accounts payable ............................................................. Long-term notes payable ................................................. C. Grassley, Capital ......................................................... Sales ................................................................................. Sales discounts ................................................................ 506 Costs of goods sold .........................................................38,250 Sales salaries expense ....................................................13,170 Totals ................................................................................ $202,283

GRASSLEY COMPANY Schedule of Accounts Receivable November 30 Carlos Mantel ...................................................................$3,695 Tori Tripp .......................................................................... 4,280 Total accounts receivable................................................$7,975

GRASSLEY COMPANY Schedule of Accounts Payable November 30 Brun Supply ......................................................................$4,136 Grebe Company ............................................................... 1,499 Total accounts payable ....................................................$5,635

Credit

$ 5,635 88,500 40,000 68,148

_______ $202,283

ANALYTICAL & REVIEW PROBLEMS A&R Problem AII-1 Sales Journal

Date Account Debited 2023 Oct. 9 Kitchen Club 18 Thorhild Co-op 24 Boyle Grocery

Invoice No.

Page 1

A/R Dr. Sales Cr.

COGS Dr. Merchandise Inventory Cr.

1,125.00 2,250.00 750.00

  

465.75 1,090.50 353.00

210 211 212

Purchases Journal

Date Account Credited 2023 Oct. 3 Arnold Brothers 15 Arnold Brothers 31 Arnold Brothers

Date of Invoice

Terms

Oct. 3 Oct. 15 Oct. 31

2/10, n/30 2/10, n/30 2/10, n/30

A/P CR

Merchandise Inventory DR

750.00 1,550.00 600.00

  

750.00 1,550.00 600.00

Office Supplies Dr.

Cash Disbursements Journal Date

Payee

Account Debited

Cash Cr.

Page 1 PR

Merchandise Inventory Cr.

Ch # 2023 Oct. 19 101 Arnold Brothers A/P – Arnold Brothers 600.00  23 102 Arnold Brothers A/P – Arnold Brothers 1,519.00  NOTE: An additional PR column has been added to the Sales and Purchases Journals to facilitate the referencing of inventory entries into the inventory subledger. A&R Problem AII-1 (continued) General Journal

Page 1 Other Accounts DR

Page: G1

31.00

Other Accounts Dr.

A/P Dr.

600.00 1,550.00

Date 2023 Oct.

Account Titles and Explanations 4

Accounts Payable – Arnold Brothers ......... Merchandise Inventory......................... To record the return of 20 units.

Debit 150.00



A&R Problem AII-1 concluded on next page.A&R Problem AII-1 (concluded) Average Perpetual

*The average cost per unit changed due to rounding.

Credit

150.00

Inventory Subledger Record — Weighted-

Inventory Balance Date PR

Oct. 1

Purchases (Returns&Allow&Discounts)

Units Unit Cost Beginning inventory

Sales (at cost)

Total Cost Units

Unit Cost

Total Cost

85 @ $5.00 = $ 425.00

(a)

(b)  (a)

(b)

Total Units

Average Cost/ Unit

Total Cost

Inventory Balance Calculations

$5.00 $ 425.00 85

3 P1

4 G1

100 @ $7.50 = $ 750.00

15 P1

75 @

185

$6.35 $ 1,175.00

165

$6.21 $ 1,025.00

$6.21 $ 559.25

290

$7.27 $ 2,109.25

140

$7.28 $ 1,018.75

140

$7.06 $ 987.75

$6.21 = $ 465.75

200 @ $7.75 = $1,550.0 0

18 S1

23 G1

100 @ 7.50 =

–20 @ $7.50 = –$150.00

9 S1

$ 425.00

150 @

$7.27 = $ 1,090.50

–$ 31.00

750.00 $ 1,175.00 185 $ 1,175.00 –20 @ 7.50 = – 150.00 165 $ 1,025.00 165 $ 1,025.00 –75 @ 6.21 = – 465.75 90 $ 559.25 90 $ 559.25 200 @ 7.75 = 1,550.00 290 $ 2,109.25 290 $ 2,109.25 –150 @ 7.27 = – 1,090.50 140 $ 1,018.75 140 $ 1,018.75 0 – 31.00 140 $ 987.75 140 $ 185

Ethics Challenge EC AII–1 1. Independence in fact means that the auditor maintains an objective point of view of the client. Independence in appearance means that a third party viewing the relationship between the auditor/client would have no reason to believe that the auditor is not independent of the client. 2. While auditors are hired by their clients to perform audits, auditors also have a responsibility to the public. In our society auditors provide credibility to financial reporting situations by offering professional audit opinions about companies‘ financial statements. While it is sometimes difficult to be responsible to clients as well as the public, auditors must maintain their independence to keep the public trust. 3. Since Gurinder Patel is a sole practitioner, it is questionable whether he can consult on the client‘s accounting system and then remain objective in subsequent years when he performs the audit of the company. Large firms often separate consulting and auditing engagements for the same client by having staff stationed in two different geographic branches of the firm do the work. Or a large local firm might be able to perform consulting and auditing for the same client by assigning different personnel to the two jobs. In this scenario Gurinder would need to do both jobs himself, making it difficult to maintain independence in fact and appearance.

Focus on Financial Statements FFS AII-1 Single-step income statement: MANGO DESIGNS Income Statement For Month Ended June 30, 2023 Revenues: Net sales ............................................................... Expenses: Cost of goods sold ............................................... Sales salaries expense ........................................ Office supplies expense ...................................... Advertising expense ............................................. Depreciation expense, store equipment .............. Interest expense ................................................... Total expenses ...................................................... Profit ..........................................................................

$212,1881 2

$134,900 42,000 13,200 550 550 120

191,320 $ 20,868

Calculations: 1. 9,100 + 17,900 + 38,400 + 2,900 + 22,700 – 182 + 121,370 = 212,188 2. 6,800 + 13,400 + 28,800 + 2,175 + 17,025 + 66,700 = 134,900

MANGO DESIGNS Statement of Changes in Equity For Month Ended June 30, 2023 Tom Mandalay, capital, June 1 ............ Add: Owner investment ..................... Profit ........................................ Tom Mandalay, capital, June 30 ..........

-075,000 20,868 $95,868

3. FFS AII-1 (concluded)

MANGO DESIGNS Balance Sheet June 30, 2023 Assets Current assets: Cash ................................................................................. Accounts receivable ....................................................... Merchandise inventory ................................................... Office supplies ............................................................... Total current assets ....................................................... Property, plant and equipment: Store equipment .............................................................. Less: Accumulated depreciation ............................. Total assets ........................................................................... Liabilities Current liabilities: Accounts payable ........................................................... Interest payable ............................................................... Total current liabilities .................................................... Non-current liabilities: Notes payable .................................................................. Total liabilities ....................................................................

$160,0781 64,0002 26,6603 4,8004 $255,538 $32,000 550

31,450 $286,988

$141,000 120

$141,120 50,000

Equity Tom Mandalay, capital ................................................... Total liabilities and equity .................................................... Calculations: 1. 75,000 + 50,000 + 8,918 + 121,370 + 17,900 – 550 – 70,560 – 42,000 = 160,078 2. 9,100 + 17,900 + 38,400 + 2,900 + 22,700 – 9,100 – 17,900 = 64,000 3. –6,800 – 13,400 – 28,800 – 2,175 – 17,025 – 66,700 + 72,000 + 91,000 – 1,440 = 26,660 4. 18,000 – 13,200 = 4,800 5. 72,000 + 18,000 + 91,000 + 32,000 – 72,000 = 141,000

Analysis Component Mango Designs operates under a perpetual inventory system because the special journals include the Cost of Goods Sold account.

$191,120 95,868 $286,988

FFS AII-2 Indigo‘s March 28, 2020, balance sheet included Accounts Receivable of $7,640 (thousand), about 0.87% of total assets (calculated as $7,640/$882,970 x 100). Although these accounts receivable are not significant in total, they represent amounts owed by various customers to Indigo so it would help decision makers better monitor collection if the details of individual balances owed, by whom, and dates due were maintained in an accounts receivable subledger. The same logic would apply regarding the March 28, 2020, Accounts Payable and accrued liabilities balance of $164,294 (thousand). Since these accounts payable are significant in total and represent amounts owed to various creditors, it would help decision makers better manage payments if the details of individual balances owed, by whom, credit terms, and dates due were maintained in an accounts payable subledger. The March 28, 2020, balance sheet shows inventories of $241,812 (thousand), about 27.39% of total assets (calculated as $241,812/$882,970 x 100). Because Indigo sells books and merchandise, the inventory balance is significant and represents a large variety of items. It would help decision makers better manage inventory if the details of unit costs, units sold, units purchased, and units on hand along with any returns and/or allowances were detailed in an inventory subledger.

Critical Thinking Mini Case CT AII-1 Note to instructor: Student responses will vary therefore the answer here is only suggested and not inclusive of all possibilities; it is presented in point form for brevity. Problem(s): — Detailed information regarding mining assets is required but is not readily available given the current accounting information system Goal(s)*: — To ensure the accounting information system is maintained in such a way that reasonable internal requests for information can be fulfilled efficiently and effectively Assumption(s)/Principle(s): — That the computer system in place at Northern Outposts can accommodate special purpose reports — The disclosure principle requires that anything of significance be reported Facts: — as presented Conclusion(s)/Consequence(s): — Internal/external reporting requirements need to be identified and matched against what is currently being provided by the accounting information system. — Gaps need to be identified and resolved to ensure that decisions dependent on such reports can be done efficiently and effectively

*The goal is highly dependent on ―perspective.‖ Instructor note: Students who might be knowledgeable about depreciation methods might raise the point that the different types of plant and equipment assets should be maintained in different accounts for the application of potentially different rates and/or methods of depreciation.

COMPREHENSIVE PROBLEMS Comprehensive Problem AII-1—Alpine Company (150 minutes) SALES JOURNAL Date 2023 May

Account Debited 2 16 22 26

Essex Company Essex Company Oscar Services Deaver Corp. Totals

Invoice Number

8785 8786 8787 8788

   

A/R Dr. Sales Cr.

Page 2 COGS Dr. Merch. Inv. Cr

6,050 3,700 7,100 12,500 29,350 (106/413)

3,640 2,220 4,260 7,500 17,620 (502/119)

CASH RECEIPTS JOURNAL Date 2023 May 5 9 11 15 30 31

Account Credited Nabors Inc.* Store Supplies Essex Company Sales Oscar Services Sales Totals

Explanation

Sale of Apr. 28 Sold store supplies Sale of May 2 Cash sales, May 1-15 Sale of May 22 Cash sales, May 16-31

 125 

*4,730 – 130 = 4,600; 4,600 x 2% = 92 discount



Cash Debit 4,508 325 5,929 61,000 6,958 61,000 139,720 (101)

Sales Disc. Debit

Accts. Rec. Credit

92*

4,600

121

6,050

142

7,100

355 (414)

17,750 (106)

Sales Credit

Page 2 Other COGS Dr. Accts. Merch. Inv. Credit Credit 325

61,000 61,000 122,000 (413)

36,600 325 (X)

36,600 73,200 (502/119)

Comprehensive Problem AII-1—Alpine Company (continued) PURCHASES JOURNAL

Date 2023 May

Account Credited 4 Store Supp./Thompson Supp. 10 Off. Equip./Thompson Supp. 11 Gale Inc. 17 Chandler Corp. 24 Store Supp./Thompson Supp. 25 Parkay Products Totals

Date of Invoice

Terms

May 04 May 10 May 10 May 14 May 24 May 23

n/10 EOM n/10 EOM 2/10, n/30 2/10, n/60 n/10 EOM 2/10, n/30

125/ 163/   125/ 

Accounts Payable Credit 37,765 4,200 9,100 14,700 10,110 3,100 78,975 (201)

Page 2 Merchandise Office Other Inventory Supplies Accounts Debit Debit Debit 37,100 9,100 14,700 9,200 3,100 73,200 (119)

CASH DISBURSEMENTS JOURNAL Ch. No.

Date 2023 May 1 3410

Payee S&M Mgmt. Co.

8 3411 15 3412

Parkay Products Payroll

19 3413 23 3414 26 3415 29 3416 30 3417

Gale Inc. Chandler Corp. Trinity Power Clint Barry Payroll Totals

*7,100 – 350 = 6,750; 6,750 x 2% = 135.

Account Debited

Rent Expense, Selling Space Rent Expense, Office Space Parkay Products Sales Salaries Expense Office Salaries Expense Gale, Inc. Chandler Corp. Utilities Expense C. Barry, Withdrawal Sales Salaries Expense Office Salaries Expense

642 641  621 620   690 302 621 620

Cash Credit

3,700 6,615 9,100 8,918 14,406 1,350 7,000 9,100 60,189 (101)

Merchandise Inventory Credit

580 4,200

280

630

365 5,410 (124) (X) Page 2 Other Accts. Accts. Payable Debit Debit 2,960 740

135

6,750* 5,500 3,600

182 294

611 (119)

9,100 14,700 1,350 7,000 5,500 3,600 30,250 (X)

30,550 (201)

Comprehensive Problem AII-1—Alpine Company (continued) Date 2023 May

GENERAL JOURNAL Page 2 Account Titles and Explanations 2

Debit

Sales Returns and Allowances ............................ Accounts Receivable—Nabors Inc. .............

415 106/

130

Accounts Payable—Parkay Products .................. Merchandise Inventory .................................

201/ 119

350

Accounts Payable—Thompson Supply Co. ........ Office Equipment ..........................................

201/ 163

850

Insurance Expense ............................................... Prepaid Insurance .........................................

637 128

553

Store Supplies Expense ....................................... Store Supplies ...............................................

651 125

700

Office Supplies Expense ...................................... Office Supplies ..............................................

650 124

291

Depreciation Expense, Store Equipment ............ Accumulated Deprec., Store Equipment .....

613 166

567

Depreciation Expense, Office Equipment ........... Accumulated Deprec., Office Equipment ....

612 164

329

Cost of Goods Sold .............................................. Merchandise Inventory .................................

502 119

10,499

Credit

130

350

850

Adjusting entries: May

553

700

291

567

329

10,499

Comprehensive Problem AII-1—Alpine Company (continued) Closing entries:

Page 4

2023 May

Sales ................................................................... Income Summary ...................................

413 901

151,350

Income Summary ............................................... Sales Discounts ......................................... Sales Returns and Allowances ................. Cost of Goods Sold .................................... Deprec. Expense, Office Equipment ......... Deprec. Expense, Store Equipment .......... Office Salaries Expense............................. Sales Salaries Expense ............................. Insurance Expense .................................... Rent Expense, Office Space ...................... Rent Expense, Selling Space .................... Office Supplies Expense ........................... Store Supplies Expense ............................ Utilities Expense ........................................

901 414 415 502 612 613 620 621 637 641 642 650 651 690

127,494

Income Summary ............................................... Clint Barry, Capital .....................................

901 301

23,856

Clint Barry, Capital............................................. Clint Barry, Withdrawals ............................

301 302

7,000

151,350

355 130 101,319 329 567 7,200 11,000 553 740 2,960 291 700 1,350

23,856

7,000

Comprehensive Problem AII-1—Alpine Company (continued) GENERAL LEDGER

Date 2023 Apr. 30 Balance May 31 31

Date 2023 Apr. 30 Balance May 2 31 31

Date 2023 Apr. 30 Balance May 3 31 31 31 31 31

Date 2023 Apr. 30 Balance May 31 31

Date 2023 Apr. 30 Balance May 4 9 24 31

Cash Explanation

Debit

CR2 CD2

139,720

Accounts Receivable Explanation PR

G3 S2 CR2 Merchandise Inventory Explanation PR

G3 S2 P2 CR2 CD2 G3 Office Supplies Explanation

P2 G3 Store Supplies Explanation

P2 CR2 P2 G3

Credit

Acct. No. 101 Balance

60,189

Debit

Acct. No. 106 Credit Balance

130 29,350 17,750

Debit

Credit

73,200 73,200 611 10,499

Credit

291

Credit

220,080 219,730 202,110 275,310 202,110 201,499 191,000

Acct. No. 124 Balance

365

Debit

4,730 4,600 33,950 16,200

Acct. No. 119 Balance

350 17,620

Debit

50,247 189,967 129,778

430 795 504

Acct. No. 125 Balance

580 325 630 700

2,447 3,027 2,702 3,332 2,632

Comprehensive Problem AII-1—Alpine Company (continued) Prepaid Insurance

Acct. No. 128

Date 2023 Apr. 30 Balance May 31

Date 2023 Apr. 30 Balance May 10 12

Explanation

Debit

G3 Office Equipment Explanation

P2 G3

Debit

Date 2023 Apr. 30 Balance

22,470 26,670 25,820

Acct. No. 164 Credit Balance

329

Debit

3,318 2,765

Acct. No. 163 Balance

850

9,898 10,227

Acct. No. 165 Credit Balance 38,920

Accumulated Depreciation, Store Equipment Explanation PR Debit

Date 2023 Apr. 30 Balance May 31

Date 2023 Apr. 30 Balance May 3 12 31 31

Credit

4,200

G3 Store Equipment Explanation

Balance

553

Accumulated Depreciation, Office Equipment Explanation PR Debit

Date 2023 Apr. 30 Balance May 31

Credit

G3 Accounts Payable Explanation

G3 G3 P2 CD2

Acct. No. 166 Credit Balance

567

Debit

Acct. No. 201 Credit Balance

350 850 78,975 30,550

17,556 18,123

7,100 6,750 5,900 84,875 54,325

Comprehensive Problem AII-1—Alpine Company (continued) Date 2023 Apr. 30 Balance May 31 31

Date 2023 May 29 31

Date 2023 May 31 31 31

Date 2023 May 31 31

Date 2023 May

Clint Barry, Capital Explanation

G4 G4 Clint Barry, Withdrawals Explanation PR CD2 G4 Sales Explanation

PR S2 CR2 G4

Sales Discounts Explanation

PR CR2 G4

Sales Returns and Allowances Explanation PR 2 31

Date 2023 May 31 31 31 31

G3 G4 Cost of Goods Sold Explanation

Debit

Acct. No. 301 Credit Balance

23,856 7,000

Debit

Credit

Acct. No. 302 Balance

7,000 7,000

Debit

Credit

151,350

355

130

Debit

S2 CR2 G3 G4

17,620 73,200 10,499

355 0

Acct. No. 415 Credit Balance

130

29,350 151,350 0

Acct. No. 414 Credit Balance

355

Debit

7,000 0

Acct. No. 413 Balance

29,350 122,000

Debit

308,088 331,944 324,944

130 0

Acct. No. 502 Credit Balance

101,319

17,620 90,820 101,319 0

Comprehensive Problem AII-1—Alpine Company (continued) Date 2023 May 31 31

Date 2023 May 31 31

Date 2023 May 15 30 31

Date 2023 May 31 31

Date 2023 May

Depreciation Expense, Office Equipment Explanation PR Debit G3 G4

Office Salaries Expense Explanation PR CD2 CD2 G4 Sales Salaries Expense Explanation PR CD2 CD2 G4 Insurance Expense Explanation

567

Debit

7,200

Rent Expense, Selling Space Explanation PR

Office Supplies Expense Explanation PR

740

740 0

Acct. No. 642 Credit Balance

2,960 2,960

Debit

553 0

Acct. No. 641 Credit Balance

740

Debit

5,500 11,000 0

Acct. No. 637 Credit Balance

553

Debit

3,600 7,200 0

Acct. No. 621 Balance

11,000

553

CD2 G4

Credit

5,500 5,500

G3 G4

567 0

Acct. No. 620 Credit Balance

3,600 3,600

Debit

329 0

Acct. No. 613 Credit Balance

567

Debit

1 CD2 31 G4 Comprehensive Problem AII-1—Alpine Company (continued) Date

329

Rent Expense, Office Space Explanation PR 1 31

329

Depreciation Expense, Store Equipment Explanation PR Debit G3 G4

Acct. No. 612 Credit Balance

2,960 0

Acct. No. 650 Credit Balance

2023 May 31 31

Date 2023 May 31 31

Date 2023 May 26 31

Date 2023 May 31 31 31

G3 G4 Store Supplies Expense Explanation PR G3 G4 Utilities Expense Explanation

PR CD2 G4

Income Summary Explanation

291 291

Debit

Acct. No. 651 Credit Balance

700 700

Debit

Credit

1,350

Debit

G4 G4 G4

127,494 23,856

Credit

700 0

Acct. No. 690 Balance

1,350

291 0

1,350 0

Acct. No. 901 Balance

151,350

151,350 23,856 0

ACCOUNTS RECEIVABLE SUBLEDGER

Date 2023 May 26

Date 2023 May

Deaver Corp. Explanation

Essex Company Explanation 2 11 16

Debit

12,500

Debit

S2 CR2 S2

Credit

12,500

Credit

6,050 6,050 3,700

Balance

Balance 6,050 0 3,700

Comprehensive Problem AII-1—Alpine Company (continued) Date 2023 Apr. 30 Balance May 2 5

Date 2023 May 22 30

Nabors Inc. Explanation

Debit

G3 CR2 Oscar Services Explanation

PR S2 CR2

Credit

130 4,600

Debit

Credit

7,100 7,100

Balance 4,730 4,600 0

Balance 7,100 0

ACCOUNTS PAYABLE SUBLEDGER

Date 2023 May 17 23

Date 2023 May 11 19

Date 2023 Apr. 30 Balance May 3 8 25

Date 2023 May

Chandler Corp. Explanation

Gale Inc. Explanation

Debit

P2 CD2

14,700

Debit

P2 CD2 Parkay Products Explanation

G3 CD2 P2 Thompson Supply Co. Explanation PR

4 10 12 24

P2 P2 G3 P2

Credit 14,700

Credit 9,100

9,100

Debit

Credit

350 6,750 3,100

Debit

Credit 37,765 4,200

850 10,110

Balance 14,700 0

Balance 9,100 0

Balance 7,100 6,750 0 3,100

Balance 37,765 41,965 41,115 51,225

Comprehensive Problem AII-1—Alpine Company (continued) ALPINE COMPANY Work Sheet For Month Ended May 31, 2023

Unadjusted Trial Balance Debit Credit

Adjustments Debit Credit

Balance Sheet and Stmt. of Income Changes in Statement Equity Debit Credit Debit Credit

Cash ................................................................................... 129,778 129,778 Accounts receivable ......................................................... 16,200 16,200 Merchandise inventory ..................................................... 201,499 (f) 10,499 191,000 Office supplies .................................................................. 795 (c) 291 504 Store supplies ................................................................... 3,332 (b) 700 2,632 Prepaid insurance ............................................................. 3,318 (a) 553 2,765 Office equipment..………………….. 25,820 25,820 Accumulated Deprec., office equip 9,898 (e) 329 10,227 Store equipment................................................................ 38,920 38,920 Accumulated Deprec., store equip. 17,556 (d) 567 18,123 Accounts payable ............................................................. 54,325 54,325 Clint Barry, Capital............................................................ 308,088 308,088 Clint Barry, Withdrawals .................................................. 7,000 7,000 Sales .................................................................................. 151,350 151,350 Sales discounts................................................................. 355 355 Sales returns and allowances .......................................... 130 130 Cost of goods sold ........................................................... 90,820 (f) 10,499 101,319 Deprec. expense, office equipment (e) 329 329 Deprec. expense, store equipment (d) 567 567 Office salaries expense .................................................... 7,200 7,200 Sales salaries expense ..................................................... 11,000 11,000 Insurance expense ............................................................ (a) 553 553 Rent expense, office space .............................................. 740 740 Rent expense, selling space ............................................ 2,960 2,960 Office supplies expense ...... ............................................ (c) 291 291 Store supplies expense .................................................... (b) 700 700 Utilities expense ............................................................... 1,350 1,350 Totals .............................................................................. 541,217 541,217 12,939 12,939 127,494 151,350 414,619 390,763 Profit .................................................................................. 23,856 23,856 Totals .............................................................................. 151,350 151,350 414,619 414,619

Comprehensive Problem AII-1—Alpine Company (continued) ALPINE COMPANY Income Statement For Month Ended May 31, 2023 Revenue: Sales ..................................................................... Less: Sales discounts ................................... Sales returns and allowances ............. Net sales ............................................................... Cost of goods sold ..................................................... Gross profit on sales ................................................. Operating expenses: Selling expenses: Sales salaries expense .................................. Rent expense, selling space .......................... Store supplies expense ................................. Depreciation expense, store equipment ........ Total selling expenses ................................... General and administrative expenses: Office salaries expense................................... Utilities expense ............................................. Rent expense, office space ........................... Insurance expense ......................................... Depreciation expense, office equipment ....... Office supplies expense ................................ Total general and administrative expenses... Total operating expenses ..................................... Profit ..........................................................................

$151,350 $

355 130

485 $150,865 101,319 $ 49,546

$11,000 2,960 700 567 $ 15,227 $ 7,200 1,350 740 553 329 291 10,463 25,690 $ 23,856

Comprehensive Problem AII-1— Alpine Company (continued) ALPINE COMPANY Statement of Changes in Equity For Month Ended May 31, 2023 Clint Barry, Capital, April 30 ................ Add: Profit ........................................... Total ..................................................... Less: Withdrawals ............................... Clint Barry, Capital, May 31 .................

$308,088 23,856 $331,944 7,000 $324,944

ALPINE COMPANY Balance Sheet May 31, 2023 Assets Current assets: Cash ................................................................................. Accounts receivable ....................................................... Merchandise inventory ................................................... Office supplies ............................................................... Store supplies ................................................................ Prepaid insurance .......................................................... Total current assets ....................................................... Property, plant and equipment: Office equipment ....................................................... Less: Accumulated depreciation ......................... Store equipment ........................................................ Less: Accumulated depreciation ......................... Total property, plant and equipment ............................ Total assets ...........................................................................

$129,778 16,200 191,000 504 2,632 2,765 $342,879 $25,820 10,227 $38,920 18,123

$ 15,593 20,797 36,390 $379,269

Liabilities Current liabilities: Accounts payable ...........................................................

$ 54,325

Equity Clint Barry, Capital ......................................................... Total liabilities and equity ....................................................

324,944 $379,269

Comprehensive Problem AII-1—Alpine Company (concluded) ALPINE COMPANY Post-Closing Trial Balance May 31, 2023 Account Cash ............................................................................... Accounts receivable ...................................................... Merchandise inventory ................................................. Office supplies .............................................................. Store supplies................................................................ Prepaid insurance ......................................................... Office equipment ........................................................... Accumulated depreciation, office equipment ............. Store equipment ............................................................ Accumulated depreciation, store equipment ............. Accounts payable ......................................................... Clint Barry, Capital ........................................................ Totals..............................................................................

Debit $129,778 16,200 191,000 504 2,632 2,765 25,820

$ 10,227 38,920

$407,619

ALPINE COMPANY Schedule of Accounts Receivable May 31, 2023 Deaver Corp. ............................................... Essex Company ........................................ Total accounts receivable .........................

$12,500 3,700 $16,200

ALPINE COMPANY Schedule of Accounts Payable May 31, 2023 Parkay Products ........................................ Thompson Supply Co. .............................. Total accounts payable .............................

Credit

$ 3,100 51,225 $54,325

18,123 54,325 324,944 $407,619

Comprehensive Problem AII-2—Alpine Company (150 minutes) SALES JOURNAL Date 2023 May

Account Debited 2 16 22 26

Essex Company Essex Company Oscar Services Deaver Corp. Total

Invoice Number

8785 8786 8787 8788

   

Page 2 A/R Dr. Sales Cr. 6,050 3,700 7,100 12,500 29,350 (106/413)

CASH RECEIPTS JOURNAL Date 2023 May 5 9 11 15 30 31

Account Credited Nabors Inc. Store Supplies Essex Company Sales Oscar Services Sales Totals

Explanation

Sale of Apr. 28 Sold store supplies Sale of May 2 Cash sales, May 1-15 Sale of May 22 Cash sales, May 16-31

 125  

Page 2 Cash Debit

4,508 325 5,929 61,000 6,958 61,000 139,720 (101)

Sales Disc. Debit

Accts. Rec. Credit

4,600

121

6,050

142

7,100

355 (414)

17,750 (106)

Sales Credit

Other Accts. Credit 325

61,000 61,000 122,000 (413)

325 (X)

Comprehensive Problem AII-2—Alpine Company (continued) PURCHASES JOURNAL

Date 2023 May 4 10 11 17 24 25

Account Credited Store Supp./Thompson Supp. Off. Equip./Thompson Supp. Gale Inc. Chandler Corp. Store Supp./Thompson Supp. Parkay Products Totals

Date of Invoice

Terms

May 04 May 10 May 10 May 14 May 24 May 23

n/10 EOM n/10 EOM 2/10, n/30 2/10, n/60 n/10 EOM 2/10, n/30

125/ 163/   125/ 

Accounts Payable Credit

Purchases Debit

37,765 4,200 9,100 14,700 10,110 3,100 78,975 (201)

37,100 9,100 14,700 9,200 3,100 73,200 (505)

CASH DISBURSEMENTS JOURNAL Ch. Date No. 2023 May 1 3410

Payee S&M Mgmt. Co.

8 3411 15 3412

Parkay Products Payroll

19 23 26 29 30

Gale Inc. Chandler Corp. Trinity Power Clint Barry Payroll

3413 3414 3415 3416 3417

Totals

Account Debited

Rent Expense, Selling Space Rent Expense, Office Space Parkay Products Sales Salaries Expense Office Salaries Expense Gale, Inc. Chandler Corp. Utilities Expense Clint Barry, Withdrawal Sales Salaries Expense Office Salaries Expense

642 641  621 620   690 302 621 620

Cash Credit 3,700 6,615 9,100 8,918 14,406 1,350 7,000 9,100 60,189 (101)

Page 2 Office Other Supplies Accounts Debit Debit

Purchase Discount Credit

580 4,200

280

630

365 (124)

5,410 (X)

Page 2 Other Accts. Accts. Payable Debit Debit 2,960 740

135

6,750 5,500 3,600

182 294

611 (506)

9,100 14,700 1,350 7,000 5,500 3,600 30,250 (X)

30,550 (201)

Comprehensive Problem AII-2—Alpine Company (continued) Date 2023 May

GENERAL JOURNAL Account Titles and Explanations 2

Debit

Sales Returns and Allowances ............................ Accounts Receivable—Nabors Inc. .............

415 106/

130

Accounts Payable—Parkay Products .................. Purchase Returns and Allowances ..............

201/ 507

350

Accounts Payable—Thompson Supply Co. ........ Office Equipment ..........................................

201/ 163

850

Insurance Expense ............................................... Prepaid Insurance .........................................

637 128

553

Store Supplies Expense ....................................... Store Supplies ...............................................

651 125

700

Office Supplies Expense ...................................... Office Supplies ..............................................

650 124

291

Depreciation Expense, Store Equipment ............ Accumulated Deprec., Store Equipment .....

613 166

567

Depreciation Expense, Office Equipment ........... Accumulated Deprec., Office Equipment ....

612 164

329

Page 3 Credit

130

350

850

Adjusting entries: May

553

700

291

567

329

Comprehensive Problem AII-2—Alpine Company (continued) Closing entries: 2023 May

Page 4

Merchandise Inventory ...................................... Sales ................................................................... Purchase Discounts .......................................... Purchase Returns and Allowances .................. Income Summary .......................................

119 413 506 507 901

191,000 151,350 611 350

Income Summary ............................................... Merchandise Inventory .............................. Sales Discounts ......................................... Sales Returns and Allowances ................. Purchases ................................................... Deprec. Expense, Office Equipment ......... Deprec. Expense, Store Equipment .......... Office Salaries Expense............................. Sales Salaries Expense ............................. Insurance Expense .................................... Rent Expense, Office Space ...................... Rent Expense, Selling Space .................... Office Supplies Expense ........................... Store Supplies Expense ............................ Utilities Expense ........................................

901 119 414 415 505 612 613 620 621 637 641 642 650 651 690

319,455

Income Summary ............................................... Clint Barry, Capital .....................................

901 301

23,856

Clint Barry, Capital............................................. Clint Barry, Withdrawals ............................

301 302

7,000

343,311

220,080 355 130 73,200 329 567 7,200 11,000 553 740 2,960 291 700 1,350

23,856

7,000

Comprehensive Problem AII-2—Alpine Company (continued) GENERAL LEDGER

Date 2023 Apr. 30 Balance May 31 31

Date 2023 Apr. 30 Balance May 2 31 31

Date 2023 Apr. 30 Balance May 31 31

Date 2023 Apr. 30 Balance May 4 9 24 31

Cash Explanation

Debit

CR2 CD2

139,720

Accounts Receivable Explanation PR

G3 S2 CR2 Merchandise Inventory Explanation PR

Credit

Acct. No. 101 Balance

60,189

Debit

Acct. No. 106 Credit Balance

130 29,350 17,750

Debit

50,247 189,967 129,778

Credit

4,730 4,600 33,950 16,200

Acct. No. 119 Balance 220,080

G4 G4 Office Supplies Explanation

P2 G3 Store Supplies Explanation

P2 CR2 P2 G3

220,080 191,000

Debit

191,000 Acct. No. 124 Credit Balance

365 291

Debit

Credit

430 795 504

Acct. No. 125 Balance

580 325 630 700

2,447 3,027 2,702 3,332 2,632

Comprehensive Problem AII-2—Alpine Company (continued) Date 2023 Apr. 30 Balance May 31

Date 2023 Apr. 30 Balance May 10 12

Prepaid Insurance Explanation

Debit

G3 Office Equipment Explanation

P2 G3

553

Debit

Store Equipment Explanation

850

Debit

Credit

Acct. No. 164 Balance

329

Credit

22,470 26,670 25,820

9,898 10,227

Acct. No. 165 Balance 38,920

Accumulated Depreciation, Store Equipment Date Explanation PR Debit 2023 Apr. 30 Balance May 31 G3

Date 2023 Apr. 30 Balance May 3 12 31 31

3,318 2,765

Acct. No. 163 Credit Balance

4,200

Accumulated Depreciation, Office Equipment Date Explanation PR Debit 2023 Apr. 30 Balance May 31 G3

Date 2023 Apr. 30 Balance

Acct. No. 128 Credit Balance

Accounts Payable Explanation

G3 G3 P2 CD2

Debit

Credit

Acct. No. 166 Balance

567

Credit

Acct. No. 201 Balance

350 850 78,975 30,550

17,556 18,123

7,100 6,750 5,900 84,875 54,325

Comprehensive Problem AII-2—Alpine Company (continued) Date 2023 Apr. 30 Balance May 31 31

Date 2023 May 29 31

Date 2023 May 31 31 31

Date 2023 May 31 31

Date 2023 May

Clint Barry, Capital Explanation

G4 G4

Clint Barry, Withdrawals Explanation

PR CD2 G4

Sales Explanation

PR S2 CR2 G4

Sales Discounts Explanation

PR CR2 G4

Sales Returns and Allowances Explanation PR 2 31

Date 2023 May 31 31

G3 G4 Purchases Explanation

Debit

Acct. No. 301 Credit Balance

23,856 7,000

Debit

Acct. No. 302 Credit Balance

7,000 7,000

Debit

151,350

355

130

Debit

P2 G4

73,200

355 0

Acct. No. 415 Credit Balance

130

29,350 151,350 0

Acct. No. 414 Credit Balance

355

Debit

7,000 0

Acct. No. 413 Credit Balance 29,350 122,000

Debit

308,088 331,944 324,944

130 0

Acct. No. 505 Credit Balance

73,200

73,200 0

Comprehensive Problem AII-2—Alpine Company (continued) Date 2023 May 31 31

Date 2023 May

Purchase Discounts Explanation PR CD2 G4 Purchase Returns and Allowances Explanation PR

3 31

Date 2023 May 31 31

Date 2023 May 15 30 31

Date 2023 May 31 31

G3 G4

Debit

611 611

Debit

Office Salaries Expense Explanation PR CD2 CD2 G4 Sales Salaries Expense Explanation PR

Insurance Expense Explanation

Credit

329

567

Credit

7,200

CD2 CD2 G4

5,500 5,500

Debit

G3 G4

553

567 0

Acct. No. 620 Balance

3,600 3,600

Debit

329 0

Acct. No. 613 Balance

567

Debit

350 0

Acct. No. 612 Balance

329

Credit

611 0

Acct. No. 507 Balance

350

Depreciation Expense, Store Equipment Explanation PR Debit G3 G4

Credit

350

Depreciation Expense, Office Equipment Explanation PR Debit G3 G4

Acct. No. 506 Credit Balance

3,600 7,200 0

Acct. No. 621 Credit Balance

11,000

5,500 11,000 0

Acct. No. 637 Credit Balance

553

553 0

Comprehensive Problem AII-2—Alpine Company (continued) Rent Expense, Office Space

Acct. No. 641

Date 2023 May

Explanation 1 31

Debit

CD2 G4

740

Rent Expense, Selling Space Explanation PR 1 31

Date 2023 May 31 31

Date 2023 May 26 31

Date 2023 May 31 31 31

CD2 G4 Office Supplies Expense Explanation PR G3 G4 Store Supplies Expense Explanation PR G3 G4 Utilities Expense Explanation

PR CD2 G4

Income Summary Explanation

PR G4 G4 G4

Debit

Credit

Balance

740

740 0

Acct. No. 642 Credit Balance

2,960 2,960

Debit

Acct. No. 650 Credit Balance

291 291

Debit

Credit

700

1,350

1,350 0

Acct. No. 901 Credit Balance 343,311

319,455 23,856

700 0

Acct. No. 690 Credit Balance

1,350

Debit

291 0

Acct. No. 651 Balance

700

Debit

2,960 0

343,311 23,856 0

Comprehensive Problem AII-2—Alpine Company (continued) ACCOUNTS RECEIVABLE SUBLEDGER

Date 2023 May 26

Date 2023 May

Deaver Corp. Explanation

Essex Company Explanation 2 11 16

Date 2023 Apr. 30 Balance May 2 5

Date 2023 May 22 30

Debit

12,500

Debit

S2 CR2 S2 Nabors Inc. Explanation

PR S2 CR2

Credit

6,050 3,700

Debit

Credit

130 4,600

Debit

Balance 12,500

6,050

G3 CR2 Oscar Services Explanation

Credit

7,100 7,100

Balance 6,050 0 3,700

Balance 4,730 4,600 0

Balance 7,100 0

Comprehensive Problem AII-2—Alpine Company (continued) ACCOUNTS PAYABLE SUBLEDGER

Date 2023 May 17 23

Date 2023 May 11 19

Date 2023 Apr. 30 Balance May 3 8 25

Date 2023 May

Chandler Corp. Explanation

Gale Inc. Explanation

Debit

P2 CD2

14,700

Debit

P2 CD2 Parkay Products Explanation

G3 CD2 P2 Thompson Supply Co. Explanation PR

4 10 12 24

P2 P2 G3 P2

Credit 14,700

Credit 9,100

9,100

Debit

Credit

350 6,750 3,100

Debit

Credit 37,765 4,200

850 10,110

Balance 14,700 0

Balance 9,100 0

Balance 7,100 6,750 0 3,100

Balance 37,765 41,965 41,115 51,225

Comprehensive Problem AII-2—Alpine Company (continued) ALPINE COMPANY Work Sheet For Month Ended May 31, 2023 Balance Sheet and Stmt. of Income Changes Trial Balance Adjustments Statement in Equity Debit Credit Debit Credit Debit Credit Debit Credit Cash ................................................... 129,778 Accounts receivable ......................... 16,200 Merchandise inventory ..................... 220,080 Office supplies .................................. 795 Store supplies ................................... 3,332

129,778 16,200 220,080 191,000 191,000 (c) 291 504 (b) 700 2,632

Prepaid insurance ............................. 3,318 (a) 553 2,765 Office equipment .............................. 25,820 25,820 Accumulated Deprec., office equip. 9,898 (e) 329 10,227 Store equipment................................ 38,920 38,920 Accumulated Deprec., store equip. 17,556 (d) 567 18,123 Accounts payable ............................. 54,325 54,325 Clint Barry, Capital ............................ 308,088 308,088 Clint Barry, Withdrawals .................. 7,000 7,000 Sales .................................................. 151,350 151,350 Sales discounts................................. 355 355 Sales returns and allowances .......... 130 130 Purchases.......................................... 73,200 73,200 Purchase discounts .......................... 611 611 Purchase returns and allowances 350 350 Deprec. expense, office equipment (e) 329 329 Deprec. expense, store equipment (d) 567 567 Office salaries expense .................... 7,200 7,200 Sales salaries expense ..................... 11,000 11,000 Insurance expense ............................ (a) 553 553 Rent expense, office space .............. 740 740 Rent expense, selling space ............ 2,960 2,960 Office supplies expense ...... ............ (c) 291 291 Store supplies expense .................... (b) 700 700 Utilities expense ............................... 1,350 1,350 Totals .............................................. 542,178 542,178 2,440 2,440 319,455 343,311 414,619 390,763 Profit .................................................. 23,856 23,856 Totals .............................................. 343,311 343,311 414,619 414,619

Comprehensive Problem AII-2—Alpine Company (continued) ALPINE COMPANY Income Statement For Month Ended May 31, 2023 Revenue: Sales ..................................................................... Less: Sales discounts .................................... Sales returns and allowances ............. Net sales ............................................................... Cost of goods sold: Merchandise inventory, April 30 .......................... Purchases .............................................................. Less: Purchase discounts ............................. Purchase returns and allowances ...... Cost of goods purchased ..................................... Goods available for sale ....................................... Merchandise inventory, May 31............................ Cost of goods sold ................................................ Gross profit on sales ................................................. Operating expenses: Selling expenses: Sales salaries expense .................................. Rent expense, selling space .......................... Store supplies expense ................................. Depreciation expense, store equipment ........ Total selling expenses ................................... General and administrative expenses: Office salaries expense................................... Utilities expense ............................................. Rent expense, office space ........................... Insurance expense ......................................... Depreciation expense, office equipment ....... Office supplies expense ................................ Total general and administrative expenses... Total operating expenses ..................................... Profit ..........................................................................

$151,350 $

355 130

485 $150,865

220,080 $73,200 $611 350

961 72,239 $292,319 191,000 101,319 $ 49,546

$11,000 2,960 700 567 $ 15,227 $ 7,200 1,350 740 553 329 291 10,463 25,690 $ 23,856

Comprehensive Problem AII-2—Alpine Company (continued) ALPINE COMPANY Statement of Changes in Equity For Month Ended May 31, 2023 Clint Barry, Capital, April 30. ............... Add: Profit ........................................... Total ..................................................... Less: Withdrawals ............................... Clint Barry, Capital, May 31 .................

$308,088 23,856 $331,944 7,000 $324,944

ALPINE COMPANY Balance Sheet May 31, 2023 Assets Current assets: Cash ................................................................................. Accounts receivable ....................................................... Merchandise inventory ................................................... Office supplies ............................................................... Store supplies ................................................................ Prepaid insurance .......................................................... Total current assets ....................................................... Property, plant and equipment: Office equipment ............................................................. Less: Accumulated depreciation ............................. Store equipment .............................................................. Less: Accumulated depreciation ............................. Total property, plant and equipment ............................ Total assets .........................................................................

$129,778 16,200 191,000 504 2,632 2,765 $342,879 $25,820 10,227 $38,920 18,123

$ 15,593 20,797 36,390 $379,269

Liabilities Current liabilities: Accounts payable .....................................................

$ 54,325

Equity Clint Barry, Capital ............................................................. Total liabilities and equity ....................................................

324,944 $379,269

Comprehensive Problem AII-2—Alpine Company (concluded) ALPINE COMPANY Post-Closing Trial Balance May 31, 2023 Account Cash ............................................................................... Accounts receivable ...................................................... Merchandise inventory ................................................. Office supplies .............................................................. Store supplies................................................................ Prepaid insurance ......................................................... Office equipment ........................................................... Accumulated depreciation, office equipment ............. Store equipment ............................................................ Accumulated depreciation, store equipment ............. Accounts payable ......................................................... Clint Barry, Capital ........................................................ Totals..............................................................................

Debit $129,778 16,200 191,000 504 2,632 2,765 25,820

$ 10,227 38,920

$407,619

$12,500 3,700 $16,200

Credit

$ 3,100 51,225 $54,325

18,123 54,325 324,944 $407,619