Solutions Manual For College Accounting, 13th Edition. John Ellis Price David Haddock Michael Farina by digitaldownload87

College Accounting, 13e John Ellis Price David Haddock Michael Farina (Solutions Manual All Chapters, 100% Original Verified, A+ Grade) All Chapters Solutions Manual Supplement files download link at the end of this file. CHAPTER 1 ACCOUNTING: THE LANGUAGE OF BUSINESS Chapter Opener: Thinking Critically A basic understanding of accounting would assist in the interpretation and analysis of financial statements released by a company like Google and would therefore make the financial position of the company more clear and a decision to purchase (or not purchase) its stock more straightforward. Fast Facts • Google’s mission is to organize the world’s information and make it universally accessible and useful. • “Googol” is the mathematical term for a 1 followed by 100 zeros. Google’s play on the term reflects the company’s mission to organize the immense amount of information available on the web. • Google’s interface can be customized into more than 100 languages. • Google’s culture is unlike any in corporate America—lava lamps and large rubber balls dot company headquarters and the company’s chef used to cook for the Grateful Dead. Google Inc. puts employees first when it comes to daily life in all of their offices. Managerial Implications: Thinking Critically Managers use financial information to make decisions about adding new products and services, offering current products and services, and choosing vendors. Discussion Questions Note to instructor: These questions are designed to check students’ understanding of new terms, concepts, and procedures presented in the chapter. 1. Owners and managers: evaluate operations. Suppliers: assess ability of a firm to pay debts. Banks: ability to repay loans. Tax authorities: determine a tax base. Governmental agencies: legal compliance. Employees: wage levels and profit-sharing plans. 2. Regulation of financial reporting by publicly owned corporations. 3. Sole proprietorship (owned by one person). Partnership (owned by two or more people). Corporation (can be owned by one person or many). 4. Measure business performance; separate entity. 5. Statements of Financial Accounting Standards. 6. SEC, AICPA, AAA. 7. Public, managerial, and governmental. 8. Auditing, tax, and management advisory services. 9. Advice on how to structure financial affairs in order to reduce taxes without violating tax laws. 10. Establish accounting policies, direct the accounting system, prepare and interpret financial statements, provide financial advice, prepare tax forms. 11. The Public Company Accounting Reform and Investor Protection Act of 2002 was passed in response to the wave of corporate accounting scandals starting with the demise of Enron Corporation in 2001, the arrest of top executives at WorldCom and Adelphia Communications Corporations, and ultimately, the demise of Arthur Andersen, an international public accounting firm. 12. The purpose of the Public Company Accounting Oversight Board is to oversee the accounting profession through its investigative and enforcement powers and to discipline corrupt accountants and auditors.

Chapter 1  1

CRITICAL THINKING PROBLEM 1.1 Student answers will vary. The student’s reasons for choosing one form of ownership over another are more important than the specific choice made. Sole proprietorship: Advantage—Ned would be his own boss and could direct the business as he wants. Disadvantages—Ned would be responsible for the debts and taxes of the business and may be limited in the amount of capital he could borrow to finance the business. Partnership: Advantage—Ned would have one or more partners to assist with business operations and to contribute capital. Disadvantages—Ned would have to share control of the business, as well as its profits. Ned could be liable for the debts of the partnership. Corporation: Advantages—The business would be a separate entity. Capital would be easier to raise and liability would be limited to the assets of the business. Disadvantages—A corporation is a more complicated form of ownership and is usually more expensive to form. There is also more government regulation and, consequently, more paperwork with a corporation.

2  Chapter 1

SOLUTIONS TO BUSINESS CONNECTIONS Managerial Focus: 1. Financial information is used to evaluate performance and make decisions about a business or a nonprofit organization. 2. The manager makes financial decisions based upon the financial information provided by the accountant. 3. Every business needs an efficient accounting system which accumulates financial data, classifies and summarizes the information. Without an accounting system, suppliers, lenders, investors, and governmental tax authorities would not be able to accurately make decisions based on the financial information of the company. 4. Analyze financial statements and review accounting procedures for internal controls. 5. Keep your employees, creditors, and investors happy. Yes, financial information is a tool for making business decisions that will yield the above results. 6. Inaccurate accounting records and poor business decisions. 7. These standards are important to management because they enhancecomparability of reporting practices. 8. Yes. The firm’s financial records need to be separate from the owner’s personal financial records in order to evaluate and measure the performance of the business. Ethical Dilemma: Yes. Ethics and accounting are intertwined. Financial Statement Analysis: Analyze Online: 1. Economic entity because it is a business for profit. 2. Clothing, accessories, outerwear and footwear. 3. Investors, suppliers, and banks. To assist the users when making financial decisions. 4. 15 to 25 year-olds. Teamwork: Balance Sheet, Income Statement and Cash Flow Statement should be required. Anticipated cost of expansion and future income projections may also be requeted. Banks might also require a list of your customers and vendors. There is no requirement to indicate to the bank problems you are having with certain customers and vendors. Internet Connection: As of June 2009, 168 statements have been issued. The statements are listed in reverse chronological order.

Chapter 1  3

SOLUTIONS TO PRACTICE TEST Part A True-False 1. TRUE 2. TRUE 3. TRUE 4. FALSE 5. FALSE 6. FALSE 7. TRUE 8. TRUE 9. FALSE 10. TRUE 11. FALSE 12. FALSE 13. FALSE Part B Completion 1. IRS 2. stockholders or shareholders 3. shares of stock 4. partnerships 5. social entity 6. recording, classifying 7. financial statements 8. language of business 9. international accounting 10. FBI 11. governmental accounting 12. AAA 13. AICPA 14. generally accepted accounting principles 15. SEC

4  Chapter 1

CHAPTER 2 ANALYZING BUSINESS TRANSACTIONS Chapter Opener: Thinking Critically Answers will vary but students should recognize that happy employees are more productive and present a positive image to the company. Happy employees are also loyal which leads to lower employee turnover, and lower training and recruiting expenses. Happy employees are much less likely to steal from the company, and of course, happy employees mean happy customers who become repeat customers. Fast Facts • Southwest Airlines opened in 1971 with three planes flying between Houston, Dallas, and San Antonio. Southwest Airlines currently flies almost 100 million passengers a year to 63 cities all across the country. • For the fiscal year 2009, the company’s net income was $99 million while its total operating revenue was $10.4 billion. • In 2009 Southwest served 63.2 million cans of soda, juices, and water; 14.3 million alcoholic beverages; 14 million bags of pretzels; 90 million bags of peanuts; 17.7 million Select-A-Snacks; and 33.5 million other snacks. Managerial Implications: Thinking Critically Answers will vary. Students should mention total assets and the type of assets, the liabilities the business would be responsible for, and whether the business is making a profit. Discussion Questions Note to instructor: These questions are designed to check students’ understanding of new terms, concepts, and procedures presented in the chapter. 1. Assets = Liabilities + Owner’s Equity 2. Outflow of money/assets for costs used to produce revenue 3. Inflow of money/assets resulting from sales or use of property 4. a. assets increase, owner’s equity increase b. one asset increase and another decrease; no change in total assets c. assets decrease, liabilities decrease d. assets increase, owner’s equity increase e. assets decrease, owner’s equity decrease f. assets increase, liabilities increase 5. Revenue and expenses; net income or loss 6. Subtract total expenses from revenue 7. Firm name, title of statement, date of statement or the period of time covered 8. Balance sheet shows position at particular date; increase of operations for a period of time 9. Beginning-of-period capital balance, additional investments, net income/loss for period, less withdrawal ending capital balance

Chapter 2  5

Discussion Questions (continued) 10. Increases owner’s equity 11. Assets: property owned. Liabilities: debts. Owners’ equity: owner’s financial interest. 12. Assets, liabilities, and owner’s equity. EXERCISE 2.1 Assets: Liabilities: Owners’ Equity

$122,900 $24,975 $97,925

EXERCISE 2.2 1. 2. 3. 4. 5.

$21,740 $18,520 $5,425 $35,975 $8,625

EXERCISE 2.3 Transaction 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Assets I I I/D I/D I D I I/D D D

Liabilities

Owners’ Equity I

I = Increase D = Decrease

I D I D D

EXERCISE 2.4 Assets 1. Cash $12,500 2. Dental Supplies 3,150

3. Dental Equipment 25,550 4. Office Furniture 7,000 5. Total $48,200

= = =

6  Chapter 2

Liabilities Accounts Payable

+ $21,680

$21,680

Owner’s Equity

+ Donna Wells, Capital $26,520 + + + $26,520

EXERCISE 2.5 Assets

Cash 1.

Accounts Receivable

Liabilities

Equipment

Accounts = Payable

+$50,000 +$17,000 +$2,100

-$3,600

+$17,000

+$3,600 +$4,550

-$3,950

+$2,200

8. Totals

-$9,000 $37,750

Expenses

+$2,100

5. 6.

+$50,000

2. 3.

Owner’s Equity Amos Roberts Capital + Revenue

+$4,550 +$3,950

-$2,200 +

$2,350

$20,600

-$9,000 $8,000

$50,000

$6,650

$3,950

EXERCISE 2.6 Net income of $20,000 Revenue Repair Fees …………………………………… $45,150 Expenses Advertising Expense ………… $5,300 Salaries Expense ……………… 18,100 Telephone Expense ………… 650 Utilities Expense …………… 1,100 Total Expenses ……………………………… $25,150 Net Income …………………………………… $20,000 EXERCISE 2.7 1. 2. 3. 4. 5. 6. 7.

Services were performed for cash. Equipment was purchased for cash. A payment was made on the amount owed to a creditor. An expense was paid in cash. Cash was received from charge customer. Services were performed on credit. An expense was paid in cash.

Chapter 2  7

EXERCISE 2.8 Parker Investment Services Income Statement Month Ended September 30, 2013 Revenue Fees Income

72 8 0 0 00

Expenses Advertising Expense Salaries Expense Telephone Expense Total Expenses

5 5 0 0 00 15 0 0 0 00 7 0 0 00 21 2 0 0 00 51 6 0 0 00

Net Income

EXERCISE 2.9 Net loss of $950 Revenue $4,800 Service Revenue ………………………………………….. Expenses Advertising Expense…………… $2,600 700 Telephone Expense……………… 2,100 Salaries Expense ………………… 350 Cleaning Expense ……………… $5,750 Total Expense ………………………………………….. ($950) Net Loss ……………………………………………….. EXERCISE 2.10 Parker Investment Services Statement of Owner’s Equity Month Ended September 30, 2013 Alexander Parker, Capital, September 1, 2013 Net Income for September Less Withdrawals for September Increase in Capital Alexander Parker, Capital, September 30, 2013

8  Chapter 2

25 7 0 0 00 51 6 0 0 00 8 0 0 0 00 43 6 0 0 00 69 3 0 0 00

EXERCISE 2.10 (continued) Parker Investment Services Balance Sheet Month Ended September 30, 2013 Assets Cash Accounts Receivable Office Supplies Office Equipment Total Assets

Liabilities 32 1 0 0 00 Accounts Payable 3 0 0 0 00 2 4 0 0 00 Owner's Equity 36 5 0 0 00 Alexander Parker, Capital 74 0 0 0 00 Total Liabilities and Owner's Equity

4 7 0 0 00

69 3 0 0 00 74 0 0 0 00

Chapter 2  9

-$3,000 +$2,500 -$5,460 -$8,000 $80,690

-$10,800 +$25,000 +$7,200

$1,800 +

-$2,500

+$4,300

$5,460

+ $5,460

Assets Accounts + Receivable + Supplies

New Balances

Beginning Balances

Cash

58,400 +10,200

60,000 -1,600

$60,000

PROBLEM 2.2A

22,180 -10,200

22,180

$15,600 +6,580

36,400

34,800 +1,600

$34,800

Auto

+ $22,500

Assets + Receivable + Furniture +

$1,600 +

10,200

$10,200

= Liabilities + = Payable +

$31,150 =

90,500

$90,500

Capital

-$8,000 $117,500

= Liabilities + Owner's Equity Accounts Owner’s Capital + Equipment = Payable + +$92,000 +$18,750 +$12,400 +$12,400 -$10,800 +$25,000 +$7,200 +$4,300 -$3,000

Analyze: The ending balance in the Cash account is $80,690.

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Totals

Cash +$92,000 -$18,750

PROBLEM 2.1A

62,180

$55,600 +6,580

Owner’s Equity + Revenue -

23,400

$23,400

Expenses

10.

$62,850

62,850

65,100 -2,250

55,600 +9,500

56,620 -1020

65,320 -8,700

67,820 -2,500

68,600 -780

Cash

+ +

$23,480

11,980 +11,500

11,980

Analyze: Total assets equal $145,230.

New Balances

Assets + Accounts

PROBLEM 2.2A (continued)

$36,400

36,400

Office

Auto

+ $22,500

$7,700

7,700

10,200 -2,500

10,200

= Liabilities + = Payable +

$90,500

90,500

Capital

$83,180

71,680 +11,500

71,680

62,180 +9,500

62,180

Owner’s Equity + Revenue -

$36,150

36,150

33,900 +2,250

33,900

32,880 +1020

24,180 +8,700

24,180

23,400 +780

Expenses

PROBLEM 2.3A Valdez Equipment Repair Balance Sheet February 28, 2013 Assets Cash Supplies Accounts Receivable Equipment Total Assets

Liabilities 33 3 0 0 00 Accounts Payable 23 0 0 0 00 5 3 8 0 00 12 2 0 0 00 Owner's Equity 77 0 0 0 00 Francisco Valdez, Capital 104 8 8 0 00 127 8 8 0 00 Total Liabilities and Owner's Equity 127 8 8 0 00

Analyze: Owner's Equity is $104,880 at February 28, 2013. PROBLEM 2.4A West Cleaning Service Income Statement Month Ended May 31, 2013 Revenue Fees Income Expenses Utilities Expense Salaries Expense Telephone Expense Total Expenses Net Loss

7 2 8 0 00 8 8 0 00 8 4 0 0 00 3 0 4 00 9 5 8 4 00 (2 3 0 4 00)

West Cleaning Service Statement of Owner's Equity Month Ended May 31, 2013 Carol West, Capital, May 1, 2013 Net Loss for May Less Withdrawal for May Decrease in Capital Carol West, Capital, May 31, 2013

12  Chapter 2

47 6 0 0 00 (2 3 0 4 00) 2 0 0 0 00 (4 3 0 4 00) 43 2 9 6 00

PROBLEM 2.4A (continued) West Cleaning Service Balance Sheet May 31, 2013 Assets Cash Accounts Receivable Supplies Equipment Total Assets

5 6 9 6 00 4 4 0 0 00 4 8 0 0 00 32 8 0 0 00 47 6 9 6 00

Liabilities Accounts Payable

4 4 0 0 00

Owner's Equity Carol West, Capital Total Liabilities and Owner's Equity

43 2 9 6 00 47 6 9 6 00

Analyze: The amount of $43,296 (Carol West, Capital) was transferred to the balance sheet.

Chapter 2  13

-$2,600 +$2,500 -$3,150 -$5,000 $18,950

-$3,000 +$6,000 +$4,200

$1,150

-$2,500

+$3,650

$3,150

+ $3,150

Assets Accounts + Receivable + Supplies

New Balances

Beginning Balances

Cash

17,560 +5,000

19,000 -1,440

$19,000

PROBLEM 2.2B

10,000

$6,000 +4,000

Assets Accounts + Receivable +

6,400

$6,400

Supplies

12,000

$12,000

Office Furniture

$22,000

$3,000

5,000

$5,000

= Liabilities + Accounts = Payable +

24,900

$24,900

R. Johnson Capital

-$5,000 $42,250

= Liabilities + Owner's Equity Accounts Owner’s Capital + Equipment = Payable + +$36,000 +$16,000 +$6,000 +$6,000 -$3,000 +$6,000 +$4,200 +$3,650 -$2,600

Analyze: Transaction 3 increased the Company's debt by $6,000.

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Totals

Cash +$36,000 -$16,000

PROBLEM 2.1B

30,000 +5,000

30,000

$26,000 +4,000

Revenue

Owner’s Equity

13,940

12,500 +1,440

$12,500

Expenses

10.

$20,000

17,000 +3,000

17,000

11,400 +5,600

18,400 -7,000

19,360 -960

21,760 -2,400

22,560 -800

Cash

+ +

$7,000

10,000 -3,000

10,000

Assets Accounts + Receivable

$7,400

7,400

6,400 +1,000

6,400

Supplies

$12,000

12,000

Office Furniture

Analyze: Owner's Equity balance is $42,800; $24,900 + ($40,600 - $22,700).

New Balances

PROBLEM 2.2B (continued)

$3,600

3,600

2,600 +1,000

2,600

5,000 -2,400

5,000

= Liabilities + Accounts = Payable +

$24,900

24,900

R. Johnson Capital

$40,600

40,600

35,000 +5,600

35,000

Revenue

Owner’s Equity

$22,700

22,700

15,700 +7,000

14,740 +960

14,740

13,940 +800

Expenses

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PROBLEM 2.3B Taylor's Tax Service Balance Sheet December 1, 2013 Assets

Liabilities

Cash

24 0 0 0 00

Furniture

8 0 0 0 00

Equipment

9 6 0 0 00 Owner's Equity David Taylor, Capital

41 6 0 0 00

41 6 0 0 00 Total Liabilities and Owner's Equity

41 6 0 0 00

Total Assets

Analyze: The amount reported on the balance sheet for owner’s equity would be $33,600. PROBLEM 2.4B Linda Carter, Attorney and Counselor of Law Income Statement Month Ended August 31, 2013 Revenue Fees Income

10 8 0 0 00

Expenses Utilities Expense Salaries Expense Telephone Expense

6 0 0 00 5 4 0 0 00 6 0 0 00

Total Expenses

6 6 0 0 00

Net Income

4 2 0 0 00

Linda Carter, Attorney and Counselor of Law Statement of Owner's Equity Month Ended August 31, 2013 Linda Carter, Capital, Aug. 1, 2013 Net Income for August Less Withdrawals for August

23 2 0 0 00 4 2 0 0 00 1 2 0 0 00

Increase in Capital

3 0 0 0 00

Linda Carter, Capital, Aug. 31, 2013

26 2 0 0 00

16  Chapter 2

PROBLEM 2.4B (continued) Linda Carter, Attorney and Counselor at Law Balance Sheet August 31, 2013 Assets Cash Accounts Receivable Supplies Equipment Total Assets

Liabilities 4 8 0 0 00 Accounts Payable 6 6 0 0 00 5 4 0 0 00 Owner's Equity 10 0 0 0 00 Linda Carter, Capital 26 8 0 0 00 Total Liabilities and Owner's Equity

6 0 0 00

26 2 0 0 00 26 8 0 0 00

Analyze: Net income of $4,200 was transferred from the income statement.

Chapter 2  17

CRITICAL THINKING PROBLEM 2.1 Body Builders Fitness Center Income Statement Month Ended November 30, 2013 Revenue Fees Earned Expenses Rent Expense Cleaning Expense Advertising Expense

9 7 6 0 00 8 0 0 0 00 2 1 0 0 00 8 0 0 00 Total Expenses

Net Loss

10 9 0 0 00 (1 1 4 0 00)

Some students may include the warm-up suits as a business expense. If the suits are a type of uniform, their inclusion is appropriate; if they are to be worn at home and at work, their cost is not a business expense. The parking ticket is a personal expense. The cleaning of the studio and the printing of the flyers are business expenses. Payment of expenses with the owner’s personal credit card would be considered an additional investment by the owner. It is not unusual for new businesses to operate at a loss. James should project his income and expenses for the next several months to determine how much new business he will need to earn an income. Students’ suggestions for improving the accounting system might include opening a business checking account, not using a personal credit card for business expenses, setting up a filing system for business records, and purchasing a computer to maintain financial records.

18  Chapter 2

Accounts Payable $12,800

= Liabilities + D. Garcia + Capital + ? D. Garcia Drawing $5,200 + +

Revenue $23,800

Owner’s Equity

Advertising Expense Maintenance Expense Salaries Expense Total Expenses

Dolly Garcia, Capital, April 1, 2013 =

$55,800 -

$3,750 4,400 9,000 $17,150

$55,800 = $14,250 = $41,550 = $41,550

$14,250 $14,250 X

+ -

X $14,250 +

Solving for X: $55,800 (Total Assets) = $12,800 (Accounts Payable) - $5,200 (Drawing) + $23,800 (Revenue) - $17,150 (Expenses) + X

Let Dolly Garcia, Capital = X.

Cash $26,000

Assets Accounts + Receivable + Machinery = + $10,800 + $19,000 =

Determine the balance for Dolly Garcia, April 30, 2013.

CRITICAL THINKING PROBLEM 2.2

Expenses $17,150

CRITICAL THINKING PROBLEM 2.2 (continued) Dolly Garcia, Certified Public Accountant Income Statement Month Ended April 30, 2013 Revenue Fees Earned

23 8 0 0 00

Expenses Advertising Expense Maintenance Expense Salaries Expense

3 7 5 0 00 4 4 0 0 00 9 0 0 0 00

Total Expenses

17 1 5 0 00

Net Income

6 6 5 0 00

Dolly Garcia, Certified Public Accountant Statement of Owner's Equity Month Ended April 30, 2013 Dolly Garcia, Capital, April 1, 2013 Net Income for April Less Withdrawals for April

41 5 5 0 00 6 6 5 0 00 5 2 0 0 00

Increase in Capital

1 4 5 0 00

Dolly Garcia, Capital, April 30, 2013

43 0 0 0 00

Dolly Garcia, Certified Public Accountant Balance Sheet April 30, 2013 Assets Cash Accounts Receivable Equipment

Liabilities 26 0 0 0 00 Accounts Payable 10 8 0 0 00 Owner's Equity 19 0 0 0 00 Dolly Garcia, Capital

Total Assets

55 8 0 0 00 Total Liabilities and Owner's Equity

12 8 0 0 00 43 0 0 0 00 55 8 0 0 00

Analyze: The increase in owner's equity was $1,450.

20  Chapter 2

SOLUTIONS TO BUSINESS CONNECTIONS Managerial Focus: 1. Organized financial information can be used to evaluate operating efficiency and to make decisions about current and future activities. 2. The firm’s obligations must be met as they become due. 3. No. Early development is expensive, risky, and time consuming. Profits may not be achieved for a year or more. 4. Not necessarily. Reinvestments in assets or use of cash to pay debts affect cash. In addition, sales or revenue may have been "on account." Ethical Dilemma: Sarineh should not record the sale until she receives the purchase order from the customer. If she enters the sale and for some reason the customer doesn’t make the order, Joseph would need to pay the bonus back. Sarineh’s job would be in jeopardy. Financial Statement Analysis: 1. Southwest Airlines Co., Consolidated Statement of Income, Years Ended December 31, 2. Passenger, Freight, Other. 3. Statement of Owner’s Equity (Consolidated Statement of Stockholders’ Equity). 4. Total operating revenue was $3,712,000,000 for the quarter ended September 30, 2010. 5. See current topic on website. Internet Connection: Macy’s, Bloomingdales, and now May is included in the Federated Corporation. Shopping online is on every home page. To record an online sale it must debit a credit card receivable and credit sales. A general job announcement and requirements are given at the site. Team Work: Accounts Payable Clerk would use Purchases (Increase), A/P (increase and decrease) and Cash (decrease). Accounts Receivable Clerk would use Sales (increase), A/R (increase and decrease) and Cash (increase). Full charge bookkeeper would use accounts Cash (increase and decrease), Bank Charges (increase) and Miscellaneous account (increase), Interest Income (increase), Interest Expense (increase). Accurate numbers are developed when it is determined that all transactions have been entered and that total assets equal total liabilities plus owner’s equity.

Chapter 2  21

SOLUTIONS TO PRACTICE TEST Part A True-False 1. TRUE 2. FALSE 3. TRUE 4. TRUE 5. TRUE 6. 7. 8. 9. 10.

FALSE TRUE FALSE TRUE FALSE

Part B Matching 1. a 2. g 3. c 4. e 5. b 6. 7. 8.

f h d

Part C Completion 1. analyze 2. accounts payable or liability 3. equal 4. profit 5. credit on account 6. reduced or decreased 7. assets 8. asset or property

22  Chapter 2

CHAPTER 3 ANALYZING BUSINESS TRANSACTIONS USING T ACCOUNTS Chapter Opener: Thinking Critically Answers will vary, but students should recognize that a sale would have been recorded as revenue from goods or services sold on a T account. The sale would be entered on the left (increase) side of an asset account. Fast Facts • One of the world’s most advanced global backbone networks, carrying 18.7 petabytes of data traffic on an average business day to nearly every continent and country, with up to 99.999 percent reliability. •

The nation’s fastest mobile broadband network serving 85.1 million customers offering voice coverage in more than 220 countries, data roaming in more than 195 and 3G in more than 125 countries.

• •

The nation’s largest directory publisher, delivering print directories to 173 million customers. The leading U.S. provider of local and long distance voice services.

Managerial Implications: Thinking Critically Answers will vary but could include the following: • Cash is overstated and checks bounce. • The credit rating of the business is affected. • The business loses customers because payments on account are not recorded properly. Discussion Questions Note to instructor: These questions are designed to check students’ understanding of new terms, concepts, and procedures presented in the chapter. 1. a. debit b. credit c. credit d. credit e. debit 2. Written records for all assets, liabilities, and owner’s equity of a business. 3. Adding the figures on both sides of the account and subtracting the smaller total from the larger total. 4. To provide a classified list of the names and numbers of a firm’s accounts. 5. Order in which they appear on financial statements. Balance sheet accounts listed first, followed by income statement accounts. 6. Additional accounts can be added when needed. 7. Permanent account balances are carried forward to start a new accounting period. Temporary account balances are transferred to a summary account at the end of the period and are zero at the start of a new accounting period. 8. Payment of rent in advance affords the right to occupy the facility the number of months covered by

the payment. 9. Each transaction produces at least two effects. 10. Debit: entry on the left side of an account. Credit: entry on the right side of an account. 11. a, b, h, i, k: temporary

c, d, e, f, g, j, l: permanent

Chapter 3  23

EXERCISE 3.1 Cash 18,000

Equipment 45,000

Accounts Payable

Wade Williams, Capital 39,800

23,200

EXERCISE 3.2

(1) (3)

Cash 80,000 (2) 8,000 (4) (5)

Fees Income (3)

(5)

Supplies 2,000

20,000 2,800 2,000

8,000

(2)

Equipment 20,000

(4)

Advertising Expense 2,800

Donna Wells, Capital (1) 80,000

EXERCISE 3.3 1. Credit 2. Debit 3. Credit 4. Credit

5. Debit 6. Debit 7. Debit 8. Debit

EXERCISE 3.4 1. Credit, Credit, Debit 2. Debit, Debit, Credit 3. Credit, Credit, Debit 4. Debit, Debit, Credit 5. Credit, Credit, Debit

24  Chapter 3

EXERCISE 3.5 Cash, $151,400 Dr. Accounts Receivable, $6,000 Dr. Supplies, $36,000 Dr. Equipment, $70,000 Dr. Accounts Payable, $70,000 Cr.

David Thomas, Capital $180,000 Cr. Fees Income, $28,000 Cr. Telephone Expense, $600 Dr. Salaries Expense, $10,000 Dr. David Thomas, Drawing, $4,000 Dr.

EXERCISE 3.6 Apartment Locators Trial Balance December 31, 2013 ACCOUNT NAME Cash Accounts Receivable Supplies Equipment Accounts Payable David Thomas, Capital David Thomas, Drawing Fees Income Salaries Expense Telephone Expense Totals

151 6 36 70

DEBIT 4 0 0 00 0 0 0 00 0 0 0 00 0 0 0 00

CREDIT

70 0 0 0 00 180 0 0 0 00 4 0 0 0 00 28 0 0 0 00 10 0 0 0 00 6 0 0 00 278 0 0 0 00

278 0 0 0 00

Apartment Locators Income Statement Month Ended December 31, 2013 Revenue Fees Income Expenses Salaries Expense Telephone Expense

28 0 0 0 00 10 0 0 0 00 6 0 0 00 Total Expenses

Net Income

10 6 0 0 00 17 4 0 0 00

Chapter 3  25

EXERCISE 3.7 Apartment Locators Statement of Owner's Equity Month Ended December 31, 2013 David Thomas, Capital, Dec. 1, 2013 Net Income for December Less Withdrawals for December Increase in Capital David Thomas, Capital, Dec. 31, 2013

180 0 0 0 00 17 4 0 0 00 4 0 0 0 00 13 4 0 0 00 193 4 0 0 00

Apartment Locators Balance Sheet December 31, 2013 Assets Cash Accounts Receivable Supplies Equipment Total Assets

26  Chapter 3

Liabilities 151 4 0 0 00 Accounts Payable 6 0 0 0 00 36 0 0 0 00 Owner's Equity 70 0 0 0 00 David Thomas, Capital 263 4 0 0 00 Total Liabilities & Owner's Equity

70 0 0 0 00

193 4 0 0 00 263 4 0 0 00

EXERCISE 3.8

Account Number 100-199 101 111 121 131 141 200-299 202

Zant Moving Company Chart of Accounts Account Name Account Number ASSETS 300-399 Cash 301 Accounts Receivable 302 Office Supplies 400-499 Prepaid Rent 401 Office Equipment 500-599 LIABILITIES 511 Accounts Payable 514 517

Account Name OWNER'S EQUITY Sue Zant, Capital Sue Zant, Drawing REVENUE Fees Income EXPENSES Salaries Expense Utilities Expense Telephone Expense

Chapter 3  27

PROBLEM 3.1A 1.

Cash + 16,000

Equipment + 9,000

James Walker, Capital + 16,000

Cash - 9,000

Cash + 1,200

Office Furniture - 1,200

Office Equipment + 2,700

Accounts Payable + 2,700

Office Equipment + 10,200

Accounts Payable + 10,200

Carol Rose, Drawing + 5,000

Delivery Truck + 32,000

Accounts Payable - 2,500

Cash - 5,000

Accounts Payable + 32,000

Cash - 2,500

Analyze: Transactions 1 and 6 directly affect the owner's equity account.

28  Chapter 3

PROBLEM 3.2A 1.

Cash + 60,000

Office Furniture + 16,000

Greta Davis, Capital + 60,000

Cash - 16,000

Office Equipment + 950

Automobile + 16,000

Cash

Cash + 10,000

Greta Davis, Capital + 10,000

Office Equipment + 3,000

Accounts Payable + 3,000

Accounts Payable - 950

Cash

Greta Davis, Drawing + 4,000

Cash

Accounts Payable + 950

- 16,000

- 950

- 4,000

Analyze: All transactions affected asset accounts.

Chapter 3  29

PROBLEM 3.3A 1.

Office Supplies + 2,000

Cash + 21,000

Rent Expense + 4,000

Accounts Receivable + 3,000

Cash - 2,000

Fees Income + 21,000

Cash - 4,000

Fees Income + 3,000

Cash + 1,000

Salaries Expense + 3,600

Cash

Telephone Expense + 480

Cash

Accounts Receivable - 1,000

- 3,600

- 480

Accounts Receivable + 2,000

Fees Income + 2,000

Office Supplies + 1,000

Accounts Payable + 1,000

10.

Salaries Expense + 3,600

30  Chapter 3

Cash - 3,600

PROBLEM 3.3A (continued) 11.

Cash + 2,000

Accounts Receivable - 2,000

12.

Cash + 8,100

Fees Income + 8,100

Analyze: $13,680 in cash was spent in June.

PROBLEM 3.4A

Bal.

Cash + 150,000 (b) + 7,200 (c) + 6,500 (e) + 13,500 (g) + 7,000 (i) (k) (l) (p) (q) (r) 111,810 (s)

(g) (k) Bal.

Office Equipment + 36,000 + 30,000 66,000

(a) (d) (h) (m) (o)

(p)

Accounts Payable - 2,400 (g) (j) (k) Bal.

- 5,000 - 15,720 - 1,150 - 12,000 - 3,000 - 15,000 - 8,400 - 2,400 - 600 - 1,120 - 8,000

+ 24,000 + 4,800 + 15,000 41,400

(f) (n) Bal.

Accounts Receivable + 13,000 (h) + 15,000 (o) 14,500

Office Furniture + 15,720 + 4,800 20,520

John Wilson, Capital (a)

- 6,500 - 7,000

+ 150,000

Chapter 3  31

PROBLEM 3.4A (continued)

(s)

John Wilson, Drawing + 8,000

(r)

Utilities Expense + 1,120

Fees Income (d) + 7,200 (f) + 13,000 (m) + 13,500 (n) + 15,000 Bal. 48,700

(l)

Salaries Expense + 8,400

(b)

Rent Expense + 5,000

Telephone Expense (e) + 1,150

Miscellaneous Expense (i) + 3,000 (q) + 600

Analyze: The company owes $41,400 (accounts payable).

32  Chapter 3

PROBLEM 3.5A John Wilson, Landscape Consultant Trial Balance June 30, 2013 ACCOUNT NAME Cash Accounts Receivable Office Equipment Office Furniture Accounts Payable John Wilson, Capital John Wilson, Drawing Fees Income Copy Expense Office Cleaning Expense Rent Expense Salaries Expense Telephone Expense Utilities Expense Total

DEBIT 111 8 1 0 00 14 5 0 0 00 66 0 0 0 00 20 5 2 0 00

CREDIT

41 4 0 0 00 150 0 0 0 00 8 0 0 0 00 48 7 0 0 00 6 0 0 00 3 0 0 0 00 5 0 0 0 00 8 4 0 0 00 1 1 5 0 00 1 1 2 0 00 240 1 0 0 00

240 1 0 0 00

John Wilson, Landscape Consultant Income Statement Month Ended June 30, 2013 Revenue Fees Income Expenses Copy Expense Office Cleaning Expense Rent Expense Salaries Expense Telephone Expense Utilities Expense Total Expenses Net Income

48 7 0 0 00 6 0 0 00 3 0 0 0 00 5 0 0 0 00 8 4 0 0 00 1 1 5 0 00 1 1 2 0 00

19 2 7 0 00 29 4 3 0 00

Chapter 3  33

PROBLEM 3.5A (Continued) John Wilson, Landscape Consultant Statement of Owner's Equity Month Ended June 30, 2013 John WIlson, Capital, June 1, 2013 Net Income for June Less Withdrawals for June Increase in Capital John Wilson, Capital, June 30, 2013

150 0 0 0 00 29 4 3 0 00 8 0 0 0 00 21 4 3 0 00 171 4 3 0 00

John Wilson, Landscape Consultant Balance Sheet June 30, 2013 Assets Cash Accounts Receivable Office Equipment Office Furniture Total Assets

111 8 1 0 00 14 5 0 0 00 66 0 0 0 00 20 5 2 0 00 212 8 3 0 00

Liabilities Accounts Payable Owner's Equity John Wilson, Capital Total Liabilities & Owner's Equity

41 4 0 0 00

171 4 3 0 00 212 8 3 0 00

Analyze: The net increase in owner's equity during the month of June was $21,430.

34  Chapter 3

PROBLEM 3.1B Equipment + 16,000

Cash

2. Angie Carvajal, Drawing + 4,000

Cash

Cash + 3,000

Equipment

- 16,000

- 4,000

- 3,000

Delivery Truck + 12,000

Cash

Accounts Payable - 3,600

Cash

Office Equipment + 5,000

Cash + 20,000

Accounts Payable - 1,500

- 12,000

- 3,600

Accounts Payable + 5,000

Chuck Vinson, Capital + 20,000

Cash - 1,500

Analyze: The transactions that affect the liability accounts are transactions 5, 6 and 8.

Chapter 3  35

PROBLEM 3.2B 1.

Cash + 20,000

Shop Equipment + 1,800

Store Equipment + 1,200

Truck + 10,000

Joseph Tejan, Capital + 20,000

Cash - 1,800

Accounts Payable + 1,200

Cash - 10,000

Shop Equipment + 3,000

Joseph Tejan, Capital + 3,000

Store Equipment + 2,500

Accounts Payable + 2,500

Accounts Payable - 400

Cash

Joseph Tejan, Drawing + 1,600

Cash

- 400

- 1,600

Analyze: The transactions that affect the cash account are transactions 1, 2, 4, 7, and 8.

PROBLEM 3.3B 1.

Rent Expense + 3,800

36  Chapter 3

Cash - 3,800

PROBLEM 3.3B (continued) 2.

Cash + 8,000

Salaries Expense + 5,600

Accounts Receivable + 10,800

Telephone Expense + 1,200

Fees Income + 8,000

Cash - 5,600

Fees Income + 10,800

Cash - 1,200

Cash + 4,000

Accounts Receivable - 4,000

Cash - 190

Telephone Expense - 190

Accounts Receivable + 5,200

Fees Income + 5,200

Utilities Expense + 850

Cash

Gasoline Expense + 1,200

Cash

10.

11.

Cash + 4,200

- 850

- 1,200

Accounts Receivable - 4,200

Chapter 3  37

PROBLEM 3.3B (continued) 12.

Cash + 8,600

Fees Income + 8,600

Analyze: The total cash collected for Accounts Receivable during the month was $8,200.00.

PROBLEM 3.4B Cash (a) + 120,000 (b) (d) + 8,000 (c) (h) + 4,500 (e) (m) + 4,750 (i) (p) + 3,800 (j) (k) (l) (o) (r) Bal. 61,054 (s)

(k) (q) Bal.

(i)

- 6,400 - 36,000 - 1,600 - 3,600 - 1,300 - 9,800 - 13,700 - 796 - 800 - 6,000

Office Equipment + 19,600 + 5,440 25,040

Accounts Payable - 3,600 (g) + 5,600 (k) + 9,800 (q) + 5,440 Bal. 17,240

38  Chapter 3

(f) (n) Bal.

Accounts Receivable + 9,150 (h) - 4,500 + 5,500 (p) - 3,800 6,350

(g)

Office Furniture + 5,600

(c)

Automobile + 36,000

Kathryn Price, Capital (a) + 120,000

PROBLEM 3.4B (continued)

(s)

Kathryn Price, Drawing + 6,000

(e) (r) Bal.

Auto Expense + 1,600 + 800 2,400

Fees Income (d) + 8,000 (f) + 9,150 (m) + 4,750 (n) + 5,500 Bal. 27,400

(j)

Utilities Expense + 1,300

(b)

Rent Expense + 6,400

Salaries Expense (l) + 13,700

Telephone Expense (o) + 796

Analyze: Credit customers owe the company $6,350 (Accounts Receivable).

Chapter 3  39

PROBLEM 3.5B Kathryn Price, Counselor and Attorney at Law Trial Balance April 30, 2013 ACCOUNT NAME Cash Accounts Receivable Automobile Office Equipment Office Furniture Accounts Payable Kathryn Price, Capital Kathryn Price, Drawing Fees Income Auto Expense Rent Expense Salaries Expense Utilities Expense Telephone Expense Total

DEBIT 61 0 5 4 00 6 3 5 0 00 36 0 0 0 00 25 0 4 0 00 5 6 0 0 00

CREDIT

17 2 4 0 00 120 0 0 0 00 6 0 0 0 00 27 4 0 0 00 2 4 0 0 00 6 4 0 0 00 13 7 0 0 00 1 3 0 0 00 7 9 6 00 164 6 4 0 00

164 6 4 0 00

Kathryn Price, Counselor and Attorney at Law Income Statement Month Ended April 30, 2013 Revenue Fees Income Expenses Auto Expense Rent Expense Salaries Expense Utilities Expense Telephone Expense Total Expenses Net Income

40  Chapter 3

27 4 0 0 00 2 4 0 0 00 6 4 0 0 00 13 7 0 0 00 1 3 0 0 00 7 9 6 00 24 5 9 6 00 2 8 0 4 00

PROBLEM 3.5B (continued) Kathryn Price, Counselor and Attorney at Law Statement of Owner's Equity Month Ended April 30, 2013 Kathryn Price, Capital, April 1, 2013 Net Income for April Less Withdrawals for April Decrease in Capital Kathryn Price, Capital, April 30, 2013

120 0 0 0 00 2 8 0 4 00 6 0 0 0 00 (3 1 9 6 00) 116 8 0 4 00

Kathryn Price, Counselor and Attorney at Law Balance Sheet April 30, 2013 Assets Cash Accounts Receivable Automobile Office Equipment Office Furniture Total Assets

Liabilities 61 0 5 4 00 Accounts Payable 6 3 5 0 00 36 0 0 0 00 Owner's Equity 25 0 4 0 00 5 6 0 0 00 Kathryn Price, Capital 134 0 4 4 00 Total Liabilities & Owner's Equity

17 2 4 0 00

116 8 0 4 00 134 0 4 4 00

Analyze: The net decrease in owner's equity during the month of April was $3,196.

Chapter 3  41

CRITICAL THINKING PROBLEM 3.1 Cash 3,000 600 500

Bal.

1,000 1,800 200 500 100

Accounts Receivable 1,150

Equipment and Tools 1,000

Ted Coe, Capital

Fees Income

500

Truck 1,800

3,000

Bal.

Salary Expense 500

42  Chapter 3

Gasoline Expense 200

600 1,150 500 2,250

Advertsing Expense 100

CRITICAL THINKING PROBLEM 3.1 (continued) Elegant Lawn Care Income Statement Three Months Ended August 31, 2013 Revenue Fees Income Expenses Salary Expense Gasoline Expense Advertising Expense Total Expenses Net income

2 2 5 0 00 5 0 0 00 2 0 0 00 1 0 0 00 8 0 0 00 1 4 5 0 00

Elegant Lawn Care Statement of Owner's Equity Three Months Ended August 31, 2013 Ted Coe, Capital, June 1, 2013 Net Income for June-August Ted Coe, Capital, August 31, 2013

3 0 0 0 00 1 4 5 0 00 4 4 5 0 00

Elegant Lawn Care Balance Sheet August 31, 2013 Assets Cash Accounts Receivable Equipment/Tool Truck Total Assets

Liabilities 5 0 0 00 1 1 5 0 00 1 0 0 0 00 1 8 0 0 00 4 4 5 0 00

Owner's Equity Ted Coe, Capital Total Liabilities & Owner's Equity

4 4 5 0 00 4 4 5 0 00

Ted is better off than he would have been had he left his money in the savings account. He earned a profit of $1,450 from his Elegant Lawn Care business, compared to approximately $45.00 in interest his money would have earned over the three summer months (assuming a bank interest rate of 6%; $3,000 × 0.06 × 3/12). Ted needs to look beyond his current checking account balance of $500 and realize that this balance will increase to $1,650 when he collects the $1,150 still owed to him. He also owns a truck and power mowers that he could sell for additional cash.

Chapter 3  43

CRITICAL THINKING PROBLEM 3.2 Cash + 20,000 (b) + 4,050 (c) + 2,160 (e) + 2,800 (g) + 1,200 (h) (k) (l) (n) (q) Bal. 15,600 (r) (a) (d) (i) (m) (p)

(g)

- 2,000 - 3,600 - 210 - 150 - 550 - 4,000 - 540 - 460 - 2,500 - 600

Office Equipment + 475

Linda Carter, Drawing (q) + 2,500

(n)

Utilities Expense + 460.00

(f) (0) Bal.

(l)

Accounts Receivable + 1,560 (i) - 2,160 + 3,200 (p) - 1,200 1,400

Accounts Payable - 540 (g) + 325 (j) + 590 Bal. 375

Fees Income (d) (f) (m) (o) Bal.

+ 4,050 + 1,560 + 2,800 + 3,200 11,610

Salaries Expense (k) + 4,000.00

Office Furniture + 3,600 + 590 4,190

Linda Carter, Capital (a) + 20,000

(b)

Advertising Expense + 2,000

(e)

Telephone Expense + 210.00

Miscellaneous Expense (h) + 550.00 (r) + 600.00 Bal. 1,150.00

44  Chapter 3

CRITICAL THINKING PROBLEM 3.2 (continued) Linda Carter, Architect Trial Balance January 31, 2013 ACCOUNT NAME Cash Accounts Receivable Office Furniture Office Equipment Accounts Payable Linda Carter, Capital Linda Carter, Drawing Fees Income Advertising Expense Utilities Expense Salaries Expense Telephone Expense Miscellaneous Expense Totals

DEBIT 15 6 0 0 00 1 4 0 0 00 4 1 9 0 00 4 7 5 00

CREDIT

3 7 5 00 20 0 0 0 00 2 5 0 0 00 11 6 1 0 00 2 0 0 0 00 4 6 0 00 4 0 0 0 00 2 1 0 00 1 1 5 0 00 31 9 8 5 00

31 9 8 5 00

Linda Carter, Architect Income Statement Month Ended January 31, 2013 Revenue Fees Income Expenses Advertising Expense Utilities Expense Salaries Expense Telephone Expense Miscellaneous Expense Total Expenses Net Income

11 6 1 0 00 2 0 0 0 00 4 6 0 00 4 0 0 0 00 2 1 0 00 1 1 5 0 00

7 8 2 0 00 3 7 9 0 00

Chapter 3  45

CRITICAL THINKING PROBLEM 3.2 (continued) Linda Carter, Architect Statement of Owner's Equity Month Ended January 31, 2013 Linda Carter, Capital, January 1, 2013 Net Income for January Less Withdrawals for January Increase in Capital Linda Carter, Capital, January 31, 2013

20 0 0 0 00 3 7 9 0 00 2 5 0 0 00 1 2 9 0 00 21 2 9 0 00

Linda Carter, Architect Balance Sheet January 31, 2013 Assets Cash Accounts Receivable Office Furniture Office Equipment Total Assets

15 6 0 0 00 1 4 0 0 00 4 1 9 0 00 4 7 5 00 21 6 6 5 00

Liabilities Accounts Payable Owner's Equity Linda Carter, Capital Total Liabilities & Owner's Equity

3 7 5 00

21 2 9 0 00 21 6 6 5 00

Analyze: Assets ($21,665) = Liabilities ($375) + Owner's Equity ($21,290)

46  Chapter 3

SOLUTIONS TO BUSINESS CONNECTIONS Managerial Focus: 1. Provide summaries of: a. Income Statement—revenues and expenses, b. Balance Sheet—assets, liabilities, and owner’s equity. 2. Review of financial records containing cash available, amounts due, and dates due. 3. Reduce expenses; increase sales volume or raise sales prices. 4. Net income (or net loss) for the period. Ethical Dilemma: Do not open the account New Expenses without approval from the controller. You must identify what expenses will be put into that account. If the account is not monitored, the Accounts Payable clerk might enter personal expenses, which would not be appropriate. Financial Statement Analysis: 1. Financial data, operational information, plans for the future. 2. $2,946,000 billion. 3. $1.9 million of cash, cash equivalents, and short-term investments were on hand at December 31, 2009. 4. Financial results are less favorable. GAAP net income was $386.5 million in fiscal year 2009 compared to $871.8 million in fiscal year 2008. 5. Adobe is targeting revenue of $800 million to $850 million for the first quarter of 2010. Teamwork: All companies would have a cash account and accounts payable. A plumbing service would have accounts receivable whereas a clothing store would also have a credit card receivable. Both grocery store and clothing store would have inventory. All would have wages expense except the real estate would have sales commission. All would have office supplies expense. Depending on whether the company owned the building most would have rent expense. Internet Connection: Honeywell is the most profitable. JC Penny has the most cash available. Honeywell has the most assets.

Chapter 3  47

SOLUTIONS TO PRACTICE TEST Part A True-False 1. TRUE 2. FALSE 3. TRUE 4. TRUE 5. TRUE 6. FALSE 7. FALSE 8. FALSE 9. FALSE 10. FALSE 11. TRUE 12. TRUE 13. TRUE 14. TRUE 15. TRUE Part B Matching 1. f 2. b 3. d 4. i 5. c 6. h 7. e 8. g 9. a Part C Completion 1. normal balance 2. trial balance 3. transposition 4. slide 5. footing

48  Chapter 3

CHAPTER 4 THE GENERAL JOURNAL AND THE GENERAL LEDGER Chapter Opener: Thinking Critically The resolution of the dispute with regards to the taxes paid by the vineyard depended upon the vineyard’s recordkeeping and accounting practices. The Alcohol and Tobacco Tax Trade Board uncovered some reporting errors which resulted in the vineyard having to revise statements and pay fines. Fast Facts • Willamette Valley Vineyards produces some 100,000 cases of wine annually that is distributed throughout the United States, Canada, and the Pacific Rim. • Willamette Valley Vineyards is set to become the first winery in the world to use cork stoppers harvested from responsibly managed forestlands certified by the Rainforest Alliance to Forest Stewardship Council (FSC) standards. • •

The vineyard uses biofuel in company tractors and delivery vehicles and has a biofuel policy which offers up to 50 gallons of biofuel a month, at no cost, to each employee. Willamette Valley (NASDAQ: WVVI) produced revenues of $16,563,712 in 2009 versus $16,048,238 in the prior year, an increase of 3.2%.

Managerial Implications: Thinking Critically Answers will vary but may include the following. • Exposing the assets of the business to fraud and theft. • Increasing the risk of producing inaccurate financial statements. • Difficulty in auditing transactions. • Research customer billing. (Customer says no invoice was received.) Discussion Questions Note to instructor: These questions are designed to check students’ understanding of new terms, concepts, and procedures presented in the chapter. 1. Assets, liabilities, and owner’s equity first, followed by revenue accounts, then expenses. They are in order of the financial statements. 2. Notations of the page number of the journal from which a figure comes; number of account to which the figure was posted; to provide cross-references. 3. Chain of references; prevents fraud and errors. 4. Before entry posted: cross out incorrect item, write correct data above it. After posted: journalize and post a correcting entry. 5. Steps performed to classify, record, and summarize financial data for a business. 6. To record business transactions in chronological order. 7. Record month, day, debited account/amount, credited account/amount, description. 8. Helps establish audit trail. 9. Entry that includes more than a single debit and credit—two or more debits and/or credits. 10. Groups of accounts. 11. Transfer of data from a journal to a ledger.

Chapter 4  49

EXERCISE 4.1

1. 2. 3. 4.

Debit Credit Debit 101 5. 202 401 101 6. 101 517 401 7. 101 111 101 131

Credit 101 401 111

8. 9. 10.

Debit 101 121 511

Credit 301 202 101

EXERCISE 4.2 GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

DATE DESCRIPTION 2013 Sept. 1 Cash Mary Vinzant, Capital Beginning investment of owner

PAGE 1 POST. REF.

DEBIT 50 0 0 0 00

101 301

50 0 0 0 00

4 Equipment Accounts Payable Purchased equipment on credit from Inc., Invoice 9823, payable in 30 days

131 202

5 5 0 0 00

16 Automobile Cash Purchased an automobile, Check 1001

141 101

13 5 0 0 00

20 Supplies Cash Purchased supplies, Check 1002

121 101

4 2 0 00

23 Cash Supplies Returned damaged supplies and received cash refund

101 121

1 2 0 00

30 Accounts Payable Cash Paid Zen, Inc., on account for Invoice 9823, Check 1003

202 101

3 2 0 0 00

50  Chapter 4

CREDIT

5 5 0 0 00

13 5 0 0 00

4 2 0 00

1 2 0 00

3 2 0 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

EXERCISE 4.2 (continued) GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

DATE DESCRIPTION 2013 Sept. 30 Mary Vinzant, Drawing Cash Owner withdrew cash for personal use

PAGE 2 POST. REF.

DEBIT

302 101

2 0 0 0 00

30 Prepaid Rent Expense Cash Paid October rent, Check 1004

511 101

1 2 0 0 00

30 Cash

101 401

2 2 5 0 00

517 101

3 8 5 00

Fees Income Performed services for cash 30 Telephone Expense Cash Paid monthly telephone bill, Check 1005

CREDIT 1 2 2 0 0 0 00 3 4 5 6 1 2 0 0 00 7 8 9 10 2 2 5 0 00 11 12 13 14 3 8 5 00 15 16 17 18

Chapter 4  51

EXERCISE 4.3 GENERAL LEDGER ACCOUNT

Cash

DATE DESCRIPTION 2013 Sept. 1 16 20 23 30 30 30 30 30

ACCOUNT

DESCRIPTION

J1 J1 J1 J1 J1 J2 J2 J2 J2

DEBIT

CREDIT

50 0 0 0 00 13 5 0 0 00 36 5 0 0 00 4 2 0 00 36 0 8 0 00 1 2 0 00 36 2 0 0 00 3 2 0 0 00 33 0 0 0 00 2 0 0 0 00 31 0 0 0 00 1 2 0 0 00 29 8 0 0 00 2 2 5 0 00 32 0 5 0 00 3 8 5 00 31 6 6 5 00

ACCOUNT NO. 111

POST REF.

DEBIT

CREDIT

52  Chapter 4

BALANCE DEBIT CREDIT

ACCOUNT NO. 121 POST REF. J1 J1

DEBIT

CREDIT

4 2 0 00 1 2 0 00

Equipment

DATE DESCRIPTION 2013 Sept. 4

BALANCE DEBIT CREDIT

50 0 0 0 00

Supplies

DATE DESCRIPTION 2013 Sept. 20 23

ACCOUNT

POST REF.

Accounts Receivable

DATE

ACCOUNT

ACCOUNT NO. 101

BALANCE DEBIT CREDIT 4 2 0 00 3 0 0 00

ACCOUNT NO. 131 POST REF.

DEBIT

5 5 0 0 00

CREDIT

BALANCE DEBIT CREDIT 5 5 0 0 00

EXERCISE 4.3 (continued) ACCOUNT

Automobile

DATE DESCRIPTION 2013 Sept. 16

ACCOUNT DATE 2013 Sept. 4 30

ACCOUNT DATE 2013 Sept. 1

ACCOUNT

POST REF.

DEBIT

13 5 0 0 00

CREDIT

ACCOUNT NO. 202

POST DESCRIPTION REF. J1 J1

DEBIT

CREDIT

POST DESCRIPTION REF.

BALANCE CREDIT DEBIT

5 5 0 0 00

5 5 0 0 00 2 3 0 0 00

3 2 0 0 00

Mary Vinzant, Capital

ACCOUNT NO. 301 DEBIT

CREDIT

BALANCE DEBIT CREDIT

50 0 0 0 00

Mary Vinzant, Drawing

50 0 0 0 00

ACCOUNT NO. 302

POST REF.

DEBIT

2 0 0 0 00

CREDIT

BALANCE DEBIT CREDIT 2 0 0 0 00

Fees Income

DATE DESCRIPTION 2013 Sept. 30

BALANCE DEBIT CREDIT 13 5 0 0 00

Accounts Payable

DATE DESCRIPTION 2013 Sept. 30

ACCOUNT

ACCOUNT NO. 141

ACCOUNT NO. 401 POST REF. J2

DEBIT

CREDIT 2 2 5 0 00

BALANCE DEBIT CREDIT 2 2 5 0 00

Chapter 4  53

EXERCISE 4.3 (continued) ACCOUNT

Rent Expense

DATE 2013 Sept. 30

ACCOUNT

DESCRIPTION

POST REF.

DEBIT

1 2 0 0 00

CREDIT

DESCRIPTION

ACCOUNT NO. 514 POST REF.

DEBIT

CREDIT

Telephone Expense

DATE 2013 Sept. 30

54  Chapter 4

DESCRIPTION

BALANCE DEBIT CREDIT 1 2 0 0 00

Salaries Expense

DATE

ACCOUNT

ACCOUNT NO. 511

BALANCE DEBIT CREDIT

ACCOUNT NO. 517 POST REF. J2

DEBIT 3 8 5 00

CREDIT

BALANCE DEBIT CREDIT 3 8 5 00

EXERCISE 4.4 GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

DATE DESCRIPTION 2013 Nov. 5 Cash Accounts Receivable Fees Income Performed services for Talent Search receiving part of fees in cash with remainder due in 60 days

PAGE POST. REF.

DEBIT

CREDIT

1 2 3 30 0 0 0 00 4 5 6 7 8 3 7 5 00 9 5 2 5 00 10 9 0 0 00 11 12 13 14 1 6 0 0 00 15 8 0 0 00 16 8 0 0 00 17 18 19 20 21

14 0 0 0 00 16 0 0 0 00

18 Equipment Supplies Cash Purchased graphing calculator and supplies, Check 1008 23 Automobile Expense Cash Accounts Payable Received Invoice 1602 from Automotive Technicians Repair, issued Check 1009 for half the amount, balance due in 30 days

EXERCISE 4.5 GENERAL JOURNAL

1 2 3 4 5 6

DATE DESCRIPTION 2013 July 30 Telephone Expense Utilities Expense To correct July 9 error charging telephone bill to Utilities Expense

PAGE POST. REF.

DEBIT

CREDIT

9 5 0 00 9 5 0 00

1 2 3 4 5 6

Chapter 4  55

EXERCISE 4.6 GENERAL JOURNAL

1 2 3 4 5 6

DATE DESCRIPTION 2013 Oct. 1 Repair Expense Truck To correct September 16 error charging truck charges to the Truck account

PAGE POST. REF.

DEBIT

CREDIT

7 5 0 00 7 5 0 00

1 2 3 4 5 6

PROBLEM 4.1A GENERAL JOURNAL DATE DESCRIPTION 1 2013 2 Sept. 1 Rent Expense 3 Cash 4 Paid September rent, Check 1169 5 6 5 Cash 7 Fees Income 8 Performed services for cash 9 10 6 Accounts Receivable 11 Fees Income 12 Performed services on credit 13 14 10 Telephone Expense 15 Cash 16 Paid monthly telephone bill, Check 1170 17 18 11 Equipment Repair Expense 19 Cash 20 Paid for repairs, Check 1171 21 22 12 Cash 23 Accounts Receivable 24 Received cash on account

56  Chapter 4

PAGE 1 POST. REF.

DEBIT 1 4 0 0 00

2 5 0 0 00

1 3 5 0 00

6 0 0 00

8 4 0 00

3 2 0 0 00

CREDIT 1 2 1 4 0 0 00 3 4 5 6 2 5 0 0 00 7 8 9 10 1 3 5 0 00 11 12 13 14 6 0 0 00 15 16 17 18 8 4 0 00 19 20 21 22 3 2 0 0 00 23 24

PROBLEM 4.1A (continued) PAGE

GENERAL JOURNAL DATE DESCRIPTION 1 2013 2 Sept. 15 Salaries Expense 3 Cash 4 Paid semimonthly salaries, Checks 1172-1177 5 6 18 Supplies 7 Cash 8 Paid for supplies, Check 1178 9 10 19 Equipment 11 Accounts Payable 12 Purchased tennis rackets from The Tennis 13 Supply Shop, Invoice 3108, payable in 30 days 14 15 20 Equipment 16 Cash 17 Purchased nets, Check 1179 18 19 21 Cash 20 Accounts Receivable 21 Received cash on account 22 23 21 Cash 24 Equipment 25 Returned damaged net for cash refund 26 27 22 Cash 28 Fees Income 29 Performed services for cash 30 31 23 Accounts Receivable 32 Fees Income 33 Performed services on account 34 35 26 Supplies 36 Cash 37 Paid for supplies, Check 1180

POST. REF.

DEBIT 4 2 0 0 00

2 0 0 0 00

2 2 5 0 00

2 7 6 0 00

9 5 0 00

4 5 0 00

3 2 6 0 00

4 8 5 0 00

4 6 0 00

CREDIT 1 2 4 2 0 0 00 3 4 5 6 2 0 0 0 00 7 8 9 10 2 2 5 0 00 11 12 13 14 15 2 7 6 0 00 16 17 18 19 9 5 0 00 20 21 22 23 4 5 0 00 24 25 26 27 3 2 6 0 00 28 29 30 31 4 8 5 0 00 32 33 34 35 4 6 0 00 36 37

Chapter 4  57

PROBLEM 4.1A (continued) PAGE 3

GENERAL JOURNAL DATE DESCRIPTION 1 2013 2 Sept. 28 Utilities Expense 3 Cash 4 Paid monthly electric bill, Check 1181 5 6 30 Salaries Expense 7 Cash Paid semimonthly salaries, Check 1182-1187 8 9 10 30 Patrice Rebello, Drawing 11 Cash Owner withdrew cash for personal use, 12 13 Check 1188

POST. REF.

DEBIT 2 2 5 0 00

4 2 0 0 00

CREDIT 1 2 2 2 5 0 00 3 4 5 6 4 2 0 0 00 7 8 9 10 4 2 0 0 00 11 12 13

Analyze: Check 1189 would be included in the journal entry description.

PROBLEM 4.2A GENERAL JOURNAL

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

DATE DESCRIPTION 2013 Oct. 1 Cash Wilson Adams, Capital Beginning investment of owner

PAGE 1 POST. REF. 101 301

2 Rent Expense Cash Paid October rent, Check 1001

514 101

5 Office Equipment Accounts Payable Purchased equipment from Office Furniture Mart, Inc., Invoice 6704, payable in 60 days

141 202

58  Chapter 4

DEBIT

CREDIT

1 50 0 0 0 00 2 50 0 0 0 00 3 4 5 2 5 0 0 00 6 2 5 0 0 00 7 8 9 14 0 0 0 00 10 14 0 0 0 00 11 12 13

PROBLEM 4.2A (continued) GENERAL JOURNAL DATE DESCRIPTION 1 2013 6 Art Equipment 2 Oct. Cash 3 Purchased art equipment, Check 1002 4 5 7 Supplies 6 Cash 7 Purchased supplies, Check 1003 8 9 10 Office Cleaning Expense 10 Cash 11 Paid for office cleaning, Check 1004 12 13 12 Cash 14 Accounts Receivable 15 Fees Income 16 Performed services for cash and on credit 17 18 15 Cash 19 Supplies Returned damaged supplies for cash refund 20 21 22 18 Office Equipment 23 Cash 24 Accounts Payable 25 Purchased equip. from Office Furniture Mart, Inc., 26 Invoice 7108; Check 1005; balance due in 30 days 27 28 20 Accounts Payable 29 Cash 30 Paid Office Furniture Mart, Inc., on account, 31 Invoice 6704; Check 1006

PAGE

POST. DEBIT CREDIT REF. 151 2 7 0 0 00 101 2 7 0 0 00

121 101

1 0 5 0 00

511 101

5 0 0 00

101 111 401

3 6 0 0 00 1 4 0 0 00

101 121

3 0 0 00

141 101 202

2 5 0 0 00

202 101

7 0 0 0 00

1 0 5 0 00

5 0 0 00

5 0 0 0 00

3 0 0 00

1 5 0 0 00 1 0 0 0 00

7 0 0 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

Chapter 4  59

PROBLEM 4.2A (continued) GENERAL JOURNAL DATE DESCRIPTION 1 2013 26 Accounts Receivable 2 Oct. Fees Income 3 Performed services on credit 4 5 27 Telephone Expense 6 Cash 7 Paid monthly telephone bill, Check 1007 8 9 30 Cash 10 Accounts Receivable 11 Received cash on account 12 13 30 Utilities Expense 14 Cash 15 Paid monthly utility bill, Check 1008 16 17 30 Salaries Expense 18 Cash 19 Paid monthly salaries, Checks 1009-1011 20

60  Chapter 4

PAGE

POST. REF. DEBIT CREDIT 111 3 9 0 0 00 401 3 9 0 0 00

520 101

2 7 5 00

101 111

3 2 0 0 00

523 101

3 5 0 00

517 101

7 5 0 0 00

1 2 3 4 5 2 7 5 00 6 7 8 9 3 2 0 0 00 10 11 12 13 3 5 0 00 14 15 16 17 7 5 0 0 00 18 19 20

PROBLEM 4.2A (continued) GENERAL LEDGER ACCOUNT

Cash

DATE 2013 Oct. 1 2 6 7 10 12 15 18 20 27 30 30 30

ACCOUNT

POST DESCRIPTION REF. J1 J1 J1 J1 J1 J1 J1 J2 J2 J2 J2 J2 J2

DEBIT

CREDIT

50 0 0 0 00 2 5 0 0 00 2 7 0 0 00 1 0 5 0 00 5 0 0 00 3 6 0 0 00 3 0 0 00 1 5 0 0 00 7 0 0 0 00 2 7 5 00 3 2 0 0 00 3 5 0 00 7 5 0 0 00

Accounts Receivable

DATE 2013 Oct. 12 26 30

ACCOUNT

ACCOUNT NO. 101

POST DESCRIPTION REF. J1 J2 J2

50 0 0 0 00 47 5 0 0 00 44 8 0 0 00 43 7 5 0 00 43 2 5 0 00 46 8 5 0 00 47 1 5 0 00 45 6 5 0 00 38 6 5 0 00 38 3 7 5 00 41 5 7 5 00 41 2 2 5 00 33 7 2 5 00

ACCOUNT NO. 111 DEBIT

CREDIT

1 4 0 0 00 3 9 0 0 00 3 2 0 0 00

Supplies

DATE 2013 Oct. 7 15

BALANCE DEBIT CREDIT

BALANCE CREDIT DEBIT 1 4 0 0 00 5 3 0 0 00 2 1 0 0 00

ACCOUNT NO. 121

POST DESCRIPTION REF. J1 J1

DEBIT

CREDIT

1 0 5 0 00 3 0 0 00

BALANCE DEBIT CREDIT 1 0 5 0 00 7 5 0 00

Chapter 4  61

PROBLEM 4.2A (continued) GENERAL LEDGER ACCOUNT

Office Equipment

DATE 2013 Oct. 5 18

ACCOUNT

ACCOUNT NO. 141

POST DESCRIPTION REF. J1 J2

14 0 0 0 00 2 5 0 0 00

ACCOUNT NO. 151 DEBIT

CREDIT

2 7 0 0 00

BALANCE DEBIT CREDIT 2 7 0 0 00

ACCOUNT NO. 202

POST DESCRIPTION REF. J1 J2 J2

DEBIT

CREDIT 14 0 0 0 00 1 0 0 0 00

7 0 0 0 00

Wilson Adams, Capital

POST DATE DESCRIPTION REF. 2013 Oct. 1 J1

62  Chapter 4

BALANCE DEBIT CREDIT 14 0 0 0 00 16 5 0 0 00

Accounts Payable

DATE 2013 Oct. 5 18 20

ACCOUNT

CREDIT

Art Equipment

POST DATE DESCRIPTION REF. 2013 Oct. 6 J1

ACCOUNT

DEBIT

BALANCE DEBIT CREDIT 14 0 0 0 00 15 0 0 0 00 8 0 0 0 00

ACCOUNT NO. 301 DEBIT

CREDIT 50 0 0 0 00

BALANCE DEBIT CREDIT 50 0 0 0 00

PROBLEM 4.2A (continued) GENERAL LEDGER ACCOUNT

Wilson Adams, Drawing

DATE

POST DESCRIPTION REF.

ACCOUNT

CREDIT

POST DESCRIPTION REF.

DEBIT

J1 J2

POST DESCRIPTION REF.

CREDIT

BALANCE DEBIT CREDIT

5 0 0 0 00 3 9 0 0 00

5 0 0 0 00 8 9 0 0 00

ACCOUNT NO. 511 DEBIT

CREDIT

5 0 0 00

BALANCE DEBIT CREDIT 5 0 0 00

Rent Expense

DATE DESCRIPTION 2013 Oct. 2

BALANCE CREDIT DEBIT

ACCOUNT NO. 401

Office Cleaning Expense

DATE 2013 Oct. 10

ACCOUNT

DEBIT

Fees Income

DATE 2013 Oct. 12 26

ACCOUNT

ACCOUNT NO. 302

ACCOUNT NO. 514 POST REF.

DEBIT

2 5 0 0 00

CREDIT

BALANCE DEBIT CREDIT 2 5 0 0 00

Chapter 4  63

PROBLEM 4.2A (continued) GENERAL LEDGER ACCOUNT

Salaries Expense

DATE 2013 Oct. 30

ACCOUNT

ACCOUNT NO. 517

POST DESCRIPTION REF. J2

CREDIT

7 5 0 0 00

ACCOUNT NO. 520 DEBIT

CREDIT

2 7 5 00

BALANCE CREDIT DEBIT 2 7 5 00

Utilities Expense

DATE 2013 Oct. 30

BALANCE DEBIT CREDIT 7 5 0 0 00

Telephone Expense

POST DATE DESCRIPTION REF. 2013 Oct. 27 J2

ACCOUNT

DEBIT

ACCOUNT NO. 523

POST DESCRIPTION REF. J2

DEBIT

CREDIT

3 5 0 00

BALANCE DEBIT CREDIT 3 5 0 00

Analyze: General ledger account 202 has an $8,000 credit balance. PROBLEM 4.3A April 1: The debit should be to Accounts Receivable, not Accounts Payable. April 2: The debit and credit amounts are reversed. Telephone Expense should be debited and Cash should be credited. April 3: The two debit amounts and the credit amount in the entry are not equal because of a math error. The credit for Cash should be $8,000. Analyze: After correcting the three entries, the assets are increased by $11,800 ($12,400 - $1,000 + $400).

64  Chapter 4

PROBLEM 4.4A GENERAL JOURNAL DATE DESCRIPTION 1 2013 2 Nov. 1 Cash 3 Tools 4 Erwin Tobias, Capital 5 Beginning investment of owner 6 7 2 Equipment 8 Office Supplies 9 Cash 10 Accounts Payable 11 Purchased equipment and office supplies from 12 Office Depot, Invoice 501; issued Check 100 13 for a down payment, balance payable in 30 days 14 15 10 Cash 16 Accounts Receivable 17 Fees Income 18 Services for cash and credit 19 20 20 Machinery 21 Cash 22 Accounts Payable 23 Purchased machinery from Cottle Machinery Inc., 24 Invoice 709; issued Check 101 25 for a down payment, balance due in 30 days 26

PAGE POST. REF.

DEBIT

101 131 301

45 0 0 0 00 1 0 0 0 00

151 121 101 202

1 9 5 0 00 4 5 0 00

101 111 401

5 0 0 00 1 4 0 0 00

141 101 202

3 0 0 0 00

CREDIT

46 0 0 0 00

6 0 0 00 1 8 0 0 00

1 9 0 0 00

1 0 0 0 00 2 0 0 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Chapter 4  65

PROBLEM 4.4A (continued) GENERAL LEDGER ACCOUNT

Cash

DATE 2013 Nov. 1 2 10 20

ACCOUNT

POST DESCRIPTION REF. J1 J1 J1 J1

45 0 0 0 00 5 0 0 00

CREDIT

45 0 0 0 00 6 0 0 00 44 4 0 0 00 44 9 0 0 00 1 0 0 0 00 43 9 0 0 00

DEBIT

CREDIT

1 4 0 0 00

ACCOUNT NO. 121 POST REF. J1

DEBIT

CREDIT

4 5 0 00

BALANCE DEBIT CREDIT 4 5 0 00

Tools

66  Chapter 4

BALANCE CREDIT DEBIT 1 4 0 0 00

Office Supplies

DATE 2013 Nov. 1

BALANCE DEBIT CREDIT

ACCOUNT NO. 111

POST DESCRIPTION REF.

DATE DESCRIPTION 2013 Nov. 2

ACCOUNT

DEBIT

Accounts Receivable

DATE 2013 Nov. 10

ACCOUNT

ACCOUNT NO. 101

ACCOUNT NO. 131

POST DESCRIPTION REF. J1

DEBIT 1 0 0 0 00

CREDIT

BALANCE DEBIT CREDIT 1 0 0 0 00

PROBLEM 4.4A (continued) GENERAL LEDGER ACCOUNT

Machinery

DATE 2013 Nov. 20

ACCOUNT

POST DESCRIPTION REF. J1

CREDIT

3 0 0 0 00

ACCOUNT NO. 151 POST REF.

DEBIT

1 9 5 0 00

CREDIT

BALANCE DEBIT CREDIT 1 9 5 0 00

ACCOUNT NO. 202

POST DESCRIPTION REF.

DEBIT

J1 J1

CREDIT 1 8 0 0 00 2 0 0 0 00

Erwin Tobias, Capital

DATE 2013 Nov. 1

BALANCE CREDIT DEBIT 3 0 0 0 00

Accounts Payable

DATE 2013 Nov. 2 20

ACCOUNT

DEBIT

Equipment

DATE DESCRIPTION 2013 Nov. 2

ACCOUNT

ACCOUNT NO. 141

POST DESCRIPTION REF. J1

BALANCE CREDIT DEBIT 1 8 0 0 00 3 8 0 0 00

ACCOUNT NO. 301 DEBIT

CREDIT 46 0 0 0 00

BALANCE DEBIT CREDIT 46 0 0 0 00

Chapter 4  67

PROBLEM 4.4A (continued) GENERAL LEDGER ACCOUNT

Fees Income

DATE 2013 Nov. 10

ACCOUNT NO. 401

POST DESCRIPTION REF.

DEBIT

CREDIT

BALANCE DEBIT CREDIT

1 9 0 0 00

Analyze: The business owes $3,800 as of November 30.

PROBLEM 4.1B GENERAL JOURNAL DATE DESCRIPTION 1 2013 2 Sept. 1 Cash 3 Cathy Cox 4 Beginning investment of owner 5 6 5 Cash 7 Fees Income 8 Performed services for cash 9 10 6 Rent Expense 11 Cash 12 Paid for September, Check 1000 13 14 7 Accounts Receivable 15 Fees Income 16 Performed services on credit 17 18 9 Telephone Expense 19 Cash 20 Paid telephone bill, Check 1001

68  Chapter 4

PAGE 1 POST REF.

DEBIT

CREDIT

25 0 0 0 00 25 0 0 0 00

2 8 0 0 00 2 8 0 0 00

1 8 0 0 00 1 8 0 0 00

3 6 0 0 00 3 6 0 0 00

4 0 0 00 4 0 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

PROBLEM 4.1B (continued) GENERAL JOURNAL DATE DESCRIPTION 1 2013 2 Sept. 10 Equipment Repair Expense 3 Cash 4 Paid for equipment repairs, Check 1002 5 6 12 Cash 7 Accounts Receivable 8 Received cash on account 9 10 14 Salaries Expense 11 Cash 12 Paid semimonthly salaries to employees, 13 Checks 1003-1004 14 15 18 Cleaning Supplies Expense 16 Cash 17 Paid for cleaning supplies, Check 1005 18 19 19 Office Supplies Expense 20 Cash 21 Paid for office supplies, Check 1006 22 23 20 Equipment 24 Cash 25 Accounts Payable 26 Purchase from Reese Equipment, Inc., 27 Invoice 1012; issued Check 1007 for down 28 payment, balance due in 30 days 29 30 22 Cash 31 Fees Income 32 Performed services for cash 33 34 24 Utilities Expense 35 Cash 36 Paid utility bill, Check 1008

PAGE POST. REF.

DEBIT 2 5 0 00

4 9 0 0 00

9 5 0 0 00

7 0 0 00

6 0 0 00

5 0 0 0 00

2 9 5 0 00

4 5 0 00

CREDIT 1 2 2 5 0 00 3 4 5 6 4 9 0 0 00 7 8 9 10 9 5 0 0 00 11 12 13 14 15 7 0 0 00 16 17 18 19 6 0 0 00 20 21 22 23 2 0 0 0 00 24 3 0 0 0 00 25 26 27 28 29 30 2 9 5 0 00 31 32 33 34 4 5 0 00 35 36

Chapter 4  69

PROBLEM 4.1B (continued) GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

DATE DESCRIPTION 2013 Sept. 26 Accounts Receivable Fees Income Performed services on account

PAGE POST. REF.

DEBIT 3 6 0 0 00

30 Salaries Expense Cash Paid semimonthly salaries, Checks 1009-1010

9 5 0 0 00

30 Cathy Cox, Drawing Cash Owner withdrew cash for personal use, Check 1011

3 0 0 0 00

CREDIT 1 2 3 6 0 0 00 3 4 5 6 9 5 0 0 00 7 8 9 10 11 3 0 0 0 00 12 13 14 15

Analyze: Eight transactions affected expense accounts. PROBLEM 4.2B GENERAL JOURNAL

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

DATE DESCRIPTION 2013 June 1 Cash Wallace King, Capital Beginning investment of owner

PAGE 1 POST. REF. 101 301

2 Rent Expense Cash Paid rent for June, Check 1001

514 101

5 Office Equipment Accounts Payable Purchased office equipment from Brown, Inc., Invoice 5312, payable in 60 days

141 202

70  Chapter 4

DEBIT

CREDIT

1 2 16 0 0 0 00 3 4 5 9 0 0 00 6 9 0 0 00 7 8 9 3 7 5 0 00 10 3 7 5 0 00 11 12 13 14

16 0 0 0 00

PROBLEM 4.2B (continued) GENERAL JOURNAL DATE DESCRIPTION 1 2013 2 June 6 Photographic Equipment 3 Cash 4 Purchased photo equipment, Check 1002 5 6 7 Supplies 7 Cash 8 Purchased supplies, Check 1003 9 10 10 Office Cleaning Expense 11 Cash 12 Paid for office cleaning, Check 1004 13 14 12 Cash 15 Accounts Receivable 16 Fees Income 17 Performed services for cash and credit 18 19 15 Cash 20 Supplies 21 Returned damaged supplies for cash 22 23 18 Office Equipment 24 Cash 25 Accounts Payable 26 Purchase from Craft Office Supply, 27 Invoice 304; issued Check 1005 for down 28 payment, balance payable in 30 days 29 30 20 Accounts Payable 31 Cash 32 Paid Brown, Inc., on account, Invoice 33 5312, Check 1006 34 35 26 Accounts Receivable 36 Fees Income 37 Performed services on credit

PAGE POST. REF.

DEBIT

151 101

9 5 0 00

121 101

2 3 8 00

511 101

2 0 0 00

101 111 401

6 5 0 00 6 5 0 00

101 121

7 5 00

141 101 202

1 0 2 5 00

202 101

2 1 0 0 00

111 401

1 0 0 0 00

CREDIT 1 2 9 5 0 00 3 4 5 6 2 3 8 00 7 8 9 10 2 0 0 00 11 12 13 14 15 1 3 0 0 00 16 17 18 19 7 5 00 20 21 22 23 5 0 0 00 24 5 2 5 00 25 26 27 28 29 30 2 1 0 0 00 31 32 33 34 35 1 0 0 0 00 36 37

Chapter 4  71

PROBLEM 4.2B (continued) GENERAL JOURNAL DATE DESCRIPTION 1 2013 2 June 27 Telephone Expense 3 Cash 4 Paid monthly phone bill, Check 1007 5 6 30 Cash 7 Accounts Receivable 8 Received cash on account 9 10 30 Utilities Expense 11 Cash 12 Paid monthly utility bill, Check 1008 13 14 30 Salaries Expense 15 Cash 16 Paid monthly salaries to employees, 17 Checks 1009-1011 18

72  Chapter 4

PAGE POST. REF.

DEBIT

520 101

2 9 0 00

101 111

1 0 5 0 00

523 101

2 7 5 00

517 101

2 8 0 0 00

CREDIT 1 2 2 9 0 00 3 4 5 6 1 0 5 0 00 7 8 9 10 2 7 5 00 11 12 13 14 2 8 0 0 00 15 16 17 18

PROBLEM 4.2B (continued) GENERAL LEDGER ACCOUNT DATE 2013 June 1 2 6 7 10 12 15 18 20 27 30 30 30

ACCOUNT DATE 2013 June 12 26 30

ACCOUNT DATE 2013 June 7 15

Cash

ACCOUNT NO. 101

POST DESCRIPTION REF. J1 J1 J1 J1 J1 J1 J1 J2 J2 J2 J2 J2 J2

DEBIT

CREDIT

16 0 0 0 00 9 0 0 00 9 5 0 00 2 3 8 00 2 0 0 00 6 5 0 00 7 5 00 5 0 0 00 2 1 0 0 00 2 9 0 00 1 0 5 0 00 2 7 5 00 2 8 0 0 00

Accounts Receivable

BALANCE DEBIT CREDIT 16 0 0 0 00 15 1 0 0 00 14 1 5 0 00 13 9 1 2 00 13 7 1 2 00 14 3 6 2 00 14 4 3 7 00 13 9 3 7 00 11 8 3 7 00 11 5 4 7 00 12 5 9 7 00 12 3 2 2 00 9 5 2 2 00

ACCOUNT NO. 111

POST DESCRIPTION REF. J1 J2 J2

DEBIT

CREDIT

BALANCE DEBIT CREDIT

1 0 5 0 00

6 5 0 00 1 6 5 0 00 6 0 0 00

6 5 0 00 1 0 0 0 00

Supplies

ACCOUNT NO. 121

POST DESCRIPTION REF. J1 J1

DEBIT

CREDIT

2 3 8 00 7 5 00

BALANCE DEBIT CREDIT 2 3 8 00 1 6 3 00

Chapter 4  73

PROBLEM 4.2B (continued) GENERAL LEDGER ACCOUNT

Office Equipment

DATE DESCRIPTION 2013 June 5 18

ACCOUNT

DEBIT

J1 J2

3 7 5 0 00 1 0 2 5 00

CREDIT

POST REF. J1

ACCOUNT NO. 151 DEBIT

CREDIT

9 5 0 00

74  Chapter 4

BALANCE DEBIT CREDIT 9 5 0 00

ACCOUNT NO. 202 POST REF. J1 J2 J2

DEBIT

CREDIT 3 7 5 0 00 5 2 5 00

2 1 0 0 00

Wallace King, Capital

DATE DESCRIPTION 2013 June 1

BALANCE DEBIT CREDIT 3 7 5 0 00 4 7 7 5 00

Accounts Payable

DATE DESCRIPTION 2013 June 5 18 20

ACCOUNT

POST REF.

Photographic Equipment

DATE DESCRIPTION 2013 June 6

ACCOUNT

ACCOUNT NO. 141

POST REF. J1

BALANCE DEBIT CREDIT 3 7 5 0 00 4 2 7 5 00 2 1 7 5 00

ACCOUNT NO. 301 DEBIT

CREDIT 16 0 0 0 00

BALANCE DEBIT CREDIT 16 0 0 0 00

PROBLEM 4.2B (continued) GENERAL LEDGER ACCOUNT

Wallace King, Drawing

DATE

POST DESCRIPTION REF.

ACCOUNT

CREDIT

BALANCE DEBIT CREDIT

ACCOUNT NO. 401

POST DESCRIPTION REF.

DEBIT

J1 J2

CREDIT

POST DESCRIPTION REF.

1 3 0 0 00 2 3 0 0 00

ACCOUNT NO. 511 DEBIT

CREDIT

2 0 0 00

BALANCE DEBIT CREDIT 2 0 0 00

Rent Expense

POST DATE DESCRIPTION REF. 2013 June 2 J1

BALANCE DEBIT CREDIT

1 3 0 0 00 1 0 0 0 00

Office Cleaning Expense

DATE 2013 June 10

ACCOUNT

DEBIT

Fees Income

DATE 2013 June 12 26

ACCOUNT

ACCOUNT NO. 302

ACCOUNT NO. 514 DEBIT

CREDIT

9 0 0 00

BALANCE DEBIT CREDIT 9 0 0 00

Chapter 4  75

PROBLEM 4.2B (continued) GENERAL LEDGER ACCOUNT DATE 2013 June 30

ACCOUNT

Salaries Expense

ACCOUNT NO. 517

POST DESCRIPTION REF. J2

DATE 2013 June 30

CREDIT

2 8 0 0 00

BALANCE DEBIT CREDIT 2 8 0 0 00

Telephone Expense

ACCOUNT NO. 520

POST DATE DESCRIPTION REF. 2013 June 27 J2

ACCOUNT

DEBIT

CREDIT

2 9 0 00

BALANCE DEBIT CREDIT 2 9 0 00

Utilities Expense

ACCOUNT NO. 523

POST DESCRIPTION REF. J2

DEBIT 2 7 5 00

CREDIT

BALANCE DEBIT CREDIT 2 7 5 00

Analyze: The Cash account balance after the June 27 transaction was $11,547.

PROBLEM 4.3B January 1: The debit should be to Accounts Receivable, not Accounts Payable. January 2: The debit and credit amounts are reversed. Telephone Expense should be debited and Cash should be credited. January 3: The two debit amounts and the credit amount in the entry are not equal because of a mathematical error. The credit for Cash should be $470. Analyze: The assets increased by $305. (Accounts Receivable + $450; Cash - $125 [$62.50 x 2]; Cash - $20)

76  Chapter 4

PROBLEM 4.4B GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

DATE 2013 Dec. 3 Cash

DESCRIPTION

PAGE POST. REF.

Richard Boley, Capital Beginning investment of owner

101 301

4 Computers Cash Paid cash for computer

131 101

5 Furnitures and Fixtures Accounts Payable Purchased office furniture on credit

151 202

6 Office Equipment Cash Paid cash for equipment

141 101

10 Accounts Receivable Fees Income Rendered services on account

111 401

11 Office Supplies Cash Paid cash for supplies

121 101

15 Accounts Payable Cash Paid invoice for furniture purchased on December 5

202 101

DEBIT

CREDIT

1 15 0 0 0 00 2 15 0 0 0 00 3 4 5 1 2 0 0 00 6 1 2 0 0 00 7 8 9 4 0 0 0 00 10 4 0 0 0 00 11 12 13 1 0 9 5 00 14 1 0 9 5 00 15 16 17 1 3 0 0 00 18 1 3 0 0 00 19 20 21 4 5 0 00 22 4 5 0 00 23 24 25 4 0 0 0 00 26 4 0 0 0 00 27 28 29

Chapter 4  77

PROBLEM 4.4B (continued) GENERAL LEDGER ACCOUNT

Cash

DATE 2013 Dec. 3 4 6 11 15

ACCOUNT

POST DESCRIPTION REF. J1 J1 J1 J1 J1

CREDIT

15 0 0 0 00 1 2 0 0 00 1 0 9 5 00 4 5 0 00 4 0 0 0 00

DEBIT

CREDIT

1 3 0 0 00

BALANCE DEBIT CREDIT

ACCOUNT NO. 121 POST REF. J1

DEBIT

CREDIT

4 5 0 00

BALANCE DEBIT CREDIT 4 5 0 00

Computers

78  Chapter 4

15 0 0 0 00 13 8 0 0 00 12 7 0 5 00 12 2 5 5 00 8 2 5 5 00

1 3 0 0 00

Office Supplies

DATE 2013 Dec. 4

BALANCE DEBIT CREDIT

ACCOUNT NO. 111

POST DESCRIPTION REF.

DATE DESCRIPTION 2013 Dec. 11

ACCOUNT

DEBIT

Accounts Receivable

DATE 2013 Dec. 10

ACCOUNT

ACCOUNT NO. 101

ACCOUNT NO. 131

POST DESCRIPTION REF. J1

DEBIT 1 2 0 0 00

CREDIT

BALANCE DEBIT CREDIT 1 2 0 0 00

PROBLEM 4.4B (continued) GENERAL LEDGER ACCOUNT DATE 2013 Dec. 6

ACCOUNT

Office Equipment POST DESCRIPTION REF. J1

DATE 2013 Dec. 5 15

ACCOUNT DATE 2013 Dec. 3

DEBIT

CREDIT

1 0 9 5 00

BALANCE DEBIT CREDIT 1 0 9 5 00

Furniture and Fixtures

DATE DESCRIPTION 2013 Dec. 5

ACCOUNT

ACCOUNT NO. 141

ACCOUNT NO. 151

POST REF.

DEBIT

4 0 0 0 00

CREDIT

BALANCE DEBIT CREDIT 4 0 0 0 00

Accounts Payable

ACCOUNT NO. 202

POST DESCRIPTION REF. J1 J1

DEBIT

CREDIT 4 0 0 0 00

4 0 0 0 00

Richard Boley, Capital POST DESCRIPTION REF. J1

BALANCE DEBIT CREDIT 4 0 0 0 00 − 0 −

ACCOUNT NO. 301 DEBIT

CREDIT 15 0 0 0 00

BALANCE DEBIT CREDIT 15 0 0 0 00

Chapter 4  79

PROBLEM 4.4B (continued) GENERAL LEDGER ACCOUNT

Fees Income

DATE 2013 Dec. 10

DESCRIPTION

ACCOUNT NO. 401 POST REF. J1

DEBIT

CREDIT 1 3 0 0 00

BALANCE DEBIT CREDIT 1 3 0 0 00

Analyze: Two postings were recorded, one debit and one credit.

CRITICAL THINKING PROBLEM 4.1 Income Statement Errors: 1. The third line of the heading is incorrect; this line must indicate the time period covered by the income statement. 2. Drawing is not an expense but a reduction of owner’s equity and is included in the calculation of ending owner’s equity, not on the income statement. 3. Arithmetic errors were made in adding column of expenses and in subtracting total expenses from revenue. Balance Sheet Errors: 1. The third line of the heading is incorrect; the balance sheet is identified by the last day of the accounting period. 2. Accounts Payable and Accounts Receivable are classified incorrectly; they should be interchanged. Accounts Payable is a liability and Accounts Receivable is an asset. 3. 4.

The assets are not listed in the correct order. The amount for Owner’s Equity on the balance sheet should be the ending owner’s equity, not the beginning owner’s equity. A statement of owner’s equity should be prepared to compute ending owner’s equity.

80  Chapter 4

CRITICAL THINKING PROBLEM 4.1 (continued) Oxford Beauty Supply Income Statement Month Ended April 30, 2013 Revenue Fees Income Expenses Salaries Expense Rent Expense Repair Expense Utilities Expense Total Expenses Net Income

18 3 0 0 00 4 5 0 0 00 9 0 0 00 1 5 0 00 8 5 0 00 6 4 0 0 00 11 9 0 0 00

Oxford Beauty Supply Statement of Owner's Equity Month Ended April 30, 2013 Ken Oxford, Capital, April 1, 2013 Net Income for April Less Withdrawals for April Increase in Capital Ken Oxford, Capital, April 30, 2013

24 6 0 0 00 11 9 0 0 00 2 0 0 0 00 9 9 0 0 00 34 5 0 0 00

Oxford Beauty Supply Balance Sheet April 30, 2013 Assets Cash Accounts Receivable Land Building Total Assets

Liabilities Accounts Payable

7 5 0 0 00 3 5 0 0 00 6 0 0 0 00 Owner's Equity 20 0 0 0 00 Ken Oxford, Capital 37 0 0 0 00 Total Liabilities & Owner's Equity

2 5 0 0 00

34 5 0 0 00 37 0 0 0 00

Chapter 4  81

CRITICAL THINKING PROBLEM 4.2 GENERAL JOURNAL DATE DESCRIPTION 1 2013 2 June 1 Cash 3 Wade Wilson, Capital 4 Beginning investment of owner 5 6 2 Rent Expense 7 Cash 8 Paid rent for June, Check 201 9 10 3 Office Furniture 11 Cash 12 Accounts Payable 13 Purchased furniture from Davis 14 Office Supply, Invoice 5103; issued 15 Check 202, balance due in 30 days 16 17 4 Supplies 18 Cash 19 Purchased supplies, Check 203 20 21 6 Cash 22 Fees Income 23 Performed services for cash 24 25 7 Advertising Expense 26 Cash 27 Paid for advertising, Check 204 28 29 8 Recording Equipment 30 Cash 31 Accounts Payable 32 Purchased equipment from Rhythms 33 and Moves, Inc., Invoice 2122; issued Check 205, balance due in 30 days 34 35 36 10 Accounts Receivable 37 Fees Income 38 Performed services on account

82  Chapter 4

PAGE 1 POST. REF. 101 301

514 101

141 101 202

121 101

101 401

511 101

151 101 202

111 401

DEBIT

CREDIT

1 2 15 0 0 0 00 3 4 5 9 0 0 00 6 9 0 0 00 7 8 9 6 0 0 0 00 10 2 0 0 0 00 11 4 0 0 0 00 12 13 14 15 16 8 0 0 00 17 8 0 0 00 18 19 20 3 0 0 0 00 21 3 0 0 0 00 22 23 24 1 0 0 0 00 25 1 0 0 0 00 26 27 28 7 5 0 0 00 29 2 5 0 0 00 30 5 0 0 0 00 31 32 33 34 35 2 4 5 0 00 36 2 4 5 0 00 37 38

15 0 0 0 00

CRITICAL THINKING PROBLEM 4.2 (continued) GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39

DATE DESCRIPTION 2013 June 11 Accounts Payable Cash Paid Davis Office Supply on account for Invoice 5103, Check 206

PAGE POST. REF.

DEBIT

202 101

1 5 0 0 00

101 401

4 5 0 0 00

15 Salaries Expense Cash Paid semimonthly salary, Check 207

517 101

2 5 0 0 00

18 Cash

101 111

2 0 0 0 00

20 Accounts Payable Cash Paid Rhythms and Moves, Inc., on account, Invoice 2122, Check 208

202 101

3 0 0 0 00

25 Telephone Expense Cash Paid telephone bill, Check 209

520 101

1 7 5 00

27 Utilities Expense Cash Paid utility bill, Check 210

523 101

4 0 0 00

28 Wade Wilson, Drawing Cash Owner withdrew cash for personal use, Check 211

302 101

2 0 0 0 00

30 Salaries Expense Cash Paid semimonthly salary, Check 212

517 101

2 5 0 0 00

12 Cash Fees Income Performed services for cash

Accounts Receivable Received payment on account

CREDIT 1 2 1 5 0 0 00 3 4 5 6 7 4 5 0 0 00 8 9 10 11 2 5 0 0 00 12 13 14 15 2 0 0 0 00 16 17 18 19 3 0 0 0 00 20 21 22 23 24 1 7 5 00 25 26 27 28 4 0 0 00 29 30 31 32 2 0 0 0 00 33 34 35 36 37 2 5 0 0 00 38 39

Chapter 4  83

CRITICAL THINKING PROBLEM 4.2 (continued) GENERAL LEDGER ACCOUNT

Cash POST DESCRIPTION REF.

DATE 2013 June 1 2 3 4 6 7 8 11 12 15 18 20 25 27 28 30

ACCOUNT

ACCOUNT NO. 101

J1 J1 J1 J1 J1 J1 J1 J2 J2 J2 J2 J2 J2 J2 J3 J3

DEBIT 15 0 0 0 00

3 0 0 0 00

4 5 0 0 00 2 0 0 0 00

CREDIT

15 0 0 0 00 9 0 0 00 14 1 0 0 00 2 0 0 0 00 12 1 0 0 00 8 0 0 00 11 3 0 0 00 14 3 0 0 00 1 0 0 0 00 13 3 0 0 00 2 5 0 0 00 10 8 0 0 00 1 5 0 0 00 9 3 0 0 00 13 8 0 0 00 2 5 0 0 00 11 3 0 0 00 13 3 0 0 00 3 0 0 0 00 10 3 0 0 00 1 7 5 00 10 1 2 5 00 4 0 0 00 9 7 2 5 00 2 0 0 0 00 7 7 2 5 00 2 5 0 0 00 5 2 2 5 00

Accounts Receivable

DATE 2013 June 10 18

ACCOUNT NO. 111

POST DESCRIPTION REF. J2 J2

DEBIT

CREDIT

BALANCE DEBIT CREDIT

2 0 0 0 00

2 4 5 0 00 4 5 0 00

2 4 5 0 00

ACCOUNT Supplies DATE 2013 June 4

84  Chapter 4

BALANCE DEBIT CREDIT

ACCOUNT NO. 121

POST DESCRIPTION REF. J1

DEBIT 8 0 0 00

CREDIT

BALANCE DEBIT CREDIT 8 0 0 00

CRITICAL THINKING PROBLEM 4.2 (continued) GENERAL LEDGER ACCOUNT

Office Furniture

DATE DESCRIPTION 2013 June 3

ACCOUNT

DEBIT

6 0 0 0 00

CREDIT

ACCOUNT NO. 151

POST REF.

DEBIT

7 5 0 0 00

CREDIT

BALANCE DEBIT CREDIT 7 5 0 0 00

ACCOUNT NO. 202 POST REF. J1 J1 J2 J2

DEBIT

CREDIT 4 0 0 0 00 5 0 0 0 00

1 5 0 0 00 3 0 0 0 00

Wade Wilson, Capital

DATE DESCRIPTION 2013 June 1

BALANCE DEBIT CREDIT 6 0 0 0 00

Accounts Payable

DATE DESCRIPTION 2013 June 3 8 11 20

ACCOUNT

POST REF.

Recording Equipment

DATE DESCRIPTION 2013 June 8

ACCOUNT

ACCOUNT NO. 141

POST REF. J1

BALANCE DEBIT CREDIT 4 0 0 0 00 9 0 0 0 00 7 5 0 0 00 4 5 0 0 00

ACCOUNT NO. 301 DEBIT

CREDIT 15 0 0 0 00

BALANCE DEBIT CREDIT 15 0 0 0 00

Chapter 4  85

CRITICAL THINKING PROBLEM 4.2 (continued) GENERAL LEDGER ACCOUNT

Wade Wilson, Drawing

DATE DESCRIPTION 2013 June 28

ACCOUNT

DEBIT

2 0 0 0 00

CREDIT

ACCOUNT NO. 401 POST REF.

DEBIT

J1 J2 J2

CREDIT

86  Chapter 4

BALANCE DEBIT CREDIT

3 0 0 0 00 2 4 5 0 00 4 5 0 0 00

3 0 0 0 00 5 4 5 0 00 9 9 5 0 00

ACCOUNT NO. 511

POST REF.

DEBIT

1 0 0 0 00

CREDIT

BALANCE DEBIT CREDIT 1 0 0 0 00

Rent Expense

DATE DESCRIPTION 2013 June 2

BALANCE DEBIT CREDIT 2 0 0 0 00

Advertising Expense

DATE DESCRIPTION 2013 June 7

ACCOUNT

POST REF.

Fees Income

DATE DESCRIPTION 2013 June 6 10 12

ACCOUNT

ACCOUNT NO. 302

ACCOUNT NO. 514 POST REF. J1

DEBIT 9 0 0 00

CREDIT

BALANCE DEBIT CREDIT 9 0 0 00

CRITICAL THINKING PROBLEM 4.2 (continued) GENERAL LEDGER ACCOUNT

Salaries Expense

DATE DESCRIPTION 2013 June 15 30

ACCOUNT

POST REF.

DEBIT

J2 J2

2 5 0 0 00 2 5 0 0 00

CREDIT

ACCOUNT NO. 520 POST REF. J2

DEBIT

CREDIT

1 7 5 00

BALANCE DEBIT CREDIT 1 7 5 00

Utilities Expense

DATE DESCRIPTION 2013 June 27

BALANCE DEBIT CREDIT 2 5 0 0 00 5 0 0 0 00

Telephone Expense

DATE DESCRIPTION 2013 June 25

ACCOUNT

ACCOUNT NO. 517

ACCOUNT NO. 523 POST REF. J2

DEBIT

CREDIT

4 0 0 00

BALANCE DEBIT CREDIT 4 0 0 00

Chapter 4  87

CRITICAL THINKING PROBLEM 4.2 (continued) California Talent Agency Trial Balance June 30, 2013 Cash Accounts Receivable Supplies Office Furniture Recording Equipment Accounts Payable Wade Wilson, Capital Wade Wilson, Drawing Fees Income Advertising Expense Rent Expense Salaries Expense Telephone Expense Utilities Expense Totals

5 2 2 5 00 4 5 0 00 8 0 0 00 6 0 0 0 00 7 5 0 0 00 4 5 0 0 00 15 0 0 0 00 2 0 0 0 00 9 9 5 0 00 1 0 0 0 00 9 0 0 00 5 0 0 0 00 1 7 5 00 4 0 0 00 29 4 5 0 00

29 4 5 0 00

California Talent Agency Income Statement Month Ended June 30, 2013 Revenue Fees Income Expenses Advertising Expense Rent Expense Salaries Expense Telephone Expense Utilities Expense Total Expenses Net Income

88  Chapter 4

9 9 5 0 00 1 0 0 0 00 9 0 0 00 5 0 0 0 00 1 7 5 00 4 0 0 00 7 4 7 5 00 2 4 7 5 00

CRITICAL THINKING PROBLEM 4.2 (continued) California Talent Agency Statement of Owner's Equity Month Ended June 30, 2010 Wade Wilson, Capital, June 1, 2013 Net Income for June Less Withdrawals for June Increase in Owner's Equity Wade Wilson, Capital, June 30, 2013

15 0 0 0 00 2 4 7 5 00 2 0 0 0 00 4 7 5 00 15 4 7 5 00

California Talent Agency Balance Sheet June 30, 2013 Assets Cash Accounts Receivable Supplies Office Furniture Recording Equipment Total Assets

5 2 2 5 00 4 5 0 00 8 0 0 00 6 0 0 0 00 7 5 0 0 00 19 9 7 5 00

Liabilities Accounts Payable

Owner's Equity Wade Wilson, Capital Total Liabilities & Owner's Equity

4 5 0 0 00

15 4 7 5 00 19 9 7 5 00

Analyze: There were 16 postings in the Cash account.

Chapter 4  89

SOLUTIONS TO BUSINESS CONNECTIONS Managerial Focus: 1. Journal: detailed chronological record. Ledger: permanent, classified record of all financial events. 2. To assure accuracy and safeguards against fraud. 3. For prompt and accurate journalizing of all transactions. 4. Inefficient flow of information; errors and insufficient information. Ethical Dilemma: You must check to see if the cash account is going down because of her actions. Is Louisa keeping the cash from the reversed sales because she has made so many errors? Is this something she does each month? It is unethical to accept a dinner for fixing her error. Financial Statement Analysis: 1. Debit Transportation Equipment account, credit Accounts Payable. 2. Invoice from the supplier. 3. Dates for equipment purchases, posting reference, purchase amount, account balance ($2,355 million at January 31, 2010). Analyze Online: Answers will vary depending on the year. Teamwork: Answers will vary. Journal Entry to General Ledger to Trial Balance to Financial Statement. Internet Connection: Sites that might be displayed are: www.careerbank.com , www.careersinaccounting.com , www.account.com . Suggested experience would require 5 years or more, with an AA degree. Skills would include good communication skills, detailed and multi-task oriented.

90  Chapter 4

SOLUTIONS TO PRACTICE TEST Part A Matching 1. i 2. h 3. d 4. e 5. c 6. g 7. a 8. f 9. b 10. j Part B Completion 1. debit 2. year 3. chronological or date 4. assets or balance sheet accounts 5. posted 6. ledger 7. posting references 8. brief or concise 9. credit 10. debit

Chapter 4  91

CHAPTER 5 ADJUSTMENTS AND THE WORKSHEET Chapter Opener: Thinking Critically Students should suggest that accountants estimate the amount of wear and tear on the equipment. This expense should be charged against the income earned during that same period. The concept of adjustments and depreciation can be introduced at this time. Fast Facts • William Boeing founded Pacific Aero Products Company in 1916; the name was changed to Boeing in 1917. • In 1917, the company employed 28 people. In 2007, Boeing employed more than 150,000 people in 48 U.S. states and 70 foreign countries. • Boeing is the largest contractor working for NASA. • Along with the ISS, the Boeing Company manufactures and services commercial airplanes, military aircraft, helicopters, a variety of electronic defense systems, and advanced communication systems. • Boeing’s 2006 sales were $61.5 billion from customers in 145 countries. International sales accounted for nearly 30 percent of total sales. Managerial Implications: Thinking Critically Assets are depreciated because they have a limited life and will be used up over time. Depreciation is the allocation of the cost of the asset over its useful life. Discussion Questions Note to instructor : These questions are designed to check students’ understanding of new terms, concepts, and procedures presented in the chapter. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.

Debit Depreciation Expense—Machine, $250; Credit Accum. Depr. – Machine, $250. Debit Insurance Expense; credit Prepaid Insurance. Expense items that are acquired and paid for in advance of their use. Supplies, prepaid rent, prepaid insurance, and advertising. Update supplies accounts at the end of a period to reflect amounts used. b, d, f, g, and i are depreciated. Only long-term tangible assets are subject to depreciation. a. none b. none c. none d. decrease a. decrease b. none c. none d. decrease To create a permanent record of any changes in account balances that are shown on the worksheet. Asset cost, accumulated depreciation, book value. Contra asset accounts have a credit balance. Asset accounts have a debit balance. Cost of asset less accumulated depreciation. To keep a record of total depreciation taken; to reduce the book value of asset. Charges off an equal amount of cost of asset during each accounting period in asset’s useful life. Equipment, buildings, and automobiles.

92  Chapter 5

EXERCISE 5.1 1. Rent Expense, $900 Dr. Prepaid Rent, $900 Cr. ($5,400 ÷ 6 months = $900 per month) 2. Supplies Expense, $4,400 Dr. Supplies, $4,400 Cr. ($7,450 - $3,050 = $4,400) 3. Depreciation Expense—Equipment, $500 Dr. Accumulated Depreciation—Equipment, $500 Cr. ($60,000 ÷ 120 months = $500) EXERCISE 5.2 1. Insurance Expense, $250 Dr. Prepaid Insurance, $250 Cr. ($6,000 ÷ 24 months = $250) 2. Advertising Expense, $1,250 Dr. Prepaid Advertising, $1,250 Cr. ($15,000 ÷ 12 months = $1,250)

Chapter 5  93

210 2 2 5 00 210 2 2 5 00 15 17 18 19 20 21 22

8 5 7 5 00

17 18 19 20 21 22

8 5 7 5 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 16

208 6 5 0 00 208 6 5 0 00

ADJUSTMENTS DEBIT CREDIT

ADJUSTED TRIAL BALANCE DEBIT CREDIT 62 0 0 0 00 21 5 0 0 00 (a) 5 2 0 0 00 2 8 0 0 00 (b) 1 8 0 0 00 5 4 0 0 00 90 5 0 0 00 (c) 1 5 7 5 00 1 5 7 5 00 15 7 0 0 00 15 7 0 0 00 80 9 5 0 00 80 9 5 0 00 112 0 0 0 00 112 0 0 0 00 9 6 0 0 00 9 6 0 0 00 9 8 5 0 00 9 8 5 0 00 (a) 5 2 0 0 00 5 2 0 0 00 (b) 1 8 0 0 00 1 8 0 0 00 (c) 1 5 7 5 00 1 5 7 5 00

TRIAL BALANCE DEBIT CREDIT 62 0 0 0 00 21 5 0 0 00 8 0 0 0 00 7 2 0 0 00 90 5 0 0 00

Herron Company Worksheet (Partial) Month Ended January 31, 2013

15 Totals

1 Cash 2 Accounts Receivable 3 Supplies 4 Prepaid Insurance 5 Equipment 6 Accumulated Depreciation—Equipment 7 Accounts Payable 8 Alfred Herron, Capital 9 Fees Income 10 Rent Expense 11 Salaries Expense 12 Supplies Expense 13 Insurance Expense 14 Depreciation Expense—Equipment

ACCOUNT NAME

EXERCISE 5.3

EXERCISE 5.4 Net Income Before Adjustments Less Adjustments: Rent Expense Depreciation Expense Supplies Expense Total Adjustments for Expenses Not Made Corrected Net Income

$80,000 $6,000 7,200 2,600 15,800 $64,200

If the adjusting entries are not made, total expenses will be understated by $15,800. Net income will be overstated by $15,800. EXERCISE 5.5 PAGE

GENERAL JOURNAL

DATE DESCRIPTION Adjusting Entries 1 2 2013 3 Dec. 31 Supplies Expense 4 Supplies 5 6 31 Insurance Expense 7 Prepaid Insurance 8 9 31 Depreciation Expense—Equipment 10 Accumulated Depreciation—Equipment

POST. REF.

DEBIT

523 121

10 0 0 0 00

521 131

7 2 0 0 00

517 142

4 8 0 0 00

CREDIT 1 2 3 10 0 0 0 00 4 5 6 7 2 0 0 00 7 8 9 4 8 0 0 00 10

Chapter 5  95

EXERCISE 5.5 (continued) GENERAL LEDGER ACCOUNT Supplies

DATE DESCRIPTION 2013 Dec. 1 31 Adjusting

ACCOUNT NO. POST. REF. J1 J3

DEBIT

CREDIT

16 0 0 0 00 10 0 0 0 00

ACCOUNT Prepaid Insurance

DATE DESCRIPTION 2013 Dec. 1 31 Adjusting

J1 J3

DEBIT 43 2 0 0 00

CREDIT

POST. REF.

DEBIT

CREDIT

96  Chapter 5

DEBIT

4 8 0 0 00

ACCOUNT NO.

CREDIT

142

BALANCE DEBIT CREDIT

4 8 0 0 00

POST. REF.

131

BALANCE DEBIT CREDIT

ACCOUNT NO.

ACCOUNT Depreciation Expense—Equipment

DATE DESCRIPTION 2013 Dec. 31 Adjusting

16 0 0 0 00 6 0 0 0 00

43 2 0 0 00 7 2 0 0 00 36 0 0 0 00

ACCOUNT Accumulated Depreciation—Equipment

DATE DESCRIPTION 2013 Dec. 31 Adjusting

BALANCE DEBIT CREDIT

ACCOUNT NO. POST. REF.

121

517

BALANCE DEBIT CREDIT 4 8 0 0 00

EXERCISE 5.5 (continued) GENERAL LEDGER ACCOUNT Insurance Expense

ACCOUNT NO.

POST. DESCRIPTION REF.

DATE 2013 Dec. 31 Adjusting

DEBIT

CREDIT

7 2 0 0 00

DATE 2013 Dec. 31 Adjusting

BALANCE DEBIT CREDIT 7 2 0 0 00

ACCOUNT Supplies Expense

ACCOUNT NO.

POST. DESCRIPTION REF. J3

DEBIT

521

CREDIT

10 0 0 0 00

523

BALANCE DEBIT CREDIT 10 0 0 0 00

Chapter 5  97

PROBLEM 5.1A Dumas Company Worksheet (Partial) Month Ended January 31, 2013 ACCOUNT NAME 1 Cash 2 Accounts Receivable 3 Supplies 4 Prepaid Insurance 5 Equipment 6 Accumulated Depn—Equipment 7 Accounts Payable 8 John Dumas, Capital 9 John Dumas, Drawing 10 Fees Income 11 Supplies Expense 12 Insurance Expense 13 Salaries Expense 14 Depreciation Expense—Equipment 15 Utilities Expense 16 Totals 17 Net Income 18 19

98  Chapter 5

TRIAL BALANCE DEBIT CREDIT 104 0 0 0 00 20 8 0 0 00 38 4 0 0 00 60 0 0 0 00 108 0 0 0 00

ADJUSTMENTS DEBIT CREDIT

(a) 32 0 0 0 00 (b) 10 0 0 0 00 (c) 2 2 0 0 00

24 8 0 0 00 252 0 0 0 00 14 4 0 0 00 103 2 0 0 00 (a) 32 0 0 0 00 (b) 10 0 0 0 00 31 2 0 0 00 (c) 2 2 0 0 00 3 2 0 0 00 380 0 0 0 00 380 0 0 0 00

44 2 0 0 00

PROBLEM 5.1A (continued)

ADJUSTED TRIAL BALANCE DEBIT CREDIT 104 0 0 0 00 20 8 0 0 00 6 4 0 0 00 50 0 0 0 00 108 0 0 0 00 2 2 0 0 00 24 8 0 0 00 252 0 0 0 00 14 4 0 0 00 103 2 0 0 00 32 0 0 0 00 10 0 0 0 00 31 2 0 0 00 2 2 0 0 00 3 2 0 0 00 382 2 0 0 00 382 2 0 0 00

INCOME STATEMENT DEBIT CREDIT

103 2 0 0 00 32 0 0 0 00 10 0 0 0 00 31 2 0 0 00 2 2 0 0 00 3 2 0 0 00 78 6 0 0 00 103 2 0 0 00 24 6 0 0 00 103 2 0 0 00 103 2 0 0 00

BALANCE SHEET DEBIT CREDIT 104 0 0 0 00 20 8 0 0 00 6 4 0 0 00 50 0 0 0 00 108 0 0 0 00 2 2 0 0 00 24 8 0 0 00 252 0 0 0 00 14 4 0 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 303 6 0 0 00 279 0 0 0 00 16 24 6 0 0 00 17 303 6 0 0 00 303 6 0 0 00 18 19

Analyze: The adjustment to Prepaid Insurance decreased the account balance.

Chapter 5  99

PROBLEM 5.2A The University Bookstore Worksheet (Partial) Month Ended November 30, 2013 ACCOUNT NAME 1 Cash 2 Accounts Receivable 3 Supplies 4 Prepaid Rent 5 Equipment 6 Accumulated Depreciation—Equip. 7 Accounts Payable 8 Julie Acker, Capital 9 Julie Acker, Drawing 10 Fees Income 11 Depreciation Expense—Equipment 12 Rent Expense 13 Salaries Expense 14 Supplies Expense 15 Utilities Expense 16 Totals 17

100  Chapter 5

TRIAL BALANCE DEBIT CREDIT 45 1 5 0 00 6 6 2 4 00 12 0 0 0 00 42 0 0 0 00 54 0 0 0 00

ADJUSTMENTS DEBIT CREDIT

(a) 4 8 0 0 00 (b) 6 0 0 0 00 (c) 1 4 0 0 00

16 0 0 0 00 81 6 7 4 00 6 0 0 0 00 84 0 0 0 00 (c) 1 4 0 0 00 (b) 6 0 0 0 00 15 0 0 0 00 (a) 4 8 0 0 00 9 0 0 00 181 6 7 4 00 181 6 7 4 00

12 2 0 0 00

PROBLEM 5.2A (continued)

ADJUSTED TRIAL BALANCE DEBIT CREDIT 45 1 5 0 00 6 6 2 4 00 7 2 0 0 00 36 0 0 0 00 54 0 0 0 00 1 4 0 0 00 16 0 0 0 00 81 6 7 4 00 6 0 0 0 00 84 0 0 0 00 1 4 0 0 00 6 0 0 0 00 15 0 0 0 00 4 8 0 0 00 9 0 0 00 183 0 7 4 00 183 0 7 4 00

INCOME STATEMENT DEBIT CREDIT

BALANCE SHEET DEBIT CREDIT 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

Analyze: The balance of the Prepaid Rent account prior to the adjusting entry for expired rent is $42,000.

Chapter 5  101

PROBLEM 5.3A Orange Corporation Income Statement Month Ended December 31, 2013 Revenue Fees Income Expenses Salaries Expense Utilities Expense Supplies Expense Advertising Expense Depreciation Expense—Equipment Total Expenses Net Income

79 5 0 0 00 16 8 0 0 00 1 8 0 0 00 6 0 0 0 00 2 4 0 0 00 1 2 0 0 00 28 2 0 0 00 51 3 0 0 00

Orange Corporation Statement of Owner's Equity Month Ended December 31, 2013 Ted Coe, Capital, December 1, 2013 Net income for December Less Withdrawals for December Increase in Capital Ted Coe, Capital, December 31, 2013

102  Chapter 5

108 0 0 0 00 51 3 0 0 00 7 2 0 0 00 44 1 0 0 00 152 1 0 0 00

PROBLEM 5.3A (continued) Orange Corporation Balance Sheet December 31, 2013 Assets Cash Accounts Receivable Supplies Prepaid Advertising Equipment Less Accumulated Depreciation—Equipment Total Assets

77 2 0 0 00 12 0 0 0 00 4 1 0 0 00 12 0 0 0 00 60 0 0 0 00 1 2 0 0 00

Liabilities and Owner's Equity Liabilities Accounts Payable Owner's Equity Ted Coe, Capital Total Liabilities and Owner's Equity

58 8 0 0 00 164 1 0 0 00

12 0 0 0 00 152 1 0 0 00 164 1 0 0 00

Analyze: Net Income would be $48,900 ($51,300 - $2,400).

Chapter 5  103

PROBLEM 5.4A Palmer Creative Designs Worksheet Month Ended January 31, 2013 ACCOUNT NAME 1 Cash 2 Accounts Receivable 3 Supplies 4 Prepaid Advertising 5 Prepaid Rent 6 Equipment 7 Accumulated Depreciation—Equip. 8 Accounts Payable 9 Sadie Palmer, Capital 10 Sadie Palmer, Drawing 11 Fees Income 12 Advertising Expense 13 Depreciation Expense—Equipment 14 Rent Expense 15 Salaries Expense 16 Supplies Expense 17 Utilities Expense 18 Totals 19 Net Income 20 21

104  Chapter 5

TRIAL BALANCE DEBIT CREDIT 35 5 0 0 00 12 6 0 0 00 7 7 5 0 00 8 4 0 0 00 19 2 0 0 00 21 6 0 0 00

ADJUSTMENTS DEBIT CREDIT

(a) 6 6 5 0 00 (b) 2 1 0 0 00 (c) 1 6 0 0 00 (d)

1 8 0 00

15 5 5 0 00 60 0 0 0 00 7 0 0 0 00 47 6 0 0 00 (b) 2 1 0 0 00 (d) 1 8 0 00 (c) 1 6 0 0 00 9 7 0 0 00 (a) 6 6 5 0 00 1 4 0 0 00 123 1 5 0 00 123 1 5 0 00

10 5 3 0 00

PROBLEM 5.4A (continued)

ADJUSTED TRIAL DEBIT CREDIT 35 5 0 0 00 12 6 0 0 00 1 1 0 0 00 6 3 0 0 00 17 6 0 0 00 21 6 0 0 00 1 8 0 00 15 5 5 0 00 60 0 0 0 00 7 0 0 0 00 47 6 0 0 00 2 1 0 0 00 1 8 0 00 1 6 0 0 00 9 7 0 0 00 6 6 5 0 00 1 4 0 0 00 123 3 3 0 00 123 3 3 0 00

INCOME STATEMENT DEBIT CREDIT

47 6 0 0 00 2 1 0 0 00 1 8 0 00 1 6 0 0 00 9 7 0 0 00 6 6 5 0 00 1 4 0 0 00 21 6 3 0 00 25 9 7 0 00 47 6 0 0 00

47 6 0 0 00 47 6 0 0 00

BALANCE SHEET DEBIT CREDIT 35 5 0 0 00 1 12 6 0 0 00 2 1 1 0 0 00 3 6 3 0 0 00 4 17 6 0 0 00 5 21 6 0 0 00 6 1 8 0 00 7 15 5 5 0 00 8 60 0 0 0 00 9 7 0 0 0 00 10 11 12 13 14 15 16 17 101 7 0 0 00 75 7 3 0 00 18 25 9 7 0 00 19 101 7 0 0 00 101 7 0 0 00 20 21

Chapter 5  105

PROBLEM 5.4A (continued) Palmer Creative Designs Income Statement Month Ended January 31, 2013 Revenue Fees Income Expenses Salaries Expense Utilities Expense Supplies Expense Advertising Expense Rent Expense Depreciation Expense—Equipment Total Expenses Net Income

47 6 0 0 00 9 7 0 0 00 1 4 0 0 00 6 6 5 0 00 2 1 0 0 00 1 6 0 0 00 1 8 0 00 21 6 3 0 00 25 9 7 0 00

Palmer Creative Designs Statement of Owner's Equity Month Ended January 31, 2013 Sadie Palmer, Capital, January 1, 2010 Net income for January Less Withdrawals for January Increase in Capital Sadie Palmer, Capital, January 31, 2010

106  Chapter 5

60 0 0 0 00 25 9 7 0 00 7 0 0 0 00 18 9 7 0 00 78 9 7 0 00

PROBLEM 5.4A (continued) Palmer Creative Designs Balance Sheet January 31, 2013 Assets Cash Accounts Receivable Supplies Prepaid Advertising Prepaid Rent Equipment Less Accumulated Depreciation—Equipment Total Assets

35 5 0 0 00 12 6 0 0 00 1 1 0 0 00 6 3 0 0 00 17 6 0 0 00 21 6 0 0 00 1 8 0 00

Liabilities and Owner's Equity Liabilities Accounts Payable Owner's Equity Sadie Palmer, Capital Total Liabilities and Owner's Equity

15 5 5 0 00 78 9 7 0 00 94 5 2 0 00

PAGE

GENERAL JOURNAL

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

2013 Jan.

DESCRIPTION Adjusting Entries

21 4 2 0 00 94 5 2 0 00

POST. P REF. O DEBIT

31 Supplies Expense Supplies

517 121

6 6 5 0 00

31 Advertising Expense Prepaid Advertising

519 130

2 1 0 0 00

31 Rent Expense Prepaid Rent

520 131

1 6 0 0 00

31 Depreciation Expense—Equipment Accumulated Depreciation—Equipment

523 142

1 8 0 00

CREDIT

6 6 5 0 00

2 1 0 0 00

1 6 0 0 00

1 8 0 00

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

Chapter 5  107

PROBLEM 5.4A (continued) GENERAL LEDGER ACCOUNT

DATE DESCRIPTION 2013 Jan. 1 31 Adjusting

ACCOUNT

J1 J3

DEBIT

BALANCE DEBIT CREDIT

6 6 5 0 00

7 7 5 0 00 1 1 0 0 00

7 7 5 0 00

ACCOUNT NO. POST. REF. J1 J3

DEBIT

CREDIT

2 1 0 0 00

8 4 0 0 00 6 3 0 0 00

8 4 0 0 00

J1 J3

DEBIT 19 2 0 0 00

CREDIT

DATE DESCRIPTION 2013 Jan. 31 Adjusting

108  Chapter 5

DEBIT

131

BALANCE DEBIT CREDIT

19 2 0 0 00 1 6 0 0 00 17 6 0 0 00

ACCOUNT NO.

Accumulated Depreciation—Equipment POST. REF.

130

BALANCE DEBIT CREDIT

ACCOUNT NO. POST. REF.

121

CREDIT

Prepaid Rent

DATE DESCRIPTION 2013 Jan. 1 31 Adjusting

ACCOUNT

POST. REF.

Prepaid Advertising

DATE DESCRIPTION 2013 Jan. 1 31 Adjusting

ACCOUNT

ACCOUNT NO.

Supplies

CREDIT 1 8 0 00

142

BALANCE DEBIT CREDIT 1 8 0 00

PROBLEM 5.4A (continued) GENERAL LEDGER ACCOUNT Supplies Expense

DATE DESCRIPTION 2013 Jan. 31 Adjusting

ACCOUNT NO. POST. REF.

DEBIT

6 6 5 0 00

CREDIT

ACCOUNT NO. POST. REF.

DEBIT

2 1 0 0 00

CREDIT

DEBIT

1 6 0 0 00

CREDIT

Analyze:

POST. REF. J3

DEBIT

520

BALANCE DEBIT CREDIT 1 6 0 0 00

ACCOUNT Depreciation Expense—Equipment

DATE DESCRIPTION 2013 Jan. 31 Adjusting

BALANCE CREDIT DEBIT

ACCOUNT NO. POST. REF.

519

2 1 0 0 00

ACCOUNT Rent Expense

DATE DESCRIPTION 2013 Jan. 31 Adjusting

BALANCE DEBIT CREDIT 6 6 5 0 00

ACCOUNT Advertising Expense

DATE DESCRIPTION 2013 Jan. 31 Adjusting

517

ACCOUNT NO.

CREDIT

1 8 0 00

523

BALANCE DEBIT CREDIT 1 8 0 00

If adjusting entries had not been made, net income would be overstated.

Chapter 5  109

PROBLEM 5.1B Torres Company Worksheet Month Ended February 28, 2013

ACCOUNT NAME 1 Cash 2 Accounts Receivable 3 Supplies 4 Prepaid Rent 5 Equipment 6 Accumulated Depreciation—Equip. 7 Accounts Payable 8 Paul Torres, Capital 9 Paul Torres, Drawing 10 Fees Income 11 Salaries Expense 12 Utilities Expense 13 Supplies Expense 14 Rent Expense 15 Depreciation Expense-Equipment 16 Totals 17 Net Income 18 19 20 21

110  Chapter 5

TRIAL BALANCE DEBIT CREDIT 36 5 0 0 00 3 2 0 0 00 2 1 0 0 00 12 0 0 0 00 23 0 0 0 00

ADJUSTMENTS DEBIT CREDIT

(a) 1 0 0 0 00 (b) 1 0 0 0 00 (c)

5 0 0 00

6 0 0 0 00 49 2 5 0 00 1 5 0 0 00 27 0 0 0 00 3 1 5 0 00 8 0 0 00 (a) 1 0 0 0 00 (b) 1 0 0 0 00 (c) 5 0 0 00 82 2 5 0 00 82 2 5 0 00 2 5 0 0 00

2 5 0 0 00

PROBLEM 5.1B (continued)

ADJUSTED TRIAL DEBIT CREDIT 36 5 0 0 00 3 2 0 0 00 1 1 0 0 00 11 0 0 0 00 23 0 0 0 00 5 0 0 00 6 0 0 0 00 49 2 5 0 00 1 5 0 0 00 27 0 0 0 00 3 1 5 0 00 8 0 0 00 1 0 0 0 00 1 0 0 0 00 5 0 0 00 82 7 5 0 00 82 7 5 0 00

INCOME STATEMENT CREDIT DEBIT

BALANCE SHEET DEBIT CREDIT 36 5 0 0 00 3 2 0 0 00 1 1 0 0 00 11 0 0 0 00 23 0 0 0 00 5 0 0 00 6 0 0 0 00 49 2 5 0 00 1 5 0 0 00

27 0 0 0 00 3 1 5 0 00 8 0 0 00 1 0 0 0 00 1 0 0 0 00 5 0 0 00 6 4 5 0 00 20 5 5 0 00 27 0 0 0 00

27 0 0 0 00

76 3 0 0 00

27 0 0 0 00

76 3 0 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 55 7 5 0 00 16 20 5 5 0 00 17 76 3 0 0 00 18 19 20 21

Analyze: No depreciation has been recorded for the fiscal period, or any previous fiscal period.

Chapter 5  111

PROBLEM 5.2B Glenn Brantley, Attorney-at-Law Worksheet (Partial) Month Ended November 30, 2013

ACCOUNT NAME 1 Cash 2 Accounts Receivable 3 Supplies 4 Prepaid Rent 5 Equipment 6 Accumulated Depreciation—Equip. 7 Accounts Payable 8 Glenn Brantley, Capital 9 Glenn Brantley, Drawing 10 Fees Income 11 Salaries Expense 12 Utilities Expense 13 Supplies Expense 14 Rent Expense 15 Depreciation Expense—Equipment 16 Totals 17 18 19

112  Chapter 5

TRIAL BALANCE DEBIT CREDIT 70 1 0 0 00 17 0 0 0 00 20 8 0 0 00 88 4 0 0 00 132 0 0 0 00

ADJUSTMENTS DEBIT CREDIT

(a) 7 2 0 0 00 (b) 6 8 0 0 00 (c) 1 1 0 0 00

34 0 0 0 00 160 0 0 0 00 12 0 0 0 00 171 4 0 0 00 21 6 0 0 00 3 5 0 0 00 (a) 7 2 0 0 00 (b) 6 8 0 0 00 (c) 1 1 0 0 00 365 4 0 0 00 365 4 0 0 00 15 1 0 0 00

15 1 0 0 00

PROBLEM 5.2B (continued)

ADJUSTED TRIAL BALANCE DEBIT CREDIT 70 1 0 0 00 17 0 0 0 00 13 6 0 0 00 81 6 0 0 00 132 0 0 0 00 1 1 0 0 00 34 0 0 0 00 160 0 0 0 00 12 0 0 0 00 171 4 0 0 00 21 6 0 0 00 3 5 0 0 00 7 2 0 0 00 6 8 0 0 00 1 1 0 0 00 366 5 0 0 00 366 5 0 0 00

INCOME STATEMENT DEBIT CREDIT

BALANCE SHEET DEBIT CREDIT 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

Analyze: Accumulated Depreciation—Equipment

Chapter 5  113

PROBLEM 5.3B JT’s Accounting Services Income Statement Month Ended December 31, 2013 Revenue Fees Income Expenses Salaries Expense Supplies Expense Utilities Expense Rent Expense Advertising Expense Depreciation Expense—Fixtures Total Expenses Net Income

62 6 6 0 00 37 2 0 0 00 1 2 0 0 00 2 1 6 0 00 7 0 0 0 00 1 6 0 0 00 6 0 0 00 49 7 6 0 00 12 9 0 0 00

JT’s Accounting Services Statement of Owner's Equity Month Ended December 31, 2013 Jason Taylor, Capital, December 1, 2013 Net income for 2013 Less Withdrawals for Year Increase in Capital Jason Taylor, Capital, December 31, 2010

114  Chapter 5

60 0 0 0 00 12 9 0 0 00 6 0 0 0 00 6 9 0 0 00 66 9 0 0 00

PROBLEM 5.3B (continued) JT’s Accounting Services Balance Sheet December 31, 2013 Assets Cash Accounts Receivable Supplies Prepaid Advertising Fixtures Less Accumulated Depreciation Total Assets Liabilities and Owner's Equity Liabilities Accounts Payable Owner's Equity Jason Taylor, Capital Total Liabilities and Owner's Equity

33 9 0 0 00 4 4 0 0 00 1 8 0 0 00 6 4 0 0 00 36 0 0 0 00 6 0 0 00

35 4 0 0 00 81 9 0 0 00

15 0 0 0 00 66 9 0 0 00 81 9 0 0 00

Analyze: Adjusting entries decreased the assets of the company by $3,400.

Chapter 5  115

PROBLEM 5.4B Rojas Estate Planning and Investments Worksheet Month Ended June 30, 2013 ACCOUNT NAME 1 Cash 2 Accounts Receivable 3 Supplies 4 Prepaid Advertising 5 Prepaid Rent 6 Equipment 7 Accumulated Depreciation—Equip. 8 Accounts Payable 9 Raul Rojas, Capital 10 Raul Rojas, Drawing 11 Fees Income 12 Advertising Expense 13 Depreciation Expense—Equipment 14 Rent Expense 15 Salaries Expense 16 Supplies Expense 17 Utilities Expense 18 Totals 19 Net Income 20 21 22

116  Chapter 5

TRIAL BALANCE DEBIT CREDIT 19 7 0 0 00 6 1 0 0 00 7 6 0 0 00 14 4 0 0 00 36 0 0 0 00 48 0 0 0 00

ADJUSTMENTS DEBIT CREDIT

(a) 4 6 0 0 00 (b) 3 6 0 0 00 (c) 3 0 0 0 00 (d)

8 0 0 00

10 8 0 0 00 60 1 0 0 00 4 0 0 0 00 73 8 0 0 00 (b) 3 6 0 0 00 (d) 8 0 0 00 (c) 3 0 0 0 00 7 6 0 0 00 (a) 4 6 0 0 00 1 3 0 0 00 144 7 0 0 00 144 7 0 0 00

12 0 0 0 00

PROBLEM 5.4B (continued)

ADJUSTED TRIAL BALANCE DEBIT CREDIT 19 7 0 0 00 6 1 0 0 00 3 0 0 0 00 10 8 0 0 00 33 0 0 0 00 48 0 0 0 00 8 0 0 00 10 8 0 0 00 60 1 0 0 00 4 0 0 0 00 73 8 0 0 00 3 6 0 0 00 8 0 0 00 3 0 0 0 00 7 6 0 0 00 4 6 0 0 00 1 3 0 0 00 145 5 0 0 00 145 5 0 0 00

INCOME STATEMENT DEBIT CREDIT

73 8 0 0 00 3 6 0 0 00 8 0 0 00 3 0 0 0 00 7 6 0 0 00 4 6 0 0 00 1 3 0 0 00 20 9 0 0 00 52 9 0 0 00 73 8 0 0 00

73 8 0 0 00 73 8 0 0 00

BALANCE SHEET DEBIT CREDIT 19 7 0 0 00 1 6 1 0 0 00 2 3 0 0 0 00 3 10 8 0 0 00 4 33 0 0 0 00 5 48 0 0 0 00 6 8 0 0 00 7 10 8 0 0 00 8 60 1 0 0 00 9 4 0 0 0 00 10 11 12 13 14 15 16 17 124 6 0 0 00 71 7 0 0 00 18 52 9 0 0 00 19 124 6 0 0 00 124 6 0 0 00 20 21 22

Chapter 5  117

PROBLEM 5.4B (continued) Rojas Estate Planning and Investments Income Statement Month Ended June 30, 2013 Revenue Fees Income Expenses Salaries Expense Utilities Expense Supplies Expense Advertising Expense Rent Expense Depreciation Expense—Equipment Total Expenses Net Income

73 8 0 0 00 7 6 0 0 00 1 3 0 0 00 4 6 0 0 00 3 6 0 0 00 3 0 0 0 00 8 0 0 00 20 9 0 0 00 52 9 0 0 00

Rojas Estate Planning and Investments Statement of Owner's Equity Month Ended June 30, 2013 Raul Rojas, Capital, June 1, 2013 Net income for June Less Withdrawals for June Increase in Capital Raul Rojas, Capital, June 30, 2013

118  Chapter 5

60 1 0 0 00 52 9 0 0 00 4 0 0 0 00 48 9 0 0 00 109 0 0 0 00

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PROBLEM 5.4B (continued) Rojas Estate Planning and Investments Balance Sheet June 30, 2013 Assets Cash Accounts Receivable Supplies Prepaid Advertising Prepaid Rent Equipment Less Accumulated Depreciation—Equipment Total Assets

19 7 0 0 00 6 1 0 0 00 3 0 0 0 00 10 8 0 0 00 33 0 0 0 00 48 0 0 0 00 8 0 0 00

Liabilities and Owner's Equity Liabilities Accounts Payable Owner's Equity Raul Rojas, Capital Total Liabilities and Owner's Equity

10 8 0 0 00 109 0 0 0 00 119 8 0 0 00

PAGE

GENERAL JOURNAL

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

2013 June

DESCRIPTION Adjusting Entries

47 2 0 0 00 119 8 0 0 00

POST. P REF. O DEBIT

30 Supplies Expense Supplies

517 121

4 6 0 0 00

30 Advertising Expense Prepaid Advertising

519 130

3 6 0 0 00

30 Rent Expense Prepaid Rent

520 131

3 0 0 0 00

30 Depreciation Expense—Equipment Accumulated Depreciation—Equipment

523 142

8 0 0 00

CREDIT 1 2 3 4 6 0 0 00 4 5 6 3 6 0 0 00 7 8 9 3 0 0 0 00 10 11 12 8 0 0 00 13 14

Chapter 5  119

PROBLEM 5.4B (continued) GENERAL LEDGER ACCOUNT

DATE DESCRIPTION 2013 June 1 30 Adjusting

ACCOUNT

J1 J3

DEBIT

BALANCE DEBIT CREDIT

4 6 0 0 00

7 6 0 0 00 3 0 0 0 00

7 6 0 0 00

ACCOUNT NO. POST. REF. J1 J3

DEBIT 14 4 0 0 00

CREDIT

J1 J3

DEBIT 36 0 0 0 00

14 4 0 0 00 3 6 0 0 00 10 8 0 0 00

CREDIT

DATE DESCRIPTION 2013 June 30 Adjusting

120  Chapter 5

DEBIT

131

BALANCE DEBIT CREDIT

36 0 0 0 00 3 0 0 0 00 33 0 0 0 00

ACCOUNT NO.

Accumulated Depreciation—Equipment POST. REF.

130

BALANCE DEBIT CREDIT

ACCOUNT NO. POST. REF.

121

CREDIT

Prepaid Rent

DATE DESCRIPTION 2013 June 1 30 Adjusting

ACCOUNT

POST. REF.

Prepaid Advertising

DATE DESCRIPTION 2013 June 1 30 Adjusting

ACCOUNT

ACCOUNT NO.

Supplies

142

CREDIT

BALANCE DEBIT CREDIT

8 0 0 00

PROBLEM 5.4B (continued) GENERAL LEDGER ACCOUNT

DATE DESCRIPTION 2013 June 30 Adjusting

ACCOUNT

4 6 0 0 00

CREDIT

BALANCE DEBIT CREDIT

ACCOUNT NO. POST. REF.

DEBIT

3 6 0 0 00

CREDIT

DEBIT

3 0 0 0 00

POST. REF. J3

DEBIT

519

BALANCE DEBIT CREDIT 3 6 0 0 00

ACCOUNT NO. POST. REF.

517

4 6 0 0 00

CREDIT

520

BALANCE DEBIT CREDIT 3 0 0 0 00

ACCOUNT NO.

Depreciation Expense—Equipment

DATE DESCRIPTION 2013 June 30 Adjusting

Analyze:

DEBIT

Rent Expense

DATE DESCRIPTION 2013 June 30 Adjusting

ACCOUNT

POST. REF.

Advertising Expense

DATE DESCRIPTION 2013 June 30 Adjusting

ACCOUNT

ACCOUNT NO.

Supplies Expense

CREDIT

8 0 0 00

523

BALANCE DEBIT CREDIT 8 0 0 00

Generally accepted accounting principles require that the original cost of the asset appear in the asset account until the asset has been used up or disposed. A contra asset account is used to record depreciation costs.

Chapter 5  121

CRITICAL THINKING PROBLEM 5.1 TO: Robert Thompson, President FROM: Student’s Name DATE: Current Date SUBJEC Effect on Financial Statements of Omitting Adjusting Entries Adjusting entries are recorded to update the accounts at the end of the accounting period for previously unrecorded items that belong to that period. If these entries are omitted, the net income will not be an accurate measure of the operation of the company for the year and certain accounts on the balance sheet will not report correct end-of-year balances. In particular, Thompson Industries net income for the year will be overstated by $52,300; net income should be $112,700 instead of $165,000. This amount represents a 32% decrease in net income over the amount that would be reported if the adjusting entries were not made. ($52,300 ÷ $165,000 = 0.32). This decrease in net income results from not making adjusting entries for the following unrecorded expenses: 1. Expense of Rent for the year ($42,000 x 6/12 = $21,000 for 6 months) 2. Expense of supplies used during the year (Total supplies of $18,000 - Ending Inventory of $3,500 = $14,500 supplies used) 3. Depreciation expense for the year ($420,000 ÷ 25 years = $16,800 per year) Total increase in expenses

$21,000 14500 16,800 $52,300

In addition to overstating the net income, the balances of Prepaid Rent and Supplies on the balance sheet would be overstated and the book value of Building would also be overstated. Preparation of the adjusting entries would permit the financial statements to present a more accurate measure of the company’s operations for the year and its financial condition at the end of the year. Therefore, it is important and the time is well spent to prepare adjusting entries so that the financial statements are up-to-date and present an accurate picture of the business.

122  Chapter 5

CRITICAL THINKING PROBLEM 5.2 Thatcher International Company Worksheet Month Ended January 31, 2013 ACCOUNT NAME 1 Cash 2 Accounts Receivable 3 Supplies 4 Prepaid Insurance 5 Equipment 6 Accumulated Depreciation—Equip. 7 Accounts Payable 8 Maggie Thatcher, Capital 9 Maggie Thatcher, Drawing 10 Fees Income 11 Advertising Expense 12 Depreciation Expense—Equipment 13 Insurance Expense 14 Rent Expense 15 Salaries Expense 16 Supplies Expense 17 Telephone Expense 18 Utilities Expense 19 Totals 20 Net Income 21 22

TRIAL BALANCE DEBIT CREDIT 36 9 5 0 00 6 8 0 0 00 4 3 0 0 00 30 0 0 0 00 48 0 0 0 00

ADJUSTMENTS DEBIT CREDIT

(a) 2 1 0 0 00 (b) 5 0 0 0 00 (c)

4 0 0 00

12 0 0 0 00 80 0 0 0 00 4 0 0 0 00 61 8 5 0 00 3 0 0 0 00 (c) 4 0 0 00 (b) 5 0 0 0 00 5 0 0 0 00 13 4 0 0 00 (a) 2 1 0 0 00 7 0 0 00 1 7 0 0 00 153 8 5 0 00 153 8 5 0 00

7 5 0 0 00

Chapter 5  123

CRITICAL THINKING PROBLEM 5.2 (continued)

ADJUSTED TRIAL DEBIT CREDIT 36 9 5 0 00 6 8 0 0 00 2 2 0 0 00 25 0 0 0 00 48 0 0 0 00 4 0 0 00 12 0 0 0 00 80 0 0 0 00 4 0 0 0 00 61 8 5 0 00 3 0 0 0 00 4 0 0 00 5 0 0 0 00 5 0 0 0 00 13 4 0 0 00 2 1 0 0 00 7 0 0 00 1 7 0 0 00 154 2 5 0 00 154 2 5 0 00

124  Chapter 5

INCOME STATEMENT DEBIT CREDIT

BALANCE SHEET DEBIT CREDIT 36 9 5 0 00 6 8 0 0 00 2 2 0 0 00 25 0 0 0 00 48 0 0 0 00 4 0 0 00 12 0 0 0 00 80 0 0 0 00 4 0 0 0 00

61 8 5 0 00 3 0 0 0 00 4 0 0 00 5 0 0 0 00 5 0 0 0 00 13 4 0 0 00 2 1 0 0 00 7 0 0 00 1 7 0 0 00 31 3 0 0 00 30 5 5 0 00 61 8 5 0 00

61 8 5 0 00

122 9 5 0 00

61 8 5 0 00

122 9 5 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 92 4 0 0 00 19 30 5 5 0 00 20 122 9 5 0 00 21 22

CRITICAL THINKING PROBLEM 5.2 (continued) Thatcher International Company Income Statement Month Ended January 31, 2013 Revenue Fees Income Expenses Advertising Expense Depreciation Expense—Equipment Insurance Expense Rent Expense Salaries Expense Supplies Expense Telephone Expense Utilities Expense Total Expenses Net Income

61 8 5 0 00 3 0 0 0 00 4 0 0 00 5 0 0 0 00 5 0 0 0 00 13 4 0 0 00 2 1 0 0 00 7 0 0 00 1 7 0 0 00 31 3 0 0 00 30 5 5 0 00

Thatcher International Company Statement of Owner’s Equity Month Ended January 31, 2013 Maggie Thatcher, Capital, January 1, 2013 Net income for January Less Withdrawals for January Increase in Capital Maggie Thatcher, Capital, January 31, 2013

80 0 0 0 00 30 5 5 0 00 4 0 0 0 00

26 5 5 0 00 106 5 5 0 00

Chapter 5  125

CRITICAL THINKING PROBLEM 5.2 (continued) Thatcher International Company Balance Sheet January 31, 2013 Assets Cash Accounts Receivable Supplies Prepaid Insurance Equipment Less Accumulated Depreciation—Equipment Total Assets

36 9 5 0 00 6 8 0 0 00 2 2 0 0 00 25 0 0 0 00 48 0 0 0 00 4 0 0 00

Liabilities and Owner's Equity Liabilities Accounts Payable Owner's Equity Maggie Thatcher, Capital Total Liabilities and Owner's Equity

12 0 0 0 00 106 5 5 0 00 118 5 5 0 00

PAGE

GENERAL JOURNAL

DATE 1 2 3 4 5 6 7 8 9 10 11

2013 Jan.

DESCRIPTION Adjusting Entries

POST. REF.

DEBIT

31 Supplies Expense Supplies

520 121

2 1 0 0 00

31 Insurance Expense Prepaid Insurance

517 131

5 0 0 0 00

30 Depreciation Expense—Equipment Accumulated Depreciation—Equipment

514 142

4 0 0 00

126  Chapter 5

47 6 0 0 00 118 5 5 0 00

CREDIT 1 2 3 2 1 0 0 00 4 5 6 5 0 0 0 00 7 8 9 4 0 0 00 10 11

CRITICAL THINKING PROBLEM 5.2 (continued) GENERAL LEDGER ACCOUNT Supplies

DATE DESCRIPTION 2013 Jan. 1 Balance 31 Adjusting

ACCOUNT NO. POST. REF. ✔ J3

DEBIT

CREDIT

BALANCE DEBIT CREDIT

2 1 0 0 00

4 3 0 0 00 2 2 0 0 00

4 3 0 0 00

ACCOUNT Prepaid Insurance

DATE DESCRIPTION 2013 Jan. 1 Balance 31 Adjusting

ACCOUNT NO. POST. REF. ✔ J3

DEBIT 30 0 0 0 00

CREDIT

POST. REF.

DEBIT

DATE DESCRIPTION 2013 Jan. 31 Adjusting

DEBIT

BALANCE DEBIT CREDIT

ACCOUNT NO.

142

CREDIT

BALANCE DEBIT CREDIT

4 0 0 00

ACCOUNT Depreciation Expense—Equipment POST. REF.

131

30 0 0 0 00 5 0 0 0 00 25 0 0 0 00

ACCOUNT Accumulated Depreciation—Equipment

DATE DESCRIPTION 2013 Jan. 31 Adjusting

121

ACCOUNT NO. CREDIT

4 0 0 00

514

BALANCE DEBIT CREDIT 4 0 0 00

Chapter 5  127

CRITICAL THINKING PROBLEM 5.2 (continued) GENERAL LEDGER ACCOUNT Insurance Expense

DATE DESCRIPTION 2013 Jan. 31 Adjusting

ACCOUNT NO. POST. REF.

DEBIT

5 0 0 0 00

CREDIT

Analyze:

BALANCE DEBIT CREDIT 5 0 0 0 00

ACCOUNT Supplies Expense

DATE DESCRIPTION 2013 Jan. 31 Adjusting

ACCOUNT NO. POST. REF.

DEBIT

2 1 0 0 00

517

CREDIT

520

BALANCE DEBIT CREDIT 2 1 0 0 00

If the useful life of the equipment had been 12 years instead of 10 years, depreciation would have been $333 rather than $400. Net Income would have been $67 greater.

128  Chapter 5

SOLUTIONS TO BUSINESS CONNECTIONS Managerial Focus: 1. Accounting records generally reflect an asset’s historical or original cost, less accumulated depreciation (not market value). 2. Depreciation Expense will offset income. Accumulated Depreciation will decrease the value of the asset. 3. Are necessary to present an accurate financial position of the firm. 4. Provides end-of-period adjusting entries and contains income statement and balance sheet accounts.

Ethical Dilemma: If the company wanted to donate to a nonprofit organization they would write a check and get a tax deduction. It is unethical to record higher costs than are actually incurred. Financial Statement Analysis: 1. 4.3% ($1,251 ÷ $28,915) 2. 61.6% ($17,821 ÷ $28,915) 3. 8.9 years ($11,094 ÷ $1,251) Analyze Online: Answers will vary depending on the year. Teamwork: Mr. Mincks has expenses that will appear on the income statement. He needs to match these expenses with revenue. He can record the revenue as a receivable, other than accounts receivable, for the amount that he has completed. In this case, he can record $15,000 or 15% of the price of the job.

Internet Connection: Professional liability, surety bonds, umbrella policies, errors and omissions, product liability, fire, auto, dental, workers’ compensation, sexual harassment.

Chapter 5  129

SOLUTIONS TO PRACTICE TEST Part A True-False 1. TRUE 2. FALSE 3. TRUE 4. TRUE 5. TRUE 6. TRUE 7. TRUE 8. TRUE 9. FALSE 10. FALSE Part B Matching 1. a 2. e 3. f 4. c 5. b 6. d

130  Chapter 5

CHAPTER 6 CLOSING ENTRIES AND THE POSTCLOSING TRIAL BALANCE Chapter Opener: Thinking Critically Students should recognize that financial statements can be used to evaluate net profit or loss, return on investments, expense trends, or growth in company net assets. The income statement is used to measure net income or loss, while the balance sheet can be used to measure growth in assets or liabilities. Executives and managers would use financial statements to make decisions about expanding business, investing in new ventures, or hiring new employees. Fast Facts • Carnival has 80,000 employees worldwide. • Of the 3 million passengers Carnival serves annually, approximately 1,000,000 are seniors and 500,000 are children. • Carnival became a publicly traded company in 1987. • Carnival Corporation is comprised of distinct brands operating in North and South America, the United Kingdom, Germany, Italy, France, Spain, and Australia, which account for nearly 90 percent of cruise passengers worldwide. •

Carnival Corporation operates 84 ships with 21 new vessels scheduled for delivery between now and 2011.

Managerial Implications: Thinking Critically Answers will vary but could include monthly or quarterly. Students should want financial statements frequently so that trends can be observed and timely decisions made before the business is negatively impacted. Discussion Questions Note to instructor: These questions are designed to check the students’ understanding of the new terms, concepts, and procedures presented in the chapter. 1. Worksheet. 2. Balances of revenue and expense accounts are transferred to Income Summary. Next the balance of the Income Summary account is transferred to the owner’s equity account. 3. Transfer results of operations to the owner’s capital account; Reduce balances of revenue, expense, and drawing accounts to zero. 4. Adjustments columns of the worksheet. 5. Journalize and post adjusting entries; Journalize and postclosing entries; Prepare a postclosing trial l 6. bSource document info to general journal, to general ledger, to worksheet, to financial statements.

Chapter 6  131

7. (1) analyze (2) journalize (3) post (4) prepare worksheet (5) prepare financial statements (6) journalize and post adjusting entries (7) journalize and post-closing entries (8) prepare post-closing trial balance (9) interpret financial information 8. Steps to classify, record, and summarize financial data. 9. Asset, liability, and owner’s capital. 10. Avoids errors, proves total debits and credits are equal after the closing process.

132  Chapter 6

EXERCISE 6.1 PAGE

GENERAL JOURNAL

DATE

DESCRIPTION Closing Entries

POST. REF.

1 2 2013 3 Dec. 31 Fees Income 4 Income Summary 5 6 31 Income Summary 7 Depreciation Expense 8 Salaries Expense 9 Supplies Expense 10 Telephone Expense 11 Utilities Expense 12 13 31 Income Summary 14 Mesia Davis, Capital 15 16 31 Mesia Davis, Capital 17 Mesia Davis, Drawing 18

DEBIT

CREDIT

48 7 5 0 00 48 7 5 0 00 27 0 0 0 00 2 2 5 0 00 16 0 0 0 00 2 5 0 0 00 2 1 0 0 00 4 1 5 0 00 21 7 5 0 00 21 7 5 0 00 25 0 0 0 00 25 0 0 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

EXERCISE 6.2 1. Analyze transactions. 2. Journalize the transactions. 3. Post the journal entries. 4. Prepare a worksheet. 5. Prepare financial statements. 6. Record adjusting entries. 7. Record closing entries. 8. Prepare a post-closing trial balance. 9. Interpret the financial information.

Chapter 6  133

EXERCISE 6.3 1. Cash 2. Accounts Receivable 3. Supplies 4. Equipment

5. Accumulated Depreciation 6. Accounts Payable 7. John Martin, Capital

EXERCISE 6.4 1. B 2. I 3. B 4. B 5. I

6. 7. 8. 9. 10.

B E B I B

11. 12. 13. 14. 15.

I, E B, E B I B

EXERCISE 6.5 1. Total revenue for the period is $65,000. 2. Total expenses for the period are $34,900. 3. Net income for the period is $30,100. 4. Owner’s withdrawals for the period are $10,000.

134  Chapter 6

EXERCISE 6.6 PAGE

GENERAL JOURNAL

DATE

DESCRIPTION Closing Entries

1 2 2013 3 Mar. 31 Fees Income 4 Income Summary 5 6 31 Income Summary 7 Depreciation Expense- Equipment 8 Insurance Expense 9 Rent Expense 10 Salaries Expense 11 Supplies Expense 12 Telephone Expense 13 Utilities Expense 14 15 31 Income Summary 16 Gloria Bahamon, Capital 17 18 31 Gloria Bahamon, Capital 19 Gloria Bahamon, Drawing 20

POST. REF.

DEBIT

401 399

325 0 0 0 00

399 510 511 514 517 518 519 523

237 3 6 0 00

399 301

87 6 4 0 00

301 302

12 0 0 0 00

CREDIT

325 0 0 0 00

20 1 6 0 00 10 4 0 0 00 32 0 0 0 00 156 0 0 0 00 4 6 0 0 00 5 8 0 0 00 8 4 0 0 00

87 6 4 0 00

12 0 0 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Chapter 6  135

EXERCISE 6.6 (continued) GENERAL LEDGER ACCOUNT Gloria Bahamon, Capital

DATE DESCRIPTION 2013 Mar. 31 Balance 31 Closing 31 Closing

POST. REF. √ J4 J4

ACCOUNT NO.

DEBIT

CREDIT

DATE DESCRIPTION 2013 Mar. 31 Balance 31 Closing

POST. REF.

136  Chapter 6

120 0 0 0 00 207 6 4 0 00 195 6 4 0 00

12 0 0 0 00

ACCOUNT NO.

DEBIT

CREDIT

BALANCE DEBIT CREDIT

ACCOUNT NO. POST. REF. J4 J4 J4

302

12 0 0 0 00 12 0 0 0 00 −0−

√ J4

ACCOUNT Income Summary

DATE DESCRIPTION 2013 Mar. 31 Closing 31 Closing 31 Closing

BALANCE DEBIT CREDIT

87 6 4 0 00

ACCOUNT Gloria Bahamon, Drawing

301

DEBIT

CREDIT 325 0 0 0 00

237 3 6 0 00 87 6 4 0 00

399

BALANCE DEBIT CREDIT 325 0 0 0 00 87 6 4 0 00 −0−

EXERCISE 6.6 (continued) GENERAL LEDGER ACCOUNT

DATE DESCRIPTION 2013 Mar. 31 Balance 31 Closing

ACCOUNT

POST. REF. √ J4

DEBIT

CREDIT

POST. REF.

ACCOUNT NO.

√ J4

CREDIT 20 1 6 0 00

20 1 6 0 00 −0−

ACCOUNT NO. POST. REF.

DEBIT

√ J4

DATE DESCRIPTION 2013 Mar. 31 Balance 31 Closing

CREDIT

10 4 0 0 00

10 4 0 0 00 −0−

ACCOUNT NO.

Ö J4

DEBIT

511

BALANCE DEBIT CREDIT

ACCOUNT Rent Expense POST. REF.

510

BALANCE DEBIT CREDIT

Insurance Expense

DATE DESCRIPTION 2013 Mar. 31 Balance 31 Closing

BALANCE DEBIT CREDIT

325 0 0 0 00

DEBIT

401

325 0 0 0 00 −0−

Depreciation Expense—Equipment

DATE DESCRIPTION 2013 Mar. 31 Balance 31 Closing

ACCOUNT

ACCOUNT NO.

Fees Income

514

CREDIT

BALANCE DEBIT CREDIT

32 0 0 0 00

32 0 0 0 00 −0−

Chapter 6  137

EXERCISE 6.6 (continued) GENERAL LEDGER ACCOUNT Salaries Expense

DATE DESCRIPTION 2013 Mar. 31 Balance 31 Closing

ACCOUNT NO. POST. REF.

DEBIT

√ J4

CREDIT

156 0 0 0 00

ACCOUNT Supplies Expense

DATE DESCRIPTION 2013 Mar. 31 Balance 31 Closing

DEBIT

√ J4

4 6 0 0 00

4 6 0 0 00 −0−

ACCOUNT NO. POST. REF.

DEBIT

√ J4

138  Chapter 6

√ J4

DEBIT

519

CREDIT

BALANCE DEBIT CREDIT

5 8 0 0 00

5 8 0 0 00 −0−

ACCOUNT NO. POST. REF.

518

BALANCE DEBIT CREDIT

ACCOUNT Utilities Expense

DATE DESCRIPTION 2013 Mar. 31 Balance 31 Closing

156 0 0 0 00 −0−

CREDIT

ACCOUNT Telephone Expense

DATE DESCRIPTION 2013 Mar. 31 Balance 31 Closing

BALANCE DEBIT CREDIT

ACCOUNT NO. POST. REF.

517

523

CREDIT

BALANCE DEBIT CREDIT

8 4 0 0 00

8 4 0 0 00 −0−

EXERCISE 6.7 PAGE

GENERAL JOURNAL

DATE

DESCRIPTION Closing Entries

POST. REF.

1 2 2013 3 Dec. 31 Rosa Escobedo, Capital 4 Income Summary 5 6 31 Rosa Escobedo, Capital 7 Rosa Escobedo, Drawing 8

DEBIT

27 0 0 0 00

3 0 0 0 00

CREDIT 1 2 3 27 0 0 0 00 4 5 6 3 0 0 0 00 7 8

The new balance of Rosa Escobedo, Capital is $18,000 ($48,000 – $27,000 – $3,000).

Chapter 6  139

EXERCISE 6.8

Analyze transactions

Journalize transactions

Post transactions

Prepare a worksheet

Prepare financial statements

Record adjusting entries

Record closing entries

Prepare post-closing trial balance

Interpret financial information

140  Chapter 6

PROBLEM 6.1A PAGE

GENERAL JOURNAL

DATE

DESCRIPTION Adjusting Entries

POST. REF.

1 2 2013 3 Jan. 31 Supplies Expense 4 Supplies 5 6 31 Rent Expense 7 Prepaid Rent 8 9 31 Depreciation Expense—Office Equipment 10 Accumulated Depreciation—Office Equip. 11

DEBIT

2 2 4 0 00

12 0 0 0 00

4 4 8 0 00

CREDIT 1 2 3 2 2 4 0 00 4 5 6 12 0 0 0 00 7 8 9 4 4 8 0 00 10 11

Chapter 6  141

PROBLEM 6.1A (continued) PAGE

GENERAL JOURNAL

DATE

DESCRIPTION Closing Entries

1 2 2013 3 Jan. 31 Fees Income 4 Income Summary 5 6 31 Income Summary 7 Depreciation Expense—Office Equipment 8 Rent Expense 9 Salaries Expense 10 Supplies Expense 11 Telephone Expense 12 Travel Expense 13 Utilities Expense 14 15 31 Income Summary 16 Paul Harris, Capital 17 18 31 Paul Harris, Capital 19 Paul Harris, Drawing 20

POST. REF.

DEBIT

90 0 0 0 00

79 9 1 0 00

10 0 9 0 00

10 0 0 0 00

CREDIT 1 2 3 90 0 0 0 00 4 5 6 4 4 8 0 00 7 12 0 0 0 00 8 48 5 0 0 00 9 2 2 4 0 00 10 1 2 5 0 00 11 10 2 9 0 00 12 1 1 5 0 00 13 14 15 10 0 9 0 00 16 17 18 10 0 0 0 00 19 20

Analyze: Debit the Capital account; credit the Drawing account.

142  Chapter 6

PROBLEM 6.2A PAGE

GENERAL JOURNAL

DATE

DESCRIPTION Adjusting Entries

1 2 2013 3 Dec. 31 Supplies Expense 4 Supplies 5 6 31 Advertising Expense 7 Prepaid Advertising 8 9 31 Depreciation Expense—Equipment 10 Accumulated Depreciation—Equipment 11

POST. REF.

DEBIT

517 121

2 4 0 0 00

526 131

3 0 0 0 00

523 142

2 4 0 0 00

DATE DESCRIPTION Closing Entries 1 2 2013 3 Dec. 31 Fees Income 4 Income Summary 5 6 31 Income Summary 7 Supplies Expense 8 Advertising Expense 9 Depreciation Expense—Equipment 10 Salaries Expense 11 Utilities Expense 12 13 31 Income Summary 14 Gayle Warrior, Capital 15 16 31 Gayle Warrior, Capital 17 Gayle Warrior, Drawing 18

CREDIT 1 2 3 2 4 0 0 00 4 5 6 3 0 0 0 00 7 8 9 2 4 0 0 00 10 11

PAGE

GENERAL JOURNAL POST. REF.

DEBIT

401 309

75 0 0 0 00

309 517 526 523 511 514

24 0 0 0 00

309 301

51 0 0 0 00

301 302

8 4 0 0 00

CREDIT 1 2 3 75 0 0 0 00 4 5 6 2 4 0 0 00 7 3 0 0 0 00 8 2 4 0 0 00 9 14 4 0 0 00 10 1 8 0 0 00 11 12 13 51 0 0 0 00 14 15 16 8 4 0 0 00 17 18

Chapter 6  143

PROBLEM 6.2A (continued) GENERAL LEDGER ACCOUNT Supplies

DATE DESCRIPTION 2013 Dec. 31 Balance 31 Adjusting

ACCOUNT NO. POST. REF.

DEBIT

√ J3

CREDIT

BALANCE DEBIT CREDIT

2 4 0 0 00

6 0 0 0 00 3 6 0 0 00

ACCOUNT Prepaid Advertising

DATE DESCRIPTION 2013 Dec. 31 Balance 31 Adjusting

ACCOUNT NO. POST. REF.

DEBIT

√ J3

CREDIT

3 0 0 0 00

ACCOUNT Accumulated Depreciation—Equipment

DATE DESCRIPTION 2013 Dec. 31 Adjusting

POST. REF.

DEBIT

CREDIT 2 4 0 0 00

DATE DESCRIPTION 2013 Dec. 31 Balance 31 Closing 31 Closing

144  Chapter 6

√ J4 J4

24 0 0 0 00 21 0 0 0 00

CREDIT

51 0 0 0 00 8 4 0 0 00

142

BALANCE DEBIT CREDIT 2 4 0 0 00

ACCOUNT NO.

DEBIT

131

BALANCE DEBIT CREDIT

ACCOUNT NO.

ACCOUNT Gayle Warrior, Capital POST. REF.

121

301

BALANCE DEBIT CREDIT 132 0 0 0 00 183 0 0 0 00 174 6 0 0 00

PROBLEM 6.2A (continued) GENERAL LEDGER ACCOUNT Gayle Warrior, Drawing

DATE DESCRIPTION 2013 Dec. 31 Balance 31 Closing

POST. REF.

ACCOUNT NO.

DEBIT

√ J4

CREDIT

BALANCE DEBIT CREDIT

8 4 0 0 00

8 4 0 0 00 −0−

ACCOUNT Income Summary

DATE DESCRIPTION 2013 Dec. 31 Closing 31 Closing 31 Closing

ACCOUNT NO. POST. REF.

DEBIT

J4 J4 J4

24 0 0 0 00 51 0 0 0 00

CREDIT 75 0 0 0 00

ACCOUNT Fees Income

DATE DESCRIPTION 2013 Dec. 31 Balance 31 Closing

√ J4

DEBIT

CREDIT

75 0 0 0 00

399

BALANCE DEBIT CREDIT 75 0 0 0 00 51 0 0 0 00 −0−

ACCOUNT NO. POST. REF.

302

401

BALANCE DEBIT CREDIT 75 0 0 0 00 −0−

Chapter 6  145

PROBLEM 6.2A (continued) GENERAL LEDGER ACCOUNT Salaries Expense

DATE DESCRIPTION 2013 Dec. 31 Balance 31 Closing

ACCOUNT NO. POST. REF.

DEBIT

Ö J4

CREDIT

14 4 0 0 00

ACCOUNT Utilities Expense

DATE DESCRIPTION 2013 Dec. 31 Balance 31 Closing

DEBIT

√ J4

1 8 0 0 00

1 8 0 0 00 −0−

ACCOUNT NO. POST. REF. J3 J4

DEBIT

146  Chapter 6

POST. REF. J3 J4

517

CREDIT

BALANCE DEBIT CREDIT

2 4 0 0 00

2 4 0 0 00 −0−

2 4 0 0 00

DEBIT

514

BALANCE DEBIT CREDIT

ACCOUNT Depreciation Expense—Equipment

DATE DESCRIPTION 2013 Dec. 31 Adjusting 31 Closing

14 4 0 0 00 −0−

CREDIT

ACCOUNT Supplies Expense

DATE DESCRIPTION 2013 Dec. 31 Adjusting 31 Closing

BALANCE DEBIT CREDIT

ACCOUNT NO. POST. REF.

511

ACCOUNT NO.

523

CREDIT

BALANCE DEBIT CREDIT

2 4 0 0 00

2 4 0 0 00 −0−

2 4 0 0 00

PROBLEM 6.2A (continued) GENERAL LEDGER ACCOUNT

ACCOUNT NO.

Advertising Expense

DATE DESCRIPTION 2013 Dec. 31 Adjusting 31 Closing

POST. REF. J3 J4

DEBIT

CREDIT

3 0 0 0 00 3 0 0 0 00

526

BALANCE DEBIT CREDIT 3 0 0 0 00 −0−

The Warrior Group Post-closing Trial Balance December 31, 2013 ACCOUNT NAME Cash Accounts Receivable Supplies Prepaid Advertising Equipment Accumulated Depreciation—Equipment Accounts Payable Gayle Warrior, Capital Totals

DEBIT 92 4 0 0 00 12 0 0 0 00 3 6 0 0 00 21 0 0 0 00 60 0 0 0 00

CREDIT

2 4 0 0 00 12 0 0 0 00 174 6 0 0 00 189 0 0 0 00 189 0 0 0 00

Analyze: Fifteen accounts are listed in the Adjusted Trial Balance section. Eight accounts are listed on the post-closing trial balance.

Chapter 6  147

PROBLEM 6.3A PAGE

GENERAL JOURNAL

DATE

DESCRIPTION Closing Entries

1 2 2013 3 Dec. 31 Fees Income 4 Income Summary 5 6 31 Income Summary 7 Advertising Expense 8 Depreciation Expense—Equipment 9 Rent Expense 10 Salaries Expense 11 Utilities Expense 12 13 31 Income Summary 14 Monica Cavazos, Capital 15 16 31 Monica Cavazos, Capital 17 Monica Cavazos, Drawing 18

POST. REF.

DEBIT

401 399

138 0 0 0 00

399 511 514 517 519 523

44 8 2 0 00

399 301

93 1 8 0 00

301 302

7 2 0 0 00

CREDIT

138 0 0 0 00

4 8 0 0 00 9 0 0 00 3 6 0 0 00 28 8 0 0 00 6 7 2 0 00

93 1 8 0 00

7 2 0 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

GENERAL LEDGER ACCOUNT

ACCOUNT NO.

Monica Cavazos, Capital

POST. DATE DESCRIPTION REF. 2013 Dec. 31 Balance √ 31 Closing J4 31 Closing J4

148  Chapter 6

DEBIT

CREDIT

93 1 8 0 00 7 2 0 0 00

301

BALANCE DEBIT CREDIT 55 6 2 0 00 148 8 0 0 00 141 6 0 0 00

PROBLEM 6.3A (continued) GENERAL LEDGER ACCOUNT Monica Cavazos, Drawing

DATE DESCRIPTION 2013 Dec. 31 Balance 31 Closing

POST. REF.

ACCOUNT NO.

DEBIT

√ J4

CREDIT

BALANCE DEBIT CREDIT

7 2 0 0 00

7 2 0 0 00 −0−

ACCOUNT Income Summary

DATE DESCRIPTION 2013 Dec. 31 Closing 31 Closing 31 Closing

ACCOUNT NO. POST. REF.

DEBIT

J4 J4 J4

44 8 2 0 00 93 1 8 0 00

CREDIT 138 0 0 0 00

ACCOUNT Fees Income

DATE DESCRIPTION 2013 Dec. 31 Balance 31 Closing

√ J4

DEBIT

CREDIT

138 0 0 0 00

399

BALANCE DEBIT CREDIT 138 0 0 0 00 93 1 8 0 00 −0−

ACCOUNT NO. POST. REF.

302

401

BALANCE DEBIT CREDIT 138 0 0 0 00 −0−

Chapter 6  149

PROBLEM 6.3A (continued) GENERAL LEDGER ACCOUNT Advertising Expense

DATE DESCRIPTION 2013 Dec. 31 Balance 31 Closing

ACCOUNT NO.

POST. REF.

DEBIT

Ö J4

CREDIT

BALANCE DEBIT CREDIT

4 8 0 0 00

4 8 0 0 00 −0−

ACCOUNT Depreciation Expense—Equipment

DATE DESCRIPTION 2013 Dec. 31 Balance 31 Closing

POST. REF.

DEBIT

√ J4

ACCOUNT NO.

CREDIT

9 0 0 00

ACCOUNT Rent Expense

DATE DESCRIPTION 2013 Dec. 31 Balance 31 Closing

DEBIT

√ J4

DATE DESCRIPTION 2013 Dec. 31 Balance 31 Closing

150  Chapter 6

9 0 0 00 −0−

CREDIT

3 6 0 0 00

3 6 0 0 00 −0−

ACCOUNT NO.

√ J4

DEBIT

517

BALANCE DEBIT CREDIT

ACCOUNT Salaries Expense POST. REF.

514

BALANCE DEBIT CREDIT

ACCOUNT NO. POST. REF.

511

CREDIT

28 8 0 0 00

519

BALANCE DEBIT CREDIT 28 8 0 0 00 −0−

PROBLEM 6.3A (continued) GENERAL LEDGER ACCOUNT Utilities Expense

DATE DESCRIPTION 2013 Dec. 31 Balance 31 Closing

ACCOUNT NO. POST. REF.

DEBIT

√ J4

523

CREDIT

BALANCE DEBIT CREDIT

6 7 2 0 00

6 7 2 0 00 −0−

Analyze: The balance in the Salaries Expense account is $0.

Chapter 6  151

PROBLEM 6.4A Nationwide Auto Detailing Service Worksheet Month Ended December 31, 2013 ACCOUNT NAME 1 Cash 2 Accounts Receivable 3 Supplies 4 Prepaid Advertising 5 Equipment 6 Accumulated Depreciation—Equip. 7 Accounts Payable 8 Richard Harris, Capital 9 Richard Harris, Drawing 10 Fees Income 11 Supplies Expense 12 Advertising Expense 13 Depreciation Expense—Equipment 14 Salaries Expense 15 Utilities Expense 16 Totals 17 Net Income 18 19

152  Chapter 6

TRIAL BALANCE DEBIT CREDIT 31 0 5 0 00 4 9 5 0 00 4 0 0 0 00 3 0 0 0 00 20 0 0 0 00

ADJUSTMENTS DEBIT CREDIT

(a) 1 6 0 0 00 (b) 1 4 0 0 00 (c)

4 8 0 00

5 0 0 0 00 35 5 0 0 00 2 0 0 0 00 30 0 0 0 00 (a) 1 6 0 0 00 (b) 1 4 0 0 00 (c) 4 8 0 00 4 8 0 0 00 7 0 0 00 70 5 0 0 00

70 5 0 0 00

3 4 8 0 00

PROBLEM 6.4A (continued)

ADJUSTED TRIAL BALANCE DEBIT CREDIT 31 0 5 0 00 4 9 5 0 00 2 4 0 0 00 1 6 0 0 00 20 0 0 0 00 4 8 0 00 5 0 0 0 00 35 5 0 0 00 2 0 0 0 00 30 0 0 0 00 1 6 0 0 00 1 4 0 0 00 4 8 0 00 4 8 0 0 00 7 0 0 00 70 9 8 0 00 70 9 8 0 00

INCOME STATEMENT DEBIT CREDIT

BALANCE SHEET DEBIT CREDIT 31 0 5 0 00 4 9 5 0 00 2 4 0 0 00 1 6 0 0 00 20 0 0 0 00 4 8 0 00 5 0 0 0 00 35 5 0 0 00 2 0 0 0 00

30 0 0 0 00 1 6 0 0 00 1 4 0 0 00 4 8 0 00 4 8 0 0 00 7 0 0 00 8 9 8 0 00 21 0 2 0 00 30 0 0 0 00

30 0 0 0 00

62 0 0 0 00

30 0 0 0 00

62 0 0 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 40 9 8 0 00 16 21 0 2 0 00 17 62 0 0 0 00 18 19

Chapter 6  153

PROBLEM 6.4A (continued) PAGE

GENERAL JOURNAL

DATE

DESCRIPTION Adjusting Entries

1 2 2013 (a) 3 Dec. 31 Supplies Expense 4 Supplies 5 6 (b) 7 31 Advertising Expense 8 Prepaid Advertising 9 10 (c) 11 31 Depreciation Expense—Equipment 12 Accumulated Depreciation—Equipment 13

POST. REF.

DEBIT

517 121

1 6 0 0 00

526 131

1 4 0 0 00

523 142

4 8 0 00

DATE

DESCRIPTION Closing Entries

1 2 2013 3 Dec. 31 Fees Income 4 Income Summary 5 6 31 Income Summary 7 Salaries Expense 8 Utilities Expense 9 Supplies Expense 10 Depreciation Expense—Equipment 11 Advertising Expense 12 13 31 Income Summary 14 Richard Harris, Capital 15 16 31 Richard Harris, Capital 17 Richard Harris, Drawing 18

154  Chapter 6

CREDIT 1 2 3 1 6 0 0 00 4 5 6 7 1 4 0 0 00 8 9 10 11 4 8 0 00 12 13

PAGE

GENERAL JOURNAL POST. REF.

DEBIT

401 399

30 0 0 0 00

399 511 514 517 523 526

8 9 8 0 00

399 301

21 0 2 0 00

301 302

2 0 0 0 00

CREDIT 1 2 3 30 0 0 0 000 4 5 6 4 8 0 0 00 7 7 0 0 00 8 1 6 0 0 00 9 4 8 0 00 10 1 4 0 0 00 11 12 13 21 0 2 0 00 14 15 16 2 0 0 0 00 17 18

PROBLEM 6.4A (continued) GENERAL LEDGER ACCOUNT Supplies

DATE DESCRIPTION 2013 Dec. 31 Balance 31 Adjusting

ACCOUNT NO. POST. REF.

DEBIT

√ J3

CREDIT

1 6 0 0 00

ACCOUNT Prepaid Advertising

DATE DESCRIPTION 2013 Dec. 31 Balance 31 Adjusting

DEBIT

√ J3

CREDIT

1 4 0 0 00

ACCOUNT Accumulated Depreciation—Equipment

DATE DESCRIPTION 2013 Dec. 31 Adjusting

4 0 0 0 00 2 4 0 0 00

POST. REF.

DEBIT

CREDIT 4 8 0 00

POST. REF. √ J4 J4

3 0 0 0 00 1 6 0 0 00

CREDIT

21 0 2 0 00 2 0 0 0 00

142

BALANCE DEBIT CREDIT 4 8 0 00

ACCOUNT NO.

DEBIT

131

BALANCE DEBIT CREDIT

ACCOUNT NO.

ACCOUNT Richard Harris, Capital

DATE DESCRIPTION 2013 Dec. 31 Balance 31 Closing 31 Closing

BALANCE DEBIT CREDIT

ACCOUNT NO. POST. REF.

121

301

BALANCE DEBIT CREDIT 35 5 0 0 00 56 5 2 0 00 54 5 2 0 00

Chapter 6  155

PROBLEM 6.4A (continued) GENERAL LEDGER ACCOUNT Richard Harris, Drawing

DATE DESCRIPTION 2013 Dec. 31 Balance 31 Closing

POST. REF.

ACCOUNT NO.

DEBIT

√ J4

CREDIT

BALANCE DEBIT CREDIT

2 0 0 0 00

2 0 0 0 00 −0−

ACCOUNT Income Summary

DATE DESCRIPTION 2013 Dec. 31 Closing 31 Closing 31 Closing

ACCOUNT NO. POST. REF.

DEBIT

J4 J4 J4

8 9 8 0 00 21 0 2 0 00

CREDIT

DESCRIPTION DATE 2013 Dec. 31 Balance 31 Closing

√ J4

CREDIT

156  Chapter 6

BALANCE CREDIT DEBIT

30 0 0 0 00

ACCOUNT NO. POST. REF. √ J4

DEBIT

401

30 0 0 0 00 −0−

ACCOUNT Salaries Expense

DATE DESCRIPTION 2013 Dec. 31 Balance 31 Closing

30 0 0 0 00 21 0 2 0 00 −0−

ACCOUNT NO.

DEBIT

399

BALANCE CREDIT DEBIT

30 0 0 0 00

ACCOUNT Fees Income POST. REF.

302

511

CREDIT

BALANCE CREDIT DEBIT

4 8 0 0 00

4 8 0 0 00 −0−

PROBLEM 6.4A (continued) GENERAL LEDGER ACCOUNT Utilities Expense

DATE DESCRIPTION 2013 Dec. 31 Balance 31 Closing

ACCOUNT NO. POST. REF.

DEBIT

√ J4

CREDIT

7 0 0 00

ACCOUNT Supplies Expense

DATE DESCRIPTION 2013 Dec. 31 Adjusting 31 Closing

J3 J4

DEBIT

POST. REF.

1 6 0 0 00

1 6 0 0 00 −0−

1 6 0 0 00

J3 J4

DEBIT

ACCOUNT NO.

CREDIT

4 8 0 00 4 8 0 00

J3 J4

DEBIT

523

BALANCE DEBIT CREDIT 4 8 0 00 −0−

ACCOUNT NO.

POST. REF.

517

BALANCE DEBIT CREDIT

ACCOUNT Advertising Expense

DATE DESCRIPTION 2013 Dec. 31 Adjusting 31 Closing

7 0 0 00 −0−

CREDIT

ACCOUNT Depreciation Expense—Equipment

DATE DESCRIPTION 2013 Dec. 31 Adjusting 31 Closing

BALANCE DEBIT CREDIT

ACCOUNT NO. POST. REF.

514

526

CREDIT

BALANCE DEBIT CREDIT

1 4 0 0 00

1 4 0 0 00 −0−

1 4 0 0 00

Chapter 6  157

PROBLEM 6.4A (continued) Nationwide Auto Detailing Service Post-closing Trial Balance December 31, 2013 ACCOUNT NAME

CREDIT

DEBIT 31 0 5 0 00 4 9 5 0 00 2 4 0 0 00 1 6 0 0 00 20 0 0 0 00

Cash Accounts Receivable Supplies Prepaid Advertising Equipment Accumulated Depreciation—Equipment Accounts Payable Richard Harris, Capital Totals

60 0 0 0 00

4 8 0 00 5 0 0 0 00 54 5 2 0 00 60 0 0 0 00

Analyze: Total debits of $62,000 were posted to the general ledger to complete the closing entries PROBLEM 6.1B PAGE

GENERAL JOURNAL

DATE 1 2 3 4 5 6 7 8 9 10 11

2013 Jan.

DESCRIPTION Adjusting Entries

(a) 31 Supplies Expense Supplies (b) 31 Insurance Expense Prepaid Insurance (c) 31 Depreciation Expense—Machinery Accumulated Depreciation—Machinery

158  Chapter 6

POST. REF.

DEBIT

523 121

8 5 8 0 00

514 134

4 4 4 0 00

511 142

3 3 6 0 00

CREDIT 1 2 3 8 5 8 0 00 4 5 6 4 4 4 0 00 7 8 9 3 3 6 0 00 10 11

PROBLEM 6.1B PAGE

GENERAL JOURNAL

DATE

DESCRIPTION Closing Entries

1 2 2013 3 Jan. 31 Fees Income 4 Income Summary 5 6 31 Income Summary 7 Depreciation Expense—Machinery 8 Insurance Expense 9 Rent Expense 10 Salaries Expense 11 Supplies Expense 12 Telephone Expense 13 Utilities Expense 14 15 31 Income Summary 16 Jay Williams, Capital 17 18 31 Jay Williams, Capital 19 Jay Williams, Drawing 20

POST. REF.

DEBIT

401 309

98 4 0 0 00

309 511 514 517 520 523 526 529

75 9 3 0 00

309 301

22 4 7 0 00

301 302

7 2 0 0 00

CREDIT

98 4 0 0 00

3 3 6 0 00 4 4 4 0 00 9 0 0 0 00 48 0 0 0 00 8 5 8 0 00 6 3 0 00 1 9 2 0 00

22 4 7 0 00

7 2 0 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Analyze: The adjusting entry for expired insurance created a debit to Insurance Expense, increasing the Insurance Expense account balance to $4,440.

Chapter 6  159

PROBLEM 6.2B PAGE

GENERAL JOURNAL

DATE

DESCRIPTION Adjusting Entries

1 2 2013 (a) 3 Dec. 31 Supplies Expense 4 Supplies 5 (b) 6 31 Advertising Expense 7 Prepaid Advertising 8 (c) 9 31 Depreciation Expense—Equipment 10 Accumulated Depreciation—Equipment 11

POST. REF.

DEBIT

517 121

6 0 0 0 00

526 131

2 4 0 0 00

523 142

3 0 0 0 00

DATE DESCRIPTION Closing Entries 1 2 2013 3 Dec. 31 Fees Income 4 Income Summary 5 6 31 Income Summary 7 Salaries Expense 8 Utilities Expense 9 Supplies Expense 10 Depreciation Expense—Equipment 11 Advertising Expense 12 13 31 Income Summary 14 Randy Scott, Capital 15 16 31 Randy Scott, Capital 17 Randy Scott, Drawing 18

160  Chapter 6

CREDIT 1 2 3 6 0 0 0 00 4 5 6 2 4 0 0 00 7 8 9 3 0 0 0 00 10 11

PAGE

GENERAL JOURNAL POST. REF.

DEBIT

401 399

93 6 0 0 00

399 511 514 517 523 526

43 8 0 0 00

399 301

49 8 0 0 00

301 302

16 8 0 0 00

CREDIT

93 6 0 0 00

28 8 0 0 00 3 6 0 0 00 6 0 0 0 00 3 0 0 0 00 2 4 0 0 00

49 8 0 0 00

16 8 0 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

PROBLEM 6.2B (continued) GENERAL LEDGER ACCOUNT Supplies

DATE DESCRIPTION 2013 Dec. 31 Balance 31 Adjusting

ACCOUNT NO. POST. REF.

DEBIT

√ J3

CREDIT

6 0 0 0 00

ACCOUNT Prepaid Advertising

DATE DESCRIPTION 2013 Dec. 31 Balance 31 Adjusting

DEBIT

√ J3

CREDIT

2 4 0 0 00

ACCOUNT Accumulated Depreciation—Equipment

DATE DESCRIPTION 2013 Dec. 31 Adjusting

12 0 0 0 00 6 0 0 0 00

POST. REF.

DEBIT

CREDIT

18 0 0 0 00 15 6 0 0 00

3 0 0 0 00

√ J4 J4

DEBIT

CREDIT

49 8 0 0 00 16 8 0 0 00

142

BALANCE DEBIT CREDIT 3 0 0 0 00

ACCOUNT NO.

POST. REF.

131

BALANCE DEBIT CREDIT

ACCOUNT NO.

ACCOUNT Randy Scott, Capital

DATE DESCRIPTION 2013 Dec. 31 Balance 31 Closing 31 Closing

BALANCE DEBIT CREDIT

ACCOUNT NO. POST. REF.

121

301

BALANCE DEBIT CREDIT 164 4 0 0 00 214 2 0 0 00 197 4 0 0 00

Chapter 6  161

PROBLEM 6.2B (continued) GENERAL LEDGER ACCOUNT Randy Scott, Drawing

DATE DESCRIPTION 2013 Dec. 31 Balance 31 Closing

ACCOUNT NO.

POST. REF.

DEBIT

√ J4

CREDIT

16 8 0 0 00

ACCOUNT Income Summary

DATE DESCRIPTION 2013 Dec. 31 Closing 31 Closing 31 Closing

DEBIT

J4 J4 J4

43 8 0 0 00 49 8 0 0 00

CREDIT 93 6 0 0 00

ACCOUNT Fees Income

DATE DESCRIPTION 2013 Dec. 31 Balance 31 Closing

162  Chapter 6

BALANCE DEBIT CREDIT 16 8 0 0 00 −0−

ACCOUNT NO. POST. REF.

√ J4

DEBIT

93 6 0 0 00

CREDIT

399

BALANCE DEBIT CREDIT 93 6 0 0 00 49 8 0 0 00 −0−

ACCOUNT NO. POST. REF.

302

401

BALANCE DEBIT CREDIT 93 6 0 0 00 −0−

PROBLEM 6.2B (continued) GENERAL LEDGER ACCOUNT Salaries Expense

DATE DESCRIPTION 2013 Dec. 31 Balance 31 Closing

ACCOUNT NO. POST. REF.

DEBIT

√ J4

CREDIT

28 8 0 0 00

ACCOUNT Utilities Expense

DATE DESCRIPTION 2013 Dec. 31 Balance 31 Closing

DEBIT

√ J4

3 6 0 0 00

3 6 0 0 00 −0−

ACCOUNT NO. POST. REF. J3 J4

DEBIT

POST. REF. J3 J4

517

CREDIT

BALANCE DEBIT CREDIT

6 0 0 0 00

6 0 0 0 00 −0−

6 0 0 0 00

DEBIT

514

BALANCE DEBIT CREDIT

ACCOUNT Depreciation Expense—Equipment

DATE DESCRIPTION 2013 Dec. 31 Adjusting 31 Closing

28 8 0 0 00 −0−

CREDIT

ACCOUNT Supplies Expense

DATE DESCRIPTION 2013 Dec. 31 Adjusting 31 Closing

BALANCE CREDIT DEBIT

ACCOUNT NO. POST. REF.

511

ACCOUNT NO.

523

CREDIT

BALANCE DEBIT CREDIT

3 0 0 0 00

3 0 0 0 00 −0−

3 0 0 0 00

Chapter 6  163

PROBLEM 6.2B (continued) GENERAL LEDGER ACCOUNT

ACCOUNT NO.

Advertising Expense

DATE DESCRIPTION 2013 Dec. 31 Adjusting 31 Closing

POST. REF. J3 J4

DEBIT

CREDIT

2 4 0 0 00 2 4 0 0 00

526

BALANCE DEBIT CREDIT 2 4 0 0 00 −0−

Cedar Canyon Nursery and Landscape Post-closing Trial Balance December 31, 2013 ACCOUNT NAME Cash Accounts Receivable Supplies Prepaid Advertising Equipment Accumulated Depreciation—Equipment Accounts Payable Randy Scott, Capital Totals

DEBIT 64 8 0 0 00 12 0 0 0 00 6 0 0 0 00 15 6 0 0 00 120 0 0 0 00

CREDIT

3 0 0 0 00 18 0 0 0 00 197 4 0 0 00 218 4 0 0 00 218 4 0 0 00

Analyze: Total credits of $204,000 were posted to the general ledger to complete the closing entries

164  Chapter 6

PROBLEM 6.3B PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 Dec. 31 Fees Income 3 Income Summary 5 6 31 Income Summary 7 Advertising Expense 8 Depreciation Expense—Equipment 9 Rent Expense 10 Salaries Expense 11 Utilities Expense 12 13 31 Income Summary 14 James Taylor, Capital 15 16 31 James Taylor, Capital 17 James Taylor, Drawing 18

POST. REF.

DEBIT

401 399

324 0 0 0 00

399 511 514 517 519 523

124 2 0 0 00

399 301

199 8 0 0 00

301 302

21 6 0 0 00

CREDIT

324 0 0 0 00

19 8 0 0 00 5 4 0 0 00 12 6 0 0 00 64 8 0 0 00 21 6 0 0 00

199 8 0 0 00

21 6 0 0 00

1 2 3 5 6 7 8 9 10 11 12 13 14 15 16 17 18

GENERAL LEDGER ACCOUNT

ACCOUNT NO.

Supplies

DATE DESCRIPTION 2013 Dec. 31 Balance

POST. REF.

DEBIT

CREDIT

√

121

BALANCE CREDIT DEBIT 18 0 0 0 00

Chapter 6  165

PROBLEM 6.3B (continued) GENERAL LEDGER ACCOUNT Prepaid Rent

DATE DESCRIPTION 2013 Dec. 31 Balance

ACCOUNT NO. POST. REF.

DEBIT

CREDIT

ACCOUNT Equipment

DATE DESCRIPTION 2013 Dec. 31 Balance

ACCOUNT NO.

DEBIT

CREDIT

POST. REF.

DEBIT

ACCOUNT NO.

CREDIT

166  Chapter 6

BALANCE DEBIT CREDIT

ACCOUNT NO.

√ J4 J4

142

5 4 0 0 00

ACCOUNT James Taylor, Capital

DATE DESCRIPTION 2013 Dec. 1 Balance 31 Closing 31 Closing

BALANCE DEBIT CREDIT

√

POST. REF.

141

216 0 0 0 00

√

ACCOUNT Accumulated Depreciation—Equipment

DATE DESCRIPTION 2013 Dec. 31 Balance

BALANCE DEBIT CREDIT 138 6 0 0 00

√

POST. REF.

131

DEBIT

CREDIT

199 8 0 0 00 21 6 0 0 00

301

BALANCE DEBIT CREDIT 344 7 0 0 00 544 5 0 0 00 522 9 0 0 00

PROBLEM 6.3B (continued) GENERAL LEDGER ACCOUNT James Taylor, Drawing

DATE DESCRIPTION 2013 Dec. 31 Balance 31 Closing

POST. REF.

ACCOUNT NO.

DEBIT

√ J4

CREDIT

21 6 0 0 00

ACCOUNT Income Summary

DATE DESCRIPTION 2013 Dec. 31 Closing 31 Closing 31 Closing

DEBIT

J4 J4 J4

124 2 0 0 00 199 8 0 0 00

CREDIT 324 0 0 0 00

ACCOUNT Fees Income

DATE DESCRIPTION 2013 Dec. 31 Balance 31 Closing

BALANCE DEBIT CREDIT 21 6 0 0 00 −0−

ACCOUNT NO. POST. REF.

√ J4

DEBIT

CREDIT

324 0 0 0 00

399

BALANCE DEBIT CREDIT 324 0 0 0 00 199 8 0 0 00 −0−

ACCOUNT NO. POST. REF.

302

401

BALANCE DEBIT CREDIT 324 0 0 0 00 −0−

Chapter 6  167

PROBLEM 6.3B (continued) GENERAL LEDGER ACCOUNT Advertising Expense

DATE DESCRIPTION 2013 Dec. 31 Balance 31 Closing

ACCOUNT NO.

POST. REF.

DEBIT

√ J4

CREDIT

19 8 0 0 00

ACCOUNT Depreciation Expense—Equipment

DATE DESCRIPTION 2013 Dec. 31 Balance 31 Closing

POST. REF.

DEBIT

√ J4

DATE DESCRIPTION 2013 Dec. 31 Balance 31 Closing

168  Chapter 6

19 8 0 0 00 −0−

BALANCE DEBIT CREDIT

5 4 0 0 00

5 4 0 0 00 −0−

ACCOUNT NO.

DEBIT

√ J4

CREDIT

12 6 0 0 00

√ J4

DEBIT

CREDIT

64 8 0 0 00

517

BALANCE DEBIT CREDIT 12 6 0 0 00 −0−

ACCOUNT NO. POST. REF.

514

CREDIT

ACCOUNT Salaries Expense

DATE DESCRIPTION 2013 Dec. 31 Balance 31 Closing

BALANCE CREDIT DEBIT

ACCOUNT NO.

ACCOUNT Rent Expense POST. REF.

511

519

BALANCE DEBIT CREDIT 64 8 0 0 00 −0−

PROBLEM 6.3B (continued) GENERAL LEDGER ACCOUNT

DATE DESCRIPTION 2013 Dec. 31 Balance 31 Closing

Analyze:

ACCOUNT NO.

Utilities Expense POST. REF. √ J4

DEBIT

CREDIT

21 6 0 0 00

523

BALANCE DEBIT CREDIT 21 6 0 0 00 −0−

Fees Income, Income Summary, James Taylor—Capital, James Taylor—Drawing, Advertising, Depreciation, Rent, Salaries, and Utilities Expense.

Chapter 6  169

PROBLEM 6.4B Scott Wilson, CPA Worksheet Month Ended June 30, 2013

ACCOUNT NAME 1 Cash 2 Accounts Receivable 3 Supplies 4 Computers 5 Accumulated Depreciation—Computers 6 Accounts Payable 7 Scott Wilson, Capital 8 Scott Wilson, Drawing 9 Fees Income 10 Salaries Expense 11 Supplies Expense 12 Depreciation Expense—Computers 13 Travel Expense 14 Utilities Expense 15 Totals

TRIAL BALANCE DEBIT CREDIT 31 9 5 0 00 11 3 4 0 00 15 7 5 0 00 28 8 0 0 00 2 8 8 0 00 12 6 0 0 00 62 2 3 5 00 12 0 0 0 00 67 9 5 0 00 37 7 2 5 00

ADJUSTMENTS DEBIT CREDIT

(a) 2 7 0 0 00 (b)

2 4 0 00

(a) 2 7 0 0 00 (b) 2 4 0 00 5 4 0 0 00 2 7 0 0 00 145 6 6 5 00

145 6 6 5 00

2 9 4 0 00

16 Net Income 17 18

170  Chapter 6

PROBLEM 6.4B (continued)

ADJUSTED TRIAL BALANCE DEBIT CREDIT 31 9 5 0 00 11 3 4 0 00 13 0 5 0 00 28 8 0 0 00 3 1 2 0 00 12 6 0 0 00 62 2 3 5 00 12 0 0 0 00 67 9 5 0 00 37 7 2 5 00 2 7 0 0 00 2 4 0 00 5 4 0 0 00 2 7 0 0 00

37 7 2 5 00 2 7 0 0 00 2 4 0 00 5 4 0 0 00 2 7 0 0 00

145 9 0 5 00

48 7 6 5 00

145 9 0 5 00

INCOME STATEMENT DEBIT CREDIT

BALANCE SHEET DEBIT CREDIT 31 9 5 0 00 11 3 4 0 00 13 0 5 0 00 28 8 0 0 00 3 1 2 0 00 12 6 0 0 00 62 2 3 5 00 12 0 0 0 00

67 9 5 0 00

97 1 4 0 00

19 1 8 5 00 67 9 5 0 00

67 9 5 0 00

97 1 4 0 00

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

77 9 5 5 00

19 1 8 5 00

97 1 4 0 00

17 18

Chapter 6  171

PROBLEM 6.4B (continued) PAGE

GENERAL JOURNAL

DATE 1 2 2013 3 Jun. 4 5 6 7 8 9 10 11 12 13

DESCRIPTION Adjusting Entries

POST. REF.

DEBIT

30 Supplies Expense Supplies

517 121

2 7 0 0 00

30 Depreciation Expense—Computers Accumulated Depreciation—Computers

523 142

2 4 0 00

DATE 1 2 2013 3 Jun. 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

DESCRIPTION Closing Entries

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

2 4 0 00

PAGE

DEBIT

30 Fees Income Income Summary

401 309

67 9 5 0 00

30 Income Summary Salaries Expense Supplies Expense Depreciation Expense—Computers Travel Expense Utilities Expense

309 511 517 523 519 514

48 7 6 5 00

30 Income Summary Scott Wilson, Capital

309 301

19 1 8 5 00

30 Scott Wilson, Capital Scott Wilson, Drawing

301 302

12 0 0 0 00

172  Chapter 6

CREDIT

2 7 0 0 00

GENERAL JOURNAL POST. REF.

CREDIT 1 2 3 67 9 5 0 000 4 5 6 37 7 2 5 00 7 2 7 0 0 00 8 2 4 0 00 9 5 4 0 0 00 10 2 7 0 0 00 11 12 13 19 1 8 5 00 14 15 16 12 0 0 0 00 17 18

PROBLEM 6.4B (continued) GENERAL LEDGER ACCOUNT

DATE DESCRIPTION 2013 Jun. 30 Balance 30 Adjusting

ACCOUNT

POST. REF.

DEBIT

CREDIT

BALANCE DEBIT CREDIT

ACCOUNT NO.

POST. REF.

121

15 7 5 0 00 2 7 0 0 00 13 0 5 0 00

√ J3

Computers

DATE DESCRIPTION 2013 Jun. 30 Balance

ACCOUNT

ACCOUNT NO.

Supplies

DEBIT

CREDIT

131

BALANCE DEBIT CREDIT 28 8 0 0 00

√

Accumulated Depreciation—Computers

ACCOUNT NO.

POST. DESCRIPTION REF.

BALANCE DEBIT CREDIT

DATE 2013 Jun. 30 Balance 30 Adjusting

√ J3

DEBIT

CREDIT

2 4 0 00

142

2 8 8 0 00 3 1 2 0 00

Chapter 6  173

PROBLEM 6.4B (continued) ACCOUNT

ACCOUNT NO.

Scott Wilson, Capital

DATE DESCRIPTION 2010 Jun. 30 Balance 30 Closing 30 Closing

POST. REF. √ J4 J4

DEBIT

CREDIT

301

BALANCE DEBIT CREDIT 62 2 3 5 00 81 4 2 0 00 69 4 2 0 00

19 1 8 5 00 12 0 0 0 00

GENERAL LEDGER ACCOUNT

DATE DESCRIPTION 2013 Jun. 30 Balance 30 Closing

ACCOUNT

ACCOUNT NO.

Scott Wilson, Drawing POST. REF.

DEBIT

√ J4

CREDIT

12 0 0 0 00

DATE DESCRIPTION 2013 Jun. 30 Closing 30 Closing 30 Closing

174  Chapter 6

BALANCE DEBIT CREDIT 12 0 0 0 00 −0−

ACCOUNT NO.

Income Summary POST. REF. J4 J4 J4

DEBIT

CREDIT 67 9 5 0 00

48 7 6 5 00 19 1 8 5 00

302

309

BALANCE DEBIT CREDIT 67 9 5 0 00 19 1 8 5 00 −0−

PROBLEM 6.4B (continued) ACCOUNT Fees Income

DESCRIPTION DATE 2013 Jun. 30 Balance 30 Closing

ACCOUNT NO. POST. REF. √ J4

DEBIT

CREDIT

BALANCE DEBIT CREDIT 67 9 5 0 00 −0−

67 9 5 0 00

ACCOUNT Salaries Expense

DATE DESCRIPTION 2013 Jun. 30 Balance 30 Closing

ACCOUNT NO. POST. REF.

DEBIT

√ J4

401

CREDIT

37 7 2 5 00

511

BALANCE DEBIT CREDIT 37 7 2 5 00 −0−

GENERAL LEDGER ACCOUNT Utilities Expense

DATE DESCRIPTION 2013 Jun. 30 Balance 30 Closing

ACCOUNT NO. POST. REF. √ J4

DEBIT

514

CREDIT

BALANCE CREDIT DEBIT

2 7 0 0 00

2 7 0 0 00 −0−

Chapter 6  175

PROBLEM 6.4B (continued) ACCOUNT Supplies Expense

DATE 2013 Jun.

DESCRIPTION 30 Adjusting 30 Closing

ACCOUNT NO. POST. REF. J3 J4

DEBIT

CREDIT

BALANCE DEBIT CREDIT

2 7 0 0 00

2 7 0 0 00 −0−

2 7 0 0 00

ACCOUNT Travel Expense

DATE 2013 Jun.

DESCRIPTION 30 Balance 30 Closing

ACCOUNT NO. POST. REF.

DEBIT

√ J4

DATE 2013 Jun.

DESCRIPTION 30 Adjusting 30 Closing

176  Chapter 6

J3 J4

DEBIT

519

CREDIT

BALANCE DEBIT CREDIT

5 4 0 0 00

5 4 0 0 00 −0−

ACCOUNT Depreciation Expense—Computers POST. REF.

517

ACCOUNT NO.

CREDIT

2 4 0 00 2 4 0 00

523

BALANCE DEBIT CREDIT 2 4 0 00 −0−

PROBLEM 6.4B (continued) Scott Wilson, CPA Post-closing Trial Balance June 30, 2013 ACCOUNT NAME Cash Accounts Receivable Supplies Computers Accumulated Depreciation—Computers Accounts Payable Scott Wilson, Capital Totals

Analyze:

DEBIT 31 9 5 0 00 11 3 4 0 00 13 0 5 0 00 28 8 0 0 00

85 1 4 0 00

CREDIT

3 1 2 0 00 12 6 0 0 00 69 4 2 0 00 85 1 4 0 00

Net Income for Scott Wilson, CPA for the month of June 2013 was $19,185.

Chapter 6  177

CRITICAL THINKING PROBLEM 6.1 Contemporary Fashions Worksheet Month Ended December 31, 2013 ACCOUNT NAME 1 Cash 2 Accounts Receivable 3 Supplies 4 Prepaid Insurance 5 Machinery 6 Accumulated Depreciation—Machinery 7 Accounts Payable 8 Jada McBride, Capital 9 Jada McBride, Drawing 10 Fees Income 11 Supplies Expense 12 Insurance Expense 13 Salaries Expense 14 Depreciation Expense—Machinery 15 Utilities Expense 16 Totals

TRIAL BALANCE DEBIT CREDIT 163 2 0 0 00 36 0 0 0 00 28 8 0 0 00 43 2 0 0 00 336 0 0 0 00

ADJUSTMENTS DEBIT CREDIT

(a) 14 4 0 0 00 (b) 9 6 0 0 00 (c) 4 8 0 0 00

54 0 0 0 00 298 3 2 0 00 24 0 0 0 00 330 0 0 0 00 (a) 14 4 0 0 00 (b) 9 6 0 0 00 44 4 0 0 00 (c) 4 8 0 0 00 6 7 2 0 00 682 3 2 0 00

682 3 2 0 00

28 8 0 0 00

17 Net Income 18 19

178  Chapter 6

CRITICAL THINKING PROBLEM 6.1 (continued)

ADJUSTED TRIAL BALANCE DEBIT CREDIT 163 2 0 0 00 36 0 0 0 00 14 4 0 0 00 33 6 0 0 00 336 0 0 0 00 4 8 0 0 00 54 0 0 0 00 298 3 2 0 00 24 0 0 0 00 330 0 0 0 00 14 4 0 0 00 9 6 0 0 00 44 4 0 0 00 4 8 0 0 00 6 7 2 0 00 687 1 2 0 00

687 1 2 0 00

INCOME STATEMENT DEBIT CREDIT

BALANCE SHEET DEBIT CREDIT 163 2 0 0 00 36 0 0 0 00 14 4 0 0 00 33 6 0 0 00 336 0 0 0 00 4 8 0 0 00 54 0 0 0 00 298 3 2 0 00 24 0 0 0 00

330 0 0 0 00 14 4 0 0 00 9 6 0 0 00 44 4 0 0 00 4 8 0 0 00 6 7 2 0 00 79 9 2 0 00

330 0 0 0 00

607 2 0 0 00

250 0 8 0 00 330 0 0 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

357 1 2 0 00 16 250 0 8 0 00 17

330 0 0 0 00

607 2 0 0 00

607 2 0 0 00 18 19

Chapter 6  179

CRITICAL THINKING PROBLEM 6.1 (continued) Contemporary Fashions Income Statement Month Ended December 31, 2013 Revenue Fees Income Expenses Supplies Expense Insurance Expense Salaries Expense Depreciation Expense—Machinery Utilities Expense Total Expenses Net Income

330 0 0 0 00 14 4 0 0 00 9 6 0 0 00 44 4 0 0 00 4 8 0 0 00 6 7 2 0 00 79 9 2 0 00 250 0 8 0 00

Contemporary Fashions Statement of Owner's Equity Month Ended December 31, 2013 Jada McBride, Capital, December 1, 2013 Net income for December Less Withdrawals for December Increase in Capital Jada McBride, Capital, December 31, 2013

180  Chapter 6

298 3 2 0 00 250 0 8 0 00 24 0 0 0 00 226 0 8 0 00 524 4 0 0 00

CRITICAL THINKING PROBLEM 6.1 (continued) Contemporary Fashions Balance Sheet December 31, 2013 Assets Cash Accounts Receivable Supplies Prepaid Insurance Machinery Accumulated Depreciation—Machinery Total Assets

163 2 36 0 14 4 33 6 336 0 4 8

Liabilities and Owner's Equity Liabilities Accounts Payable Owner's Equity Jada McBride, Capital Total Liabilities and Owner's Equity

0 0 00 0 0 00 0 0 00 0 0 00

0 0 00 0 0 00 331 2 0 0 00 578 4 0 0 00

54 0 0 0 00 524 4 0 0 00 578 4 0 0 00

Chapter 6  181

CRITICAL THINKING PROBLEM 6.1 (continued) PAGE

GENERAL JOURNAL

DATE

DESCRIPTION Adjusting Entries

POST. REF.

1 2 2013 3 Dec. 31 Supplies Expense 4 Supplies 5 6 31 Insurance Expense 7 Prepaid Insurance 8 9 31 Depreciation Expense—Machinery 10 Accumulated Depreciation—Machinery 11

DEBIT

14 4 0 0 00

9 6 0 0 00

4 8 0 0 00

DATE DESCRIPTION 1 Closing Entries 2 2013 3 Dec. 31 Fees Income 4 Income Summary 5 6 31 Income Summary 7 Supplies Expense 8 Insurance Expense 9 Salaries Expense 10 Depreciation Expense—Machinery 11 Utilities Expense 12 13 31 Income Summary 14 Jada McBride, Capital 15 16 31 Jada McBride, Capital 17 Jada McBride, Drawing 18

182  Chapter 6

CREDIT 1 2 3 14 4 0 0 00 4 5 6 9 6 0 0 00 7 8 9 4 8 0 0 00 10 11

PAGE

GENERAL JOURNAL POST. REF.

DEBIT

CREDIT

1 2 330 0 0 0 00 3 330 0 0 0 000 4 5 79 9 2 0 00 6 14 4 0 0 00 7 9 6 0 0 00 8 44 4 0 0 00 9 4 8 0 0 00 10 6 7 2 0 00 11 12 250 0 8 0 00 13 250 0 8 0 00 14 15 24 0 0 0 00 16 24 0 0 0 00 17 18

CRITICAL THINKING PROBLEM 6.1 (continued) Contemporary Fashions Post-closing Trial Balance December 31, 2013 ACCOUNT NAME Cash Accounts Receivable Supplies Prepaid Insurance Machinery Accumulated Depreciation—Machinery Accounts Payable Jada McBride, Capital

DEBIT 163 2 0 0 00 36 0 0 0 00 14 4 0 0 00 33 6 0 0 00 336 0 0 0 00

Totals

583 2 0 0 00 583 2 0 0 00

Analyze:

CREDIT

4 8 0 0 00 54 0 0 0 00 524 4 0 0 00

The net income would be $269,280.

CRITICAL THINKING PROBLEM 6.2 1. Reed made the following errors preparing the closing entries: Accumulated Depreciation and Accounts Payable are permanent accounts that continue from accounting a. period to accounting period and, consequently, are not closed. b.

The Drawing account is not an expense account to be closed to Income Summary but is a reduction of equity and is closed directly to the Capital account.

Wilson Reed closed accounts based on what kind of balance they had (debit/credit) rather than looking at the type of account (permanent/temporary) they were. Only temporary, or nominal, accounts are closed.

1 2 3 4 5 6

PAGE

GENERAL JOURNAL

DATE DESCRIPTION 2013 Dec. 31 James Walker, Capital Accumulated Depreciation Accounts Payable To correct errors made in closing entries

POST. REF.

DEBIT 20 7 5 0 00

CREDIT 1 2 4 2 5 0 00 3 16 5 0 0 00 4 5 6

Chapter 6  183

CRITICAL THINKING PROBLEM 6.2 (continued) 3. The proof of this entry is: Fees Income Expenses: Salaries Expense Supplies Expense Depreciation Expense Net Income Withdrawals Increase in Capital Capital, Beginning Capital, Ending Corrected balance per Reed’s entries Less debit from correcting entry Corrected ending Capital balance

49,000 39,000 2,500 1,200

42,700 6,300 (3,500) 2,800 25,000 27,800 48,550 (20,750) 27,800

Note: It is not necessary to make an entry to correct the closing of the Drawing account to the Income Summary account. Closing the Drawing account to the Income Summary account, which in turn was closed to the Capital account, results in reducing the Capital account by the amount of the withdrawals. So, while incorrect, Reed’s entry with regard to Drawing achieves the correct end result.

The balance of the Capital account after closing entries have been posted must agree with the ending Capital balance as shown. Posting the entry closing the Income Summary account increases the Capital account by the amount of the net income (or decreases it by the amount of a net loss), while posting the entry closing the Drawing account decreases the Capital account. These postings reflect the same changes to Capital that are shown on the statement of owner’s equity and on the balance sheet, and therefore, the ending Capital amount must be the same for both. Note that the errors Reed made in preparing the closing entries would not be revealed by the post-closing trial balance. Since each entry Reed made had equal debits and credits, the post-closing trial balance would be in balance. The errors would not become evident until the next year when postings were made to the Accumulated Depreciation and Accounts Payable accounts or when the ledger account balances were compared to the balance sheet amounts.

184  Chapter 6

SOLUTIONS TO BUSINESS CONNECTIONS Managerial Focus: 1. No. A thorough analysis of the components of the income statement would reveal how costs directly impact net income. The balance sheet helps determine the amount of the firm’s assets and its liquidity, liabilities, and equity. 2. Current assets compared with current liabilities. 3. Timely preparation of financial statements support future planning, prompt payment of debts, developing effective credit policies. 4. The income statement might help determine the adequacy of profit, how to improve revenue and hold down expenses, how to reduce expenses without decreasing revenue, and how to even out the business operating cycle. Balance sheet data might influence decisions concerning growth of equity, the return on investment, adequacy of the firm’s assets, whether collections on accounts receivable should be accelerated, and whether more capital is needed. Ethical Dilemma: You should wait to verify the invoice is an actual invoice. At the end of the year, Miscellaneous Expense will be closed and the $1,000 expense will be in the previous year and not given the verification it so badly needs. Financial Statement Analysis: 1. Dr. Inc. Summ., $6,756,000; Cr. Labor and Fringe, $2,629,000,000; Cr. Materials, Supplies, and Other $1,715,000,000; Cr. Inland Trans., $264,000,000; Cr. Depreciation, $908,000,000; Cr. Fuel, $849,000,000; Cr. Equipment & Other Rents, $391,000,000 2. Dr. Intermodal, $1,204,000,000; Dr. Rail, $7,837,000,000; Cr. Inc. Summ., $9,041,000,000 Analyze Online: Answers will vary depending on the year. Teamwork: 1) Analyze transactions, 2) journalize the data about transactions, 3) post the data about transactions, 4) prepare a worksheet, 5) prepare financial statements, 6) record adjusting entries, 7) record closing entries, 8) prepare a post-closing trial balance, and 9) interpret the financial information. Internet Connection: 1. Requirements Experience: At least 2 years full-time experience or the part-time or freelance equivalent. 2. Examination: Candidates must pass a 4-part national examination, including 2 parts given at any Prometric Test Center (there are over 300 nationwide). 3. Code of Ethics: Applicants must sign a Code of Ethics.

Chapter 6  185

SOLUTIONS TO PRACTICE TEST Part A True-False 1. TRUE 2. FALSE 3. FALSE 4. TRUE 5. FALSE 6. TRUE 7. FALSE 8. TRUE 9. FALSE 10. FALSE Part B Matching 1. a 2. b 3. c 4. e 5. d

186  Chapter 6

MINI-PRACTICE SET 1 SERVICE BUSINESS ACCOUNTING CYCLE PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2014 2 Jan. 2 Supplies 3 Cash 4 Bought supplies for cash, Check 1015 5 6 2 Prepaid Insurance 7 Cash 8 Purchased one year of insurance, Check 1016 9 10 7 Cash 11 Accounts Receivable 12 Fees Income 13 Performed services for cash and on account 14 15 12 Cash 16 Accounts Receivable 17 Received cash on account 18 19 12 Advertising Expense 20 Cash 21 Paid for advertising on radio, Check 1017 22 23 13 Cash 24 Accounts Receivable 25 Received cash on account 26 27 14 Cash 28 Supplies 29 Returned damaged supplies for cash refund 30 31 15 Cash 32 Accounts Receivable 33 Fees Income 34 Performed services for cash and on account 35

POST. REF.

DEBIT

121 101

4 0 0 0 00

134 101

6 0 0 0 00

101 111 401

18 0 0 0 00 2 0 0 0 00

101 111

3 0 0 0 00

526 101

2 8 0 0 00

101 111

2 5 0 0 00

101 121

5 5 0 00

101 111 401

19 5 0 0 00 2 5 0 0 00

CREDIT 1 2 4 0 0 0 00 3 4 5 6 6 0 0 0 00 7 8 9 10 11 20 0 0 0 00 12 13 14 15 3 0 0 0 00 16 17 18 19 2 8 0 0 00 20 21 22 23 2 5 0 0 00 24 25 26 27 5 5 0 00 28 29 30 31 32 22 0 0 0 00 33 34 35

Chapter 6  187

MINI-PRACTICE SET 1 (continued) PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2014 2 Jan. 20 Supplies 3 Accounts Payable 4 Bought supplies on account 5 6 20 Cash 7 Accounts Receivable 8 Fees Income 9 Performed services for cash and on account 10 11 20 Cash 12 Accounts Receivable 13 Performed services for cash and on account 14 15 21 Maintenance Expense 16 Cash 17 Paid for maintenance on equipment 18 Check 1018 19 20 22 Advertising Expense 21 Cash 22 Paid cash for newspaper ads, Check 1019 23 24 23 Telephone Expense 25 Cash 26 Paid monthly telephone bill, Check 1020 27 28 26 Cash 29 Accounts Receivable 30 Received cash on account 31 32 27 Accounts Payable 33 Cash 34 Made payment to creditor, Check 1021 35 36 37

188  Chapter 6

POST. REF. 121 202

101 111 401

101 111

529 101

526 101

532 101

101 111

202 101

DEBIT

CREDIT

1 3 6 0 0 00 2 3 6 0 0 00 3 4 5 10 5 0 0 00 6 2 2 5 0 00 7 12 7 5 0 00 8 9 10 3 2 0 0 00 11 3 2 0 0 00 12 13 14 5 0 2 5 00 15 5 0 2 5 00 16 17 18 19 2 8 0 0 00 20 2 8 0 0 00 21 22 23 8 7 5 00 24 8 7 5 00 25 26 27 2 8 0 0 00 28 2 8 0 0 00 29 30 31 3 0 0 0 00 32 3 0 0 0 00 33 34 35 36 37

MINI-PRACTICE SET 1 (continued) PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2014 28 Utilities Expense 2 Jan. Cash 3 Paid monthly utility bill, Check 1022 4 5 29 Cash 6 Accounts Receivable 7 Fees Income 8 Performed services for cash and on account 9 10 31 Salaries Expense 11 Cash 12 Paid monthly salaries, Checks 1023–1027 13 14 31 Carolyn Wells, Drawing 15 Cash 16 Owner withdrew cash for personal use, 17 Check 1028 18 19 31 Maintenance Expense 20 Cash 21 Paid for monthly maintenance services, 22 Check 1029 23 24 31 Equipment 25 Cash 26 Accounts Payable 27 Bought equipment for cash and on account, 28 Check 1030 29 30 31 Cash 31 Accounts Receivable 32 Fees Income 33 Performed services for cash and on account 34 35 36 37

POST. REF. 514 101

DEBIT 2 1 7 5 00

101 111 401

16 5 0 0 00 3 5 0 0 00

511 101

20 5 0 0 00

302 101

12 0 0 0 00

529 101

3 0 5 0 00

141 101 202

12 8 0 0 00

101 111 401

4 2 5 0 00 1 4 5 0 00

CREDIT 1 2 1 7 5 00 2 3 4 5 6 20 0 0 0 00 7 8 9 10 20 5 0 0 00 11 12 13 14 12 0 0 0 00 15 16 17 18 19 3 0 5 0 00 20 21 22 23 24 10 0 0 0 00 25 2 8 0 0 00 26 27 28 29 30 31 5 7 0 0 00 32 33 34 35 36 37

Chapter 6  189

MINI-PRACTICE SET 1 (continued) PAGE

GENERAL JOURNAL

DATE DESCRIPTION Adjusting Entries 1 2 2014 3 Jan. 31 Supplies Expense 4 Supplies 5 6 31 Rent Expense 7 Prepaid Rent 8 9 31 Insurance Expense 10 Prepaid Insurance 11 12 31 Depreciation Expense—Equipment 13 Accumulated Depreciation—Equipment 14 Closing Entries 15 16 17 31 Fees Income 18 Income Summary 19 20 31 Income Summary 21 Salaries Expense 22 Utilities Expense 23 Supplies Expense 24 Rent Expense 25 Depreciation Expense—Equipment 26 Advertising Expense 27 Maintenance Expense 28 Telephone Expense 29 Insurance Expense 30 31 31 Income Summary 32 Carolyn Wells, Capital 33 34 31 Carolyn Wells, Capital 35 Carolyn Wells, Drawing 36

190  Chapter 6

POST. REF.

DEBIT

517 121

5 0 0 0 00

520 137

4 0 0 0 00

535 134

5 0 0 00

523 142

1 8 3 00

401 309

80 4 5 0 00

309 511 514 517 520 523 526 529 532 535

46 9 0 8 00

309 301

33 5 4 2 00

301 302

12 0 0 0 00

CREDIT 1 2 3 5 0 0 0 00 4 5 6 4 0 0 0 00 7 8 9 5 0 0 00 10 11 12 1 8 3 00 13 14 15 16 17 80 4 5 0 00 18 19 20 20 5 0 0 00 21 2 1 7 5 00 22 5 0 0 0 00 23 4 0 0 0 00 24 1 8 3 00 25 5 6 0 0 00 26 8 0 7 5 00 27 8 7 5 00 28 5 0 0 00 29 30 31 33 5 4 2 00 32 33 34 12 0 0 0 00 35 36

MINI−PRACTICE SET 1 (continued) GENERAL LEDGER ACCOUNT

ACCOUNT NO.

Cash

DATE DESCRIPTION 2014 Jan. 1 Balance 2 2 7 12 12 13 14 15 20 20 21 22 23 26 27 28 29 31 31 31 31 31

POST. REF. ✔ J3 J3 J3 J3 J3 J3 J3 J4 J4 J4 J4 J4 J4 J4 J5 J5 J5 J5 J5 J5 J5 J5

DEBIT

CREDIT

4 0 0 0 00 6 0 0 0 00 18 0 0 0 00 3 0 0 0 00 2 8 0 0 00 2 5 0 0 00 5 5 0 00 19 5 0 0 00 10 5 0 0 00 3 2 0 0 00 5 0 2 5 00 2 8 0 0 00 8 7 5 00 2 8 0 0 00 3 0 0 0 00 2 1 7 5 00 16 5 0 0 00 20 5 0 0 00 12 0 0 0 00 3 0 5 0 00 10 0 0 0 00 4 2 5 0 00

101

BALANCE DEBIT CREDIT 111 3 5 0 00 107 3 5 0 00 101 3 5 0 00 119 3 5 0 00 122 3 5 0 00 119 5 5 0 00 122 0 5 0 00 122 6 0 0 00 142 1 0 0 00 152 6 0 0 00 155 8 0 0 00 150 7 7 5 00 147 9 7 5 00 147 1 0 0 00 149 9 0 0 00 146 9 0 0 00 144 7 2 5 00 161 2 2 5 00 140 7 2 5 00 128 7 2 5 00 125 6 7 5 00 115 6 7 5 00 119 9 2 5 00

Chapter 6  191

MINI−PRACTICE SET 1 (continued) GENERAL LEDGER ACCOUNT

DATE DESCRIPTION 2014 Jan. 1 Balance 7 12 13 15 20 20 26 29 31

ACCOUNT

ACCOUNT NO.

Accounts Receivable POST. REF. ✔ J3 J3 J3 J4 J4 J4 J4 J5 J5

DEBIT

CREDIT

2 0 0 0 00 3 0 0 0 00 2 5 0 0 00 2 5 0 0 00 2 2 5 0 00 3 2 0 0 00 2 8 0 0 00 3 5 0 0 00 1 4 5 0 00

111

BALANCE DEBIT CREDIT 5 0 7 0 4 0 1 5 4 0 6 2 3 0 2 3 7 5 2

0 0 0 0 0 5 5 5 5 0

0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00

Supplies

ACCOUNT NO.

POST. DESCRIPTION REF.

BALANCE DEBIT CREDIT

DATE 2014 Jan. 1 Balance 2 14 20 31 Adjusting

192  Chapter 6

✔ J3 J3 J4 J6

DEBIT

CREDIT

4 0 0 0 00 5 5 0 00 3 6 0 0 00 5 0 0 0 00

1 0 5 0 4 4 8 0 3 0

0 0 5 5 5

121

0 00 0 00 0 00 0 00 0 00

MINI−PRACTICE SET 1 (continued) GENERAL LEDGER ACCOUNT

DATE DESCRIPTION 2014 Jan. 2 31 Adjusting

ACCOUNT

POST. REF. J3 J6

CREDIT

6 0 0 0 00 5 0 0 00

POST. REF.

DEBIT

✔ J6

CREDIT

4 0 0 0 00

DATE 2014 Jan. 1 Balance 31

✔ J5

DEBIT

CREDIT

POST. DESCRIPTION REF. ✔ J6

DEBIT

137

BALANCE DEBIT CREDIT 4 0 0 0 00 − 0−

141

BALANCE DEBIT CREDIT 11 0 0 0 00 23 8 0 0 00

12 8 0 0 00

ACCOUNT NO.

Accumulated Depreciation—Equipment

DATE 2014 Jan. 1 Balance 31 Adjusting

6 0 0 0 00 5 5 0 0 00

ACCOUNT NO.

Equipment

134

BALANCE DEBIT CREDIT

ACCOUNT NO.

POST. DESCRIPTION REF.

ACCOUNT

DEBIT

Prepaid Rent

DATE DESCRIPTION 2014 Jan. 1 Balance 31 Adjusting

ACCOUNT

ACCOUNT NO.

Prepaid Insurance

CREDIT

1 8 3 00

142

BALANCE DEBIT CREDIT 1 8 3 00 3 6 6 00

Chapter 6  193

MINI−PRACTICE SET 1 (continued) GENERAL LEDGER ACCOUNT

ACCOUNT NO.

Accounts Payable

POST. DATE DESCRIPTION REF. 2014 Jan. 1 Balance ✔ 20 J4 27 J5 31 J5

ACCOUNT

CREDIT

DATE 2014 Jan. 1 Balance 31 Closing 31 Closing

✔ J6 J6

3 5 0 0 00 7 1 0 0 00 4 1 0 0 00 6 9 0 0 00

3 0 0 0 00 2 8 0 0 00

ACCOUNT NO.

DEBIT

CREDIT

33 5 4 2 00 12 0 0 0 00

Carolyn Wells, Drawing

BALANCE DEBIT CREDIT

3 6 0 0 00

Carolyn Wells, Capital POST. DESCRIPTION REF.

ACCOUNT

DEBIT

202

301

BALANCE DEBIT CREDIT 128 6 6 7 00 162 2 0 9 00 150 2 0 9 00

ACCOUNT NO.

302

BALANCE POST. DEBIT CREDIT DATE DESCRIPTION REF. DEBIT CREDIT 2014 Jan. 31 J5 12 0 0 0 00 12 0 0 0 00 31 Closing J6 12 0 0 0 00 − 0 −

194  Chapter 6

MINI−PRACTICE SET 1 (continued) GENERAL LEDGER ACCOUNT

ACCOUNT NO.

Income Summary

POST. DATE DESCRIPTION REF. DEBIT CREDIT 2014 Jan. 31 Closing J6 80 4 5 0 00 31 Closing J6 46 9 0 8 00 31 Closing J6 33 5 4 2 00

ACCOUNT

POST. DESCRIPTION REF.

DATE 2014 Jan. 7 15 20 29 31 31 Closing

ACCOUNT

J3 J4 J4 J5 J5 J6

DEBIT

CREDIT

80 4 5 0 00 33 5 4 2 00 − 0 −

20 0 0 0 00 42 0 0 0 00 54 7 5 0 00 74 7 5 0 00 80 4 5 0 00 − 0 −

80 4 5 0 00

ACCOUNT NO.

POST. DESCRIPTION REF. J5 J6

DEBIT 20 5 0 0 00

CREDIT

401

BALANCE DEBIT CREDIT

20 0 0 0 00 22 0 0 0 00 12 7 5 0 00 20 0 0 0 00 5 7 0 0 00

Salaries Expense

DATE 2014 Jan. 31 31 Closing

BALANCE DEBIT CREDIT

ACCOUNT NO.

Fees Income

309

511

BALANCE DEBIT CREDIT

20 5 0 0 00 20 5 0 0 00 − 0 −

Chapter 6  195

MINI−PRACTICE SET 1 (continued) GENERAL LEDGER ACCOUNT

DATE DESCRIPTION 2014 Jan. 28 31 Closing

ACCOUNT

POST. REF. J5 J6

CREDIT

2 1 7 5 00 2 1 7 5 00

POST. REF. J6 J6

DEBIT

CREDIT

5 0 0 0 00 5 0 0 0 00

DATE 2014 Jan. 31 Adjusting 31 Closing

J6 J6

DEBIT

CREDIT

4 0 0 0 00 4 0 0 0 00

POST. DESCRIPTION REF.

196  Chapter 6

J6 J6

DEBIT

517

BALANCE DEBIT CREDIT 5 0 0 0 00 − 0 −

520

BALANCE DEBIT CREDIT 4 0 0 0 00 − 0 −

ACCOUNT NO.

Depreciation Expense—Equipment

DATE 2014 Jan. 31 Adjusting 31 Closing

2 1 7 5 00 − 0 −

ACCOUNT NO.

Rent Expense

514

BALANCE DEBIT CREDIT

ACCOUNT NO.

POST. DESCRIPTION REF.

ACCOUNT

DEBIT

Supplies Expense

DATE DESCRIPTION 2014 Jan. 31 Adjusting 31 Closing

ACCOUNT

ACCOUNT NO.

Utilities Expense

523

CREDIT

BALANCE DEBIT CREDIT

1 8 3 00

1 8 3 00 − 0 −

1 8 3 00

MINI−PRACTICE SET 1 (continued) GENERAL LEDGER ACCOUNT

DATE DESCRIPTION 2014 Jan. 12 22 31 Closing

ACCOUNT

J3 J4 J6

DEBIT 2 8 0 0 00 2 8 0 0 00

CREDIT

POST. REF. J4 J5 J6

5 0 2 5 00 3 0 5 0 00

CREDIT

BALANCE CREDIT DEBIT

ACCOUNT NO.

POST. REF. J4 J6

DEBIT

BALANCE DEBIT CREDIT

8 7 5 00

8 7 5 00 − 0 −

8 7 5 00

J6 J6

DEBIT

532

CREDIT

ACCOUNT NO.

POST. DESCRIPTION REF.

529

5 0 2 5 00 8 0 7 5 00 8 0 7 5 00 − 0 −

Insurance Expense

DATE 2014 Jan. 31 Adjusting 31 Closing

BALANCE DEBIT CREDIT

ACCOUNT NO.

DEBIT

526

2 8 0 0 00 5 6 0 0 00 5 6 0 0 00 − 0 −

Telephone Expense

DATE DESCRIPTION 2014 Jan. 23 31 Closing

ACCOUNT

POST. REF.

Maintenance Expense

DATE DESCRIPTION 2014 Jan. 21 31 31 Closing

ACCOUNT

ACCOUNT NO.

Advertising Expense

535

CREDIT

BALANCE DEBIT CREDIT

5 0 0 00

5 0 0 00 − 0 −

5 0 0 00

Chapter 6  197

MINI-PRACTICE SET 1 (continued) Wells’ Consulting Services Worksheet Month Ended January 31, 2014

ACCOUNT NAME 1 Cash 2 Accounts Receivable 3 Supplies 4 Prepaid Rent 5 Prepaid Insurance 6 Equipment 7 Accumulated Depreciation—Equipment 8 Accounts Payable 9 Carolyn Wells, Capital 10 Carolyn Wells, Drawing 11 Income Summary 12 Fees Income 13 Salaries Expense 14 Utilities Expense 15 Supplies Expense 16 Rent Expense 17 Depreciation Expense—Equipment 18 Insurance Expense 19 Advertising Expense 20 Telephone Expense 21 Maintenance Expense 22 Totals

TRIAL BALANCE DEBIT CREDIT 119 9 2 5 00 5 2 0 0 00 8 0 5 0 00 4 0 0 0 00 6 0 0 0 00 23 8 0 0 00 1 8 3 00

ADJUSTMENTS DEBIT CREDIT

(a) 5 0 0 0 00 (b) 4 0 0 0 00 (c) 5 0 0 00 (d)

1 8 3 00

6 9 0 0 00 128 6 6 7 00 12 0 0 0 00 80 4 5 0 00 20 5 0 0 00 2 1 7 5 00 (a) 5 0 0 0 00 (b) 4 0 0 0 00 (c) 5 0 0 00 (d) 1 8 3 00 5 6 0 0 00 8 7 5 00 8 0 7 5 00 216 2 0 0 00

216 2 0 0 00

9 6 8 3 00

23 Net Income 24 25

198  Chapter 6

MINI-PRACTICE SET 1 (continued)

ADJUSTED TRIAL BALANCE DEBIT CREDIT 119 9 2 5 00 5 2 0 0 00 3 0 5 0 00 − 0 − 5 5 0 0 00 23 8 0 0 00 3 6 6 00

INCOME STATEMENT DEBIT CREDIT

BALANCE SHEET DEBIT CREDIT 119 9 2 5 00 5 2 0 0 00 3 0 5 0 00 − 0 − 5 5 0 0 00 23 8 0 0 00 3 6 6 00

6 9 0 0 00 128 6 6 7 00

12 0 0 0 00

12 0 0 0 00 80 4 5 0 00

20 5 0 0 00 2 1 7 5 00 5 0 0 0 00 4 0 0 0 00 1 8 3 00 5 0 0 00 5 6 0 0 00 8 7 5 00 8 0 7 5 00 216 3 8 3 00

80 4 5 0 00 20 5 0 0 00 2 1 7 5 00 5 0 0 0 00 4 0 0 0 00 1 8 3 00 5 0 0 00 5 6 0 0 00 8 7 5 00 8 0 7 5 00

216 3 8 3 00

46 9 0 8 00

80 4 5 0 00

169 4 7 5 00

33 5 4 2 00 80 4 5 0 00

80 4 5 0 00

169 4 7 5 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

135 9 3 3 00

33 5 4 2 00

169 4 7 5 00

24 25

Chapter 6  199

MINI-PRACTICE SET 1 (continued) Wells’ Consulting Services Income Statement Month Ended January 31, 2014 Revenue Fees Income Expenses Salaries Expense Utilities Expense Supplies Expense Rent Expense Insurance Expense Depreciation Expense—Equipment Advertising Expense Telephone Expense Maintenance Expense Total Expenses Net Income

80 4 5 0 00 20 5 0 0 00 2 1 7 5 00 5 0 0 0 00 4 0 0 0 00 5 0 0 00 1 8 3 00 5 6 0 0 00 8 7 5 00 8 0 7 5 00 46 9 0 8 00 33 5 4 2 00

Wells’ Consulting Services Statement of Owner's Equity Month Ended January 31, 2014 Carolyn Wells, Capital, January 1, 2014 Net Income for January Less Withdrawals for January Increase in Capital for January Carolyn Wells, Capital, January 31, 2014

200  Chapter 6

128 6 6 7 00 33 5 4 2 00 12 0 0 0 00 21 5 4 2 00 150 2 0 9 00

MINI-PRACTICE SET 1 (continued) Wells’ Consulting Services Balance Sheet January 31, 2014 Assets Cash Accounts Receivable Supplies Prepaid Insurance Equipment Less Accumulated Depreciation—Equipment Total Assets

119 9 2 5 00 5 2 0 0 00 3 0 5 0 00 5 5 0 0 00 23 8 0 0 00 3 6 6 00

23 4 3 4 00 157 1 0 9 00

Liabilities and Owner's Equity Liabilities Accounts Payable Owner's Equity Carolyn Wells, Capital Total Liabilities and Owner's Equity

6 9 0 0 00 150 2 0 9 00 157 1 0 9 00

Chapter 6  201

MINI-PRACTICE SET 1 (continued) Wells’ Consulting Services Post-closing Trial Balance January 31, 2014 ACCOUNT NAME Cash Accounts Receivable Supplies Prepaid Insurance Equipment Accumulated Depreciation—Equipment Accounts Payable Carolyn Wells, Capital Totals

Analyze:

DEBIT 119 9 2 5 00 5 2 0 0 00 3 0 5 0 00 5 5 0 0 00 23 8 0 0 00

CREDIT

3 6 6 00 6 9 0 0 00 150 2 0 9 00 157 4 7 5 00 157 4 7 5 00

a. Total assets increased by $24,942 ($157,109 – $132,167). Total liabilities increased by $3,400 ($6,900 – $3,500). Owner’s capital increased by $21,542 ($150,209 – 128,667). b. The balance of Cash increased by $8,575 ($119,925 – $111,350). The balance of Accounts Receivable increased by $200 ($5,200 – $5,000). c. Yes. The firm’s financial position improved through the increases in capital of $21,542 ($150,209 – $128,667).

202  Chapter 6

CHAPTER 7 ACCOUNTING FOR SALES AND ACCOUNTS RECEIVABLE Chapter Opener: Thinking Critically Students should recognize that technology is an important factor in the success of a merchant like indieDenim. As a direct merchant, indieDenim customers shop directly with them — from home or office, by phone, mail, fax or Web. They ship directly to their customers. Their direct merchant method of doing business makes shopping simpler, faster and more convenient. Fast Facts • Once an order is generated, indi creates a customized garment and ships it to the customer for free within 4 weeks. • All orders come with a Perfect Fit Promise and Worry-Free Shopping Guarantee, which promises fit adjustments until 100% satisfaction or customer’s money back. • The average price for a pair of indi jeans is $185. • indiTailored – sister company to indi – offers customers in search of the perfect dress shirt the same customization, fit and delivery options as indieDenim. Managerial Implications: Thinking Critically A company which fails to maintain up-to-date accounts receivable records may face the following: • Customer dissatisfaction: Businesses who extend credit to their customers risk customer dissatisfaction if accounts are not updated frequently. • Ineffective collection efforts: Effective accounts receivable collection efforts rely on accurate account balances. • Cash flow: Negative cash flow situations may stem from improper maintenance of accounts receivable or from delayed accounts receivable billings. Discussion Questions Note to instructor : These questions are designed to check students’ understanding of the new terms, concepts, and procedures presented in the chapter. 1. Retail: sell goods directly to consumers. Wholesale: sell goods to retailers. 2. Prove balances, summarize receivables. 3. Subtract balance of Sales Returns and Allowances from balance of Sales. 4. Separate record of returns and allowances. 5. Contra revenue account. 6. Compare totals of debit and credit columns. 7. Time of sale; Sales Tax Payable. 8. Divide total of Sales account by 105 percent, multiply by sales tax rate. 9. a. Debit Accounts Receivable, credit Sales, b. Debit Accounts Receivable from Credit Card Companies, credit Sales. 10. Summaries of credit card sales submitted to the credit card company for payment. 11. The credit card company.

Chapter 7 203

Discussion Questions (continued) 12. Fee charged by banks to retailers for the privilege of allowing their customers to use bank credit cards; expense account. 13. The bank deposits cash from the sale to the business checking account the same day the sale is authorized. 14. It is a form of credit granted to a customer with the understanding that the amount of the sale will be paid at a later date. 15. A trade discount is a reduction from the list, or suggested retail, price. Different trade discounts are offered to different customers, based on the size of the order or other factors.

EXERCISE 7.1 1. 2. 3. 4.

Sales journal General journal Cash receipts journal Purchases journal

5. 6. 7. 8.

General journal Cash receipts journal Cash receipts journal Cash payments journal

EXERCISE 7.2 Dr. 111 101 451, 231

1. 2. 3.

Cr. 401 , 231 111 111

4. 5. 6.

Dr. 101 451, 231 451, 231

Cr. 401, 231 111 101

EXERCISE 7.3 PAGE

SALES JOURNAL

1 2 3 4 5

DATE 2013 May 1 2 3

SALES SLIP NO.

CUSTOMER’S NAME

1101 1102 1103

Justin Williams Daine Le Richard Rodrigues

204 Chapter 7

ACCOUNTS SALES TAX POST. RECEIVABLE PAYABLE REF. DEBIT CREDIT 3 2 4 00 2 7 0 00 3 5 1 00

2 4 00 2 0 00 2 6 00

SALES CREDIT 1 3 0 0 00 2 2 5 0 00 3 3 2 5 00 4 5

EXERCISE 7.4 PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 June 5 Sales Returns and Allowances 3 Sales Tax Payable 4 Accounts Receivable/Tiffany Monroe 5 Accepted a return of defective merchandise, 6 Credit Memo 301; original sale made on 7 S l Slip Sales Sli 1610, 1610 May M 31 8 9 25 Sales Returns and Allowances 10 Sales Tax Payable 11 Accounts Receivable/Brian Barnett 12 Gave an allowance for damaged merchandise, 13 Credit Memo 302; original sale made on 14 Sales Slip 1663, June 17 15

POST. REF.

DEBIT 6 0 0 00 4 8 00

9 0 0 00 7 2 00

CREDIT 1 2 3 6 4 8 00 4 5 6 7 8 9 10 9 7 2 00 11 12 13 14 15

EXERCISE 7.5 1. The $6,480 debit is posted to Accounts Receivable (111). July 31 is entered in the date column, S1 in the Post. Ref. column, and $6,480 in the Debit column. The balance is increased by this amount. 2. The $480 credit is posted to Sales Tax Payable (231). July 31 is entered in the Date column, S1 in the Post. Ref. column, and $480 in the Credit column. The balance is increased by this amount. 3. The $6,000 credit is posted to Sales (401). July 31 is entered in the Date column, S1 in the Post. Ref. column, and $6,000 Credit The bbalance l d $6 000 iin the h C di column. l Th l iis iincreased d bby this hi amount. 4. Individual entries are posted as a debit to customers’ accounts in the accounts receivable ledger, usually on a daily basis. A ✔ in the sales journal indicates that amounts have been posted. EXERCISE 7.6 11. $$500 00 − $100 = $400 2. $650 − $260 = $390 3. $150 − $30 = $120

Chapter 7 205

EXERCISE 7.7 1 $2,120.00 636.00 1,484.00 252.28 252 28 $1,231.72

List price Less first trade discount Subtotal L secondd trade Less t d discount di t Sales price

2 $4,200.00 1,260.00 2,940.00 499 80 499.80 $2,440.20

3 $1,550.00 356.50 1,193.50 71 71.61 61 $1,121.89

EXERCISE 7.8 PAGE

GENERAL JOURNAL

1 2 3 4 5

DATE DESCRIPTION 2013 Apr. 30 Sales Tax Payable Cash Remitted 6% sales tax on sales of $217,000

POST. REF.

DEBIT

CREDIT

13 0 2 0 00 13 0 2 0 00

1 2 3 4 5

EXERCISE 7.9 The Jean Barn Schedule of Accounts Receivable January 31, 2013 Cheryl Amos Edward Cooke Neal Fitzgerald g David Pifer Lisa Stanton Nikki Whitaker Total

2 1 1 5 00 2 8 3 00 7 5 6 00 1 2 2 4 00 2 7 0 0 00 2 0 5 2 00 9 1 3 0 00

Balance of Accounts Receivable: $9130.00

206 Chapter 7

EXERCISE 7.10 GENERAL LEDGER ACCOUNT

Accounts Receivable

ACCOUNT NO.

POST. DESCRIPTION REF.

BALANCE DEBIT CREDIT

DATE 2013 Mar. 1 Balance 14 22

ACCOUNT

DATE 2013 Mar. 14 22

ACCOUNT

DATE 2013 Mar. 14 22

DEBIT

✔ J42 J42

CREDIT

3 2 4 00 1 0 8 00

111

1 1 8 8 00 8 6 4 00 7 5 6 00

Sales Tax Payable

ACCOUNT NO.

POST. DESCRIPTION REF.

BALANCE DEBIT CREDIT

J42 J42

DEBIT

CREDIT

2 4 00 8 00

231

2 4 00 3 2 00

Sales Returns and Allowances

ACCOUNT NO.

POST. DESCRIPTION REF.

BALANCE DEBIT CREDIT

J42 J42

DEBIT

CREDIT

3 0 0 00 1 0 0 00

451

3 0 0 00 4 0 0 00

ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER NAME

TERMS

Cara Fountain POST. POST DESCRIPTION REF.

DATE 2013 Mar 1 Balance 14 Credit Memo 101

✔ J42

DEBIT

CREDIT

3 2 4 00

n/30

BALANCE 5 4 0 00 2 1 6 00

Chapter 7 207

EXERCISE 7.10 (continued) ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER NAME

TERMS

Sadie Palmer

DATE DESCRIPTION 2013 Mar. 1 Balance 22 Credit Memo 102

POST. REF.

DEBIT

✔ J42

CREDIT

1 0 8 00

n/30

BALANCE 6 4 8 00 5 4 0 00

PROBLEM 7.1A Page

SALES JOURNAL

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

DATE 2013 July 1 6 11 17 23 27 29 31 31

SALES SLIP NO NO. 501 502 503 504 505 506 507 508

208 Chapter 7

CUSTOMER’S NAME Perry Martin Cindy Han Richard Slocomb Mary Schneider Veronica Velazquez Jeff Budd Michelle Ly Phil Long Totals

POST. REF REF.

ACCOUNTS RECEIVABLE DEBIT 9 7 2 00 2 3 4 9 00 2 5 3 8 00 1 1 0 7 00 7 0 2 00 1 5 9 3 00 1 2 9 6 00 4 0 5 00 10 9 6 2 00 ( 1 1 1)

SALES TAX PAYABLE CREDIT

SALES CREDIT

7 2 00 9 0 0 00 1 7 4 00 2 1 7 5 00 1 8 8 00 2 3 5 0 00 8 2 00 1 0 2 5 00 5 2 00 6 5 0 00 1 1 8 00 1 4 7 5 00 9 6 00 1 2 0 0 00 3 0 00 3 7 5 00 8 1 2 00 10 1 5 0 00 ( 2 3 1) ( 4 0 1)

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

PROBLEM 7.1A (continued) GENERAL LEDGER ACCOUNT Accounts Receivable

DATE DESCRIPTION 2013 July 1 Balance 31

POST. REF. ✔ S8

ACCOUNT NO.

DEBIT

CREDIT

DATE 2013 July 31

10 9 6 2 00

ACCOUNT NO.

DEBIT

CREDIT 8 1 2 00

ACCOUNT Sales

DATE 2013 July 31

Analyze:

BALANCE DEBIT CREDIT 29 5 0 0 00 40 4 6 2 00

ACCOUNT Sales Tax Payable POST. DESCRIPTION REF.

DEBIT

CREDIT 10 1 5 0 00

231

BALANCE DEBIT CREDIT 8 1 2 00

ACCOUNT NO.

POST. DESCRIPTION REF.

111

401

BALANCE DEBIT CREDIT 10 1 5 0 00

37.68% of credit sales were from entertainment items. ($3,825 ÷ $10,150 = 37.68%)

Chapter 7 209

PROBLEM 7.2A PAGE

SALES JOURNAL

DATE 1 2013 2 Feb. 1 3 5 4 9 5 17 6 23 7 27 8 28 9 28 10 28 11 12

SALES SLIP NO. 1615 1616 1617 1618 1619 1620 1621 1622

CUSTOMER’S NAME

ACCOUNTS POST. RECEIVABL REF. E DEBIT

Sun Yoo Jacqueline Moore Hazel Tran Ann Brown Domingo Salas Jose Saucedo Mimi Yuki Alan Baker Totals

SALES CREDIT

1 4 9 0 3 20 3 6 3 20 4 5 4 0 00 2 2 2 6 8 00 1 6 8 00 2 1 0 0 00 3 6 8 0 4 00 5 0 4 00 6 3 0 0 00 4 10 0 4 4 00 7 4 4 00 9 3 0 0 00 5 3 6 7 2 00 2 7 2 00 3 4 0 0 00 6 4 2 9 3 00 3 1 8 00 3 9 7 5 00 7 1 9 4 4 00 1 4 4 00 1 8 0 0 00 8 3 9 4 2 00 2 9 2 00 3 6 5 0 00 9 37 8 7 0 20 2 8 0 5 20 35 0 6 5 00 10 ( 2 3 1) ( 4 0 1 ) 11 ( 1 1 1) 12

PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 Feb. 11 Sales Returns and Allowances 3 Sales Tax Payable Accounts Receivable/Jacqueline Moore 4

SALES TAX PAYABLE CREDIT

POST. REF REF.

DEBIT

CREDIT

7 0 0 00 5 6 00

451 231 111

7 5 6 00

1 2 3 4

✔ 5 6 7 8 9 10 11

Accepted return of damaged chair, Credit Memo 702; original sale made on Sales Slip 1616, February 5 25 Sales Returns and Allowances Sales Tax Payable Accounts Receivable/Ann Brown

451 231 111

4 0 0 00 3 2 00

5 6 7 8 9 10 4 3 2 00 11

✔ 12 13 14 15

Gave allowance for damaged bookcases, Credit Memo 703; original sale made on Sales Slip 1618, February 17

210 Chapter 7

12 13 14 15

PROBLEM 7.2A (continued) GENERAL LEDGER ACCOUNT Accounts Receivable

DATE DESCRIPTION 2013 Feb. 1 Balance 11 25 28

ACCOUNT NO.

POST. REF. ✔ J24 J24 S8

DEBIT

CREDIT

7 5 6 00 4 3 2 00 37 8 7 0 20

ACCOUNT Sales Tax Payable

DATE DESCRIPTION 2013 Feb. 1 Balance 11 25 28

✔ J24 J24 S8

DEBIT

CREDIT

POST. REF.

DEBIT

CREDIT

7 7 7 9

1 7 0 00 1 1 4 00 0 8 2 00 8 8 7 20

ACCOUNT NO.

401

BALANCE DEBIT CREDIT

35 0 6 5 00

ACCOUNT NO.

POST. REF.

DEBIT

J24 J24

7 0 0 00 4 0 0 00

CREDIT

231

BALANCE DEBIT CREDIT

2 8 0 5 20

ACCOUNT Sales Returns and Allowances

DATE DESCRIPTION 2013 Feb. 11 25

15 6 3 6 00 14 8 8 0 00 14 4 4 8 00 52 3 1 8 20

5 6 00 3 2 00

ACCOUNT Sales

DATE DESCRIPTION 2013 Feb. 28

BALANCE DEBIT CREDIT

ACCOUNT NO. POST. REF.

111

451

BALANCE DEBIT CREDIT 7 0 0 00 1 1 0 0 00

Chapter 7 211

PROBLEM 7.2A (continued) Armik's Furniture Income Statement (Partial) Month Ended February 28, 2013 Revenue Sales Less Sales Returns and Allowances Net Sales

35 0 6 5 00 1 1 0 0 00 33 9 6 5 00

Analyze: Net sales for January were $89,625 (Sales tax $7,170 ÷ Rate 0.08 = $89,625).

PROBLEM 7.3A PAGE

SALES JOURNAL

DATE 1 2013 2 Nov. 1 3 5 4 6 5 10 6 14 7 21 8 24 9 30 10 30 11 12

SALES SLIP NO. 1001 1002 1003 1004 1005 1006 1007 1008

212 Chapter 7

CUSTOMER’S NAME

POST. REF.

Pauline Judge Janet Hutchinson Charles Brown Lisa Morgan Dorothy Watts Winnie Wu Henry Okafor Euline Brock Totals

✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔

ACCOUNTS SALES TAX RECEIVABLE PAYABLE DEBIT CREDIT 1 6 2 0 00 2 2 6 8 00 7 5 6 00 1 8 3 6 00 5 9 4 00 3 4 5 6 00 6 4 8 00 4 1 0 4 00 15 2 8 2 00 ( 1 1 1)

SALES CREDIT

1 1 2 0 00 1 5 0 0 00 2 1 6 8 00 2 1 0 0 00 3 5 6 00 7 0 0 00 4 1 3 6 00 1 7 0 0 00 5 4 4 00 5 5 0 00 6 2 5 6 00 3 2 0 0 00 7 4 8 00 6 0 0 00 8 3 0 4 00 3 8 0 0 00 9 1 1 3 2 00 14 1 5 0 00 10 ( 2 3 1) ( 4 0 1 ) 11 12

PROBLEM 7.3A (continued) PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 Nov. 17 Sales Returns and Allowances Sales Tax Payable 3 Accounts Receivable/Lisa Morgan 4 5 6 7 8 9 10 11 12 13 14 15

POST. REF. 451 231 111 ✔

DEBIT

451 231 111 ✔

CREDIT

1 5 0 00 1 2 00 1 6 2 00

Accepted return of broken glass, Credit Memo 102; original sale made on Sales Slip 1004, November 10 25 Sales Returns and Allowances Sales Tax Payable Accounts Receivable/Winnie Wu

3 5 0 00 2 8 00

1 2 3 4

5 6 7 8 9 10 3 7 8 00 11

Gave allowance for damaged coffee table, Credit Memo 103; original sale made on Sales Slip 1006, November 21

12 13 14 15

GENERAL LEDGER ACCOUNT Accounts Receivable

DATE DESCRIPTION 2013 Nov. 17 25 30

POST. REF. J16 J16 S6

ACCOUNT NO.

DEBIT

CREDIT

BALANCE DEBIT CREDIT

1 6 2 00 3 7 8 00 15 2 8 2 00

111

1 6 2 00 5 4 0 00 14 7 4 2 00

Chapter 7 213

PROBLEM 7.3A (continued) GENERAL LEDGER ACCOUNT

DATE 2013 Nov. 17 25 30

ACCOUNT

DATE 2013 Nov. 30

ACCOUNT

DATE 2013 Nov. 17 25

Sales Tax Payable

ACCOUNT NO.

POST. DESCRIPTION REF.

BALANCE DEBIT CREDIT

DEBIT

J16 J16 S6

CREDIT

1 2 00 2 8 00

231

1 2 00 4 0 00 1 1 3 2 00

1 0 9 2 00

Sales

ACCOUNT NO.

POST. DESCRIPTION REF.

BALANCE DEBIT CREDIT

DEBIT

CREDIT 14 1 5 0 00

401

14 1 5 0 00

Sales Returns and Allowances

ACCOUNT NO.

POST. DESCRIPTION REF.

BALANCE DEBIT CREDIT

J16 J16

DEBIT

CREDIT

1 5 0 00 3 5 0 00

451

1 5 0 00 5 0 0 00

ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER NAME

TERMS

Euline Brock POST. DESCRIPTION REF.

DATE 2013 Nov. 30 Sales Slip 1008

214 Chapter 7

DEBIT 4 1 0 4 00

CREDIT

n/30

BALANCE 4 1 0 4 00

PROBLEM 7.3A (continued) ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER NAME

DESCRIPTION DATE 2013 Nov. 6 Sales Slip 1003

NAME

DATE 2013

POST. REF.

DEBIT

7 5 6 00

POST. REF.

DEBIT

2 2 6 8 00

Nov.

1 Sales Slip 1001

NAME

Lisa Morgan

DESCRIPTION DATE 2013 Nov. 10 Sales Slip 1004 17 Credit Memo 102

POST. REF.

DEBIT

1 6 2 0 00

7 5 6 00

CREDIT

S6 J16

DEBIT

2 2 6 8 00

CREDIT

n/30

BALANCE 1 6 2 0 00

n/30

CREDIT

BALANCE

1 6 2 00

1 8 3 6 00 1 6 7 4 00

1 8 3 6 00

n/30

BALANCE

TERMS POST. REF.

n/30

BALANCE

TERMS

Pauline Judge

DESCRIPTION

CREDIT

TERMS

Janet Hutchinson

DESCRIPTION DATE 2013 Nov. 5 Sales Slip 1002

NAME

TERMS

Charles Brown

Chapter 7 215

PROBLEM 7.3A (continued) ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER NAME

TERMS

Henry Okafor

DESCRIPTION DATE 2013 Nov. 27 Sales Slip 1007

NAME

DEBIT

BALANCE 6 4 8 00

TERMS POST. REF. S6

DEBIT

CREDIT

5 9 4 00

DATE DESCRIPTION 2013 Nov. 21 Sales Slip 1006 25 Credit Memo 103

POST. REF.

DEBIT

3 4 5 6 00

n/30

BALANCE 5 9 4 00

TERMS

Winnie Wu

216 Chapter 7

CREDIT

6 4 8 00

Dorothy Watts

DESCRIPTION DATE 2013 Nov. 14 Sales Slip 1005

NAME

POST. REF.

n/30

CREDIT

BALANCE

3 7 8 00

3 4 5 6 00 3 0 7 8 00

PROBLEM 7.3A (continued) The Dining Elegance China Shop Schedule of Accounts Receivable November 30, 2013 Euline Brock Charles Brown Janet Hutchinson Pauline Judge Lisa Morgan Henry Okafor Dorothy Watts Winnie Wu Total

4 1 7 2 2 1 6 1 6 6 5 3 0 14 7

0 5 6 2 7 4 9 7 4

4 00 6 00 8 00 0 00 4 00 8 00 4 00 8 00 2 00

Balance of Accounts Receivable account: $14742.00 Analyze:

Euline Brock ($4,104).

PROBLEM 7.4A PAGE

SALES JOURNAL

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

DATE 2013 Jan. 3 8 9 10 20 22 25 27 31

INVOICE NO. 1081 1082 1083 1084 1085 1086 1087 1088

CUSTOMER’S NAME Thomas Florist Carter Garden Supply Thomasville Flower Shop Moore’s Flower Shop Cedar Hill Floral Shop Applegate Nursery Moore’s Flower Shop Thomas Florist Total

POST. REF. ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔

ACCOUNTS RECEIVABLE DR./ SALES CR. 5 0 7 7 4 6 5 3 4 8 6 8 4 2 9 2 4 7 7 (1 1 1/

0 00 5 00 2 00 0 00 0 00 0 00 7 00 5 00 9 00 4 01)

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

Chapter 7 217

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PROBLEM 7.4A (continued) PAGE

GENERAL JOURNAL POST. REF.

DATE DESCRIPTION 1 2013 2 Jan. 15 Sales Returns and Allowances Accounts Receivable/Thomasville Flower Shop 3 4 5 6 7 8 9

451 111 ✔

DEBIT

CREDIT

5 0 00

1 2 3

1 5 0 00

4 5 6 7 8 9

5 0 00

Accepted returns of damaged merchandise, Credit Memo 101; original sale made on Invoice 1083, January 9 451 111 ✔

31 Sales Returns and Allowances Accounts Receivable/Thomas Florist

1 5 0 00

Gave allowance for damaged merchandise, Credit Memo 102; original sale made Sales on Invoice 1088, 1088 January 27

10 11 12 13

GENERAL LEDGER ACCOUNT Accounts Receivable

DATE 2013 Jan. 15 31 31

DESCRIPTION

ACCOUNT NO. POST. REF. J11 J11 S6

DEBIT

CREDIT

BALANCE DEBIT CREDIT

5 0 00 1 5 0 00

5 0 00 2 0 0 00

4 7 7 9 00

4 5 7 9 00

ACCOUNT Sales

DATE 2013 Jan. 31

218 Chapter 7

DESCRIPTION

ACCOUNT NO. POST. REF. S7

DEBIT

111

CREDIT 4 7 7 9 00

401

BALANCE DEBIT CREDIT 4 7 7 9 00

PROBLEM 7.4A (continued) GENERAL LEDGER ACCOUNT

DATE 2013 Jan. 15 31

Sales Returns and Allowances

ACCOUNT NO.

POST. DESCRIPTION REF.

BALANCE DEBIT CREDIT

J11 J11

DEBIT

CREDIT

5 0 00 1 5 0 00

451

5 0 00 2 0 0 00

ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER NAME

DATE DESCRIPTION 2013 Jan. 22 Invoice 1086

NAME

TERMS

Applegate Nursery POST. POST REF. S7

CREDIT

DATE 2013 Jan. 8 Invoice 1082

6 8 0 00

TERMS

DEBIT

CREDIT

POST. REF. REF

7 7 5 00

TERMS

DEBIT

n/45

BALANCE

7 7 5 00

Cedar Hill Floral Shop

DATE DESCRIPTION 2013 Jan. 20 Invoice 1085

BALANCE

6 8 0 00

Carter Garden Supply POST. DESCRIPTION REF.

NAME

DEBIT

n/45

CREDIT

4 8 0 00

n/45

BALANCE 4 8 0 00

Chapter 7 219

PROBLEM 7.4A (continued) ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER NAME

DATE DESCRIPTION 2013 Jan. 10 Invoice 1084 25 Invoice 1087

NAME

POST. REF.

DEBIT

S7 S7

5 3 0 00 4 2 7 00

POST. REF. S7 S7 J11

DEBIT

220 Chapter 7

POST. REF.

BALANCE

S7 J11

n/45

CREDIT

BALANCE

1 5 0 00

5 0 0 00 1 4 2 5 00 1 2 7 5 00

TERMS

DEBIT

n/45

5 3 0 00 9 5 7 00

5 0 0 00 9 2 5 00

Thomasville Flower Shop

DATE DESCRIPTION 2013 Jan. 9 Invoice 1083 15 Credit Memo 101

CREDIT

TERMS

Thomas Florist

DESCRIPTION DATE 2013 Jan. 3 Invoice 1081 27 Invoice 1088 31 Credit Memo 102

NAME

TERMS

Moore’s Flower Shop

CREDIT

4 6 2 00 5 0 00

n/45

BALANCE 4 6 2 00 4 1 2 00

PROBLEM 7.4A (continued) Special Occasions Flower Shop Schedule of Accounts Receivable January 31, 2013 Applegate Nursery Carter Garden Supply Cedar Hill Floral Shop Moore’s Flower Shop Thomas Florist Thomasville Flower Shop Total

6 8 0 00 7 7 5 00 4 8 0 00 9 5 7 00 1 2 7 5 00 4 1 2 00 4 5 7 9 00

Balance of Accounts Receivable account: Analyze:

$4,579.00

Damaged goods decreased net sales revenue by $200.00 and by 4% ($200 ÷ $4,779 = .04).

PROBLEM 7.1B PAGE

SALES JOURNAL

1 2 3 4 5 6 7 8 9 10 11

DATE 2013 June 1 6 11 17 23 27 29 30 30

SALES ACCOUNTS SLIP CUSTOMER’S POST. RECEIVABL NO. NAME REF. E DEBIT 201 202 203 204 205 206 207 208

Fatima Fakih Gilbert Gomez Tyrone Smith Betty Odom Evie Young Joon Yi Ty Long Aina Carreras Totals

SALES TAX PAYABLE CREDIT

1 1 3 4 00 9 9 9 00 2 7 0 0 00 9 1 8 00 5 4 0 00 1 2 9 6 00 1 4 3 1 00 1 6 2 00 9 1 8 0 00 ( 1 1 1)

8 4 00 7 4 00 2 0 0 00 6 8 00 4 0 00 9 6 00 1 0 6 00 1 2 00 6 8 0 00 ( 2 3 1)

SALES CREDIT 1 0 5 0 00 9 2 5 00 2 5 0 0 00 8 5 0 00 5 0 0 00 1 2 0 0 00 1 3 2 5 00 1 5 0 00 8 5 0 0 00 ( 4 0 1)

1 2 3 4 5 6 7 8 9 10 11

Chapter 7 221

PROBLEM 7.1B (continued) GENERAL LEDGER ACCOUNT Accounts Receivable

ACCOUNT NO.

POST. DESCRIPTION REF.

DATE 2013 June 1 Balance 30

✔ S8

DEBIT

CREDIT

DATE 2013 June 30

9 1 8 0 00

ACCOUNT NO.

DEBIT

CREDIT

6 8 0 00

ACCOUNT NO. POST. REF. S8

DEBIT

CREDIT

231

BALANCE DEBIT CREDIT

6 8 0 00

ACCOUNT Sales

DATE DESCRIPTION 2013 June 30

BALANCE DEBIT CREDIT 73 0 0 0 00 82 1 8 0 00

ACCOUNT Sales Tax Payable POST. DESCRIPTION REF.

111

401

BALANCE CREDIT DEBIT

8 5 0 0 00

Analyze: 43.53% of credit sales were for entertainment items. ($3,700 ÷ $8,500 = 43.53%)

222 Chapter 7

PROBLEM 7.2B PAGE

SALES JOURNAL

DATE 1 2013 2 June 1 3 5 4 9 5 17 6 23 7 27 8 29 9 30 10 30 11 12

SALES SLIP NO. 1601 1602 1603 1604 1605 1606 1607 1608

CUSTOMER’S CUSTOMER S NAME

POST. REF.

Kenya Jackson Carmen Cruz Lu Chang Rick Jones Demitri Brown Paul Rivera Rosie Seltz Jim Mayor Totals

ACCOUNTS RECEIVABLE DEBIT 2 7 2 7 00 1 6 2 0 00 6 5 0 7 00 4 3 2 0 00 2 5 9 2 00 2 7 8 1 00 1 2 4 2 00 3 3 4 8 00 25 1 3 7 00 ( 1 1 1)

SALES TAX PAYABLE CREDIT

DATE DESCRIPTION 1 2013 2 June 11 Sales Returns and Allowances 3 Sales Tax Payable 4 Accounts Receivable/Carmen Cruz 5 6 7 8 9 10 11 12 13 14 15

SALES CREDIT

2 0 2 00 2 5 2 5 00 1 2 0 00 1 5 0 0 00 4 8 2 00 6 0 2 5 00 3 2 0 00 4 0 0 0 00 1 9 2 00 2 4 0 0 00 2 0 6 00 2 5 7 5 00 9 2 00 1 1 5 0 00 2 4 8 00 3 1 0 0 00 1 8 6 2 00 23 2 7 5 00 ( 2 3 1) ( 4 0 1)

PAGE

GENERAL JOURNAL POST. REF. 451 231 111 ✔

DEBIT

451 231 111 ✔

Gave allowance for damaged bookcases, Credit Memo 216; original sale made on Sales Slip 1604, June 17

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

CREDIT 1 2 3 4

5 0 0 00 4 0 00 00

5 4 0 00

2 5 0 00 2 0 00 00

5 6 7 8 9 10 2 7 0 00 11

Accepted return of damaged chair, Credit Memo 215; original sale made on Sales Slip 1602, June 5 25 Sales Returns and Allowances Sales Tax Payable Accounts Receivable/Risk Jones

12 13 14 15

Chapter 7 223

PROBLEM 7.2B (continued) GENERAL LEDGER ACCOUNT Accounts Receivable

DATE DESCRIPTION 2013 June 1 Balance 11 25 30

ACCOUNT NO.

POST. REF. ✔ J26 J26 S9

DEBIT

25 1 3 7 00

CREDIT

DATE 2013 June 1 Balance 11 25 30

ACCOUNT NO.

DEBIT

✔ J26 J26 S9

CREDIT

1 8 6 2 00

DEBIT

CREDIT

POST. DESCRIPTION REF.

224 Chapter 7

J26 J26

DEBIT 5 0 0 00 2 5 0 00

23 2 7 5 00

ACCOUNT NO.

CREDIT

401

BALANCE CREDIT DEBIT

23 2 7 5 00

ACCOUNT Sales Returns and Allowances

DATE 2013 June 11 25

4 5 1 5 00 4 4 7 5 00 4 4 5 5 00 6 3 1 7 00

ACCOUNT NO.

POST. DESCRIPTION REF.

231

BALANCE CREDIT DEBIT

4 0 00 2 0 00

ACCOUNT Sales

DATE 2013 June 30

BALANCE DEBIT CREDIT

24 1 5 0 00 5 4 0 00 23 6 1 0 00 2 7 0 00 23 3 4 0 00 48 4 7 7 00

ACCOUNT Sales Tax Payable POST. DESCRIPTION REF.

111

451

BALANCE DEBIT CREDIT 5 0 0 00 7 5 0 00

PROBLEM 7.2B (continued) The Furniture Lot Income Statement (Partial) June 30, 2013 Revenue Sales Less Sales Returns and Allowances Net Sales

23 2 7 5 00 7 5 0 00 22 5 2 5 00

Analyze: Total net sales for April and May were $56,437.50 (Sales tax $4,515 ÷ Rate 0.08 = $56,437.50).

PROBLEM 7.3B PAGE

SALES JOURNAL

DATE 1 2013 2 Feb. 3 3 4 4 5 5 8 6 9 7 10 8 14 9 15 10 20 11 22 12 28 13 28 14

SALES SLIP NO. 201 202 203 204 205 206 207 208 209 210 211

CUSTOMER’S NAME Ronald Brown Ken Hamlett Vickie Neal Amy Peloza Luther Evans Gordon Edwards Ronald Brown Kerry Goree Ned Jones Susan Anderson Melissa Thomas Totals

ACCOUNTS POST. RECEIVABL REF. E DEBIT ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔

SALES TAX PAYABLE CREDIT

5 4 00 2 1 6 00 3 2 4 00 4 3 2 00 4 3 2 00 1 6 2 00 2 1 6 00 3 2 4 00 1 0 8 00 5 4 0 00 6 4 8 00 3 4 5 6 00 (111)

4 00 1 6 00 2 4 00 3 2 00 3 2 00 1 2 00 1 6 00 2 4 00 8 00 4 0 00 4 8 00 2 5 6 00 (231)

SALES CREDIT 5 0 00 2 0 0 00 3 0 0 00 4 0 0 00 4 0 0 00 1 5 0 00 2 0 0 00 3 0 0 00 1 0 0 00 5 0 0 00 6 0 0 00 3 2 0 0 00 (401)

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

Chapter 7 225

PROBLEM 7.3B (continued) PAGE

GENERAL JOURNAL

DATE 1 2013 2 Feb.

POST. REF.

DESCRIPTION

CREDIT 1

9 Sales Returns and Allowances

3 4

Sales Tax Payable Accounts Receivable/Vickie Neal

5 6 7 8 9 10 11

Accepted return of incomplete gift pack, pack Credit Memo 101; original sale made on Sales Slip 203, February 5 13 Sales Returns and Allowances Sales Tax Payable Accounts Receivable/Amyy Peloza

12 13 14 15 16

DEBIT

451

5 0 00

231 111 ✔

4 00

3 4

451 231 111 ✔

5 4 00

5 6 7 8 9 10 5 4 00 11

5 0 00 4 00

Accepted return of broken glass, Credit Memo 102; original sale made on Sales Slip 204, February 8

12 13 14 15 16

GENERAL LEDGER ACCOUNT Accounts Receivable

DATE 2013 Feb. 9 13 28

ACCOUNT NO.

POST. DESCRIPTION REF.

226 Chapter 7

J16 J16 S6

111

BALANCE DEBIT

CREDIT

DEBIT

5 4 00 5 4 00 3 4 5 6 00

CREDIT 5 4 00 1 0 8 00

3 3 4 8 00

PROBLEM 7.3B (continued) GENERAL LEDGER ACCOUNT

DATE DESCRIPTION 2013 Feb. 9 13 28

ACCOUNT

DATE 2013 Feb. 28

ACCOUNT NO.

Sales Tax Payable POST. REF.

DEBIT

J16 J16 S6

CREDIT

BALANCE DEBIT CREDIT

4 00 4 00

4 00 8 00 2 5 6 00

2 4 8 00

Sales

ACCOUNT NO.

POST. DESCRIPTION REF.

BALANCE DEBIT CREDIT

DEBIT

CREDIT 3 2 0 0 00

ACCOUNT Sales Returns and Allowances

DATE 2013 Feb. 9 13

231

POST. DESCRIPTION REF. J16 J16

3 2 0 0 00

ACCOUNT NO.

DEBIT

CREDIT

401

451

BALANCE CREDIT DEBIT

5 0 00 5 0 00

5 0 00 1 0 0 00

ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER NAME

TERMS

Susan Anderson

DATE DESCRIPTION 2013 Feb. 22 Sales Slip 210

POST. REF.

DEBIT

5 4 0 00

CREDIT

n/30

BALANCE 5 4 0 00

Chapter 7 227

PROBLEM 7.3B (continued) ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER NAME

DATE DESCRIPTION 2013 Feb. 3 Sales Slip 201 14 Sales Slip 207

NAME

S6 S6

5 4 00 2 1 6 00

POST. REF.

DEBIT

1 6 2 00

POST. REF.

DEBIT

4 3 2 00

228 Chapter 7

5 4 00 2 7 0 00

CREDIT

DEBIT

3 2 4 00

1 6 2 00

CREDIT

DEBIT

2 1 6 00

n/30

BALANCE 4 3 2 00

CREDIT

n/30

BALANCE 3 2 4 00

TERMS POST.REF.

n/30

BALANCE

TERMS POST. REF.

n/30

BALANCE

TERMS

Ken Hamlett

DESCRIPTION DATE 2013 Feb. 4 Sales Slip 202

CREDIT

TERMS

Kerry Goree

DATE DESCRIPTION 2013 Feb. 15 Sales Slip 208

NAME

DEBIT

Luther Evans

DATE DESCRIPTION 2013 Feb. 9 Sales Slip 205

NAME

POST. REF.

Gordon Edwards

DATE DESCRIPTION 2013 Feb. 10 Sales Slip 206

NAME

TERMS

Ronald Brown

CREDIT

n/30

BALANCE 2 1 6 00

PROBLEM 7.3B (continued) ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER NAME

DATE DESCRIPTION 2013 Feb. 20 Sales Slip 209

NAME

DEBIT

1 0 8 00

CREDIT

DEBIT

S6 J16

3 2 4 00

BALANCE

5 4 00

3 2 4 00 2 7 0 00

TERMS POST. REF.

DEBIT

S6 J16

4 3 2 00

DEBIT

6 4 8 00

n/30

CREDIT

BALANCE

5 4 00

4 3 2 00 3 7 8 00

TERMS POST. REF.

n/30

CREDIT

Melissa Thomas

DATE DESCRIPTION 2013 Feb. 28 Sales Slip 211

BALANCE

TERMS POST. REF.

n/30

1 0 8 00

Amy Peloza

DESCRIPTION DATE 2013 Feb. 8 Sales Slip 204 13 Credit Memo 102

NAME

POST. REF.

Vicki Neal

DATE DESCRIPTION 2013 Feb. 5 Sales Slip 203 9 Credit Memo 101

NAME

TERMS

Ned Jones

CREDIT

n/30

BALANCE 6 4 8 00

Chapter 7 229

PROBLEM 7.3B (continued) Special Elegance Gift Shop Schedule of Accounts Receivable February 28, 2013 Susan Anderson Ronald Brown Gordon Edwards Luther Evans Kerry Goree Ken Hamlett Ned Jones

5 4 0 2 7 0 1 6 2 4 3 2 3 2 4 2 1 6 1 0 8

00 00 00 00 00 00 00

Vickie Neall Vi ki N Amy Peloza Melissa Thomas Total

2 7 0 3 7 8 6 4 8 3 3 4 8

00 00 00 00

Balance of Accounts Receivable account: $3,348.00 Analyze: Nine postings were made to the general ledger.

PROBLEM 7.4B PAGE

SALES JOURNAL

DATE 1 2013 2 Feb. 3 3 8 4 9 5 10 6 20 7 22 8 25 9 27 10 28 11 12

230 Chapter 7

INVOICE NO. 2201 2202 2203 2204 2205 2206 2207 2208

CUSTOMER’S NAME Thompson Funeral Home Meadows Nursery DeSoto Flower Shop Lovelace Nursery Lovelace Nursery y Southwest Nursery Denton Flower Shop Thompson Funeral Home Total

ACCOUNTS POST. RECEIVABLE REF. DR./ SALES CR. ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔

4 0 0 00 8 0 0 00 1 0 5 0 00 7 0 0 00 6 5 0 00 8 5 0 00 4 5 0 00 7 5 0 00 5 6 5 0 00 (1 1 1/ 4 01)

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

PROBLEM 7.4B (continued) PAGE

GENERAL JOURNAL POST. REF.

DATE DESCRIPTION 1 2013 2 Feb. 15 Sales Returns and Allowances 3 Accounts Receivable/DeSoto Flower Shop 4 5 6 7 8 9 10 11 12 13

451 111 ✔

DEBIT

CREDIT 1 2 3

1 0 0 00 1 0 0 00

4 5 6 7 8 9

Accepted returns of damaged merchandise, Credit Memo 105; original sale made on invoice 2203, 2203 February 9 28 Sales Returns and Allowances Accounts Receivable/Thompson Funeral Shop

451 111 ✔

7 5 00 7 5 00

Gave allowance for damaged merchandise, Credit Memo 106;; original g sale made on invoice 2208, February 27

10 11 12 13

GENERAL LEDGER ACCOUNT Accounts Receivable

DATE DESCRIPTION 2013 Feb. 15 28 28

ACCOUNT NO.

POST. REF. J10 J10 S5

DEBIT

CREDIT

1 0 0 00 1 7 5 00 5 4 7 5 00

ACCOUNT Sales

DATE DESCRIPTION 2013 Feb. 28

BALANCE DEBIT CREDIT

1 0 0 00 7 5 00 5 6 5 0 00

ACCOUNT NO. POST. OS . REF. S5

DEBIT

111

CREDIT 5 6 5 0 00

401

BALANCE DEBIT CREDIT 5 6 5 0 00

Chapter 7 231

PROBLEM 7.4B (continued) GENERAL LEDGER ACCOUNT Sales Returns and Allowances

DATE 2013 Feb. 15 28

DESCRIPTION

ACCOUNT NO.

POST. REF.

DEBIT

J10 J10

1 0 0 00 7 5 00

CREDIT

451

BALANCE DEBIT CREDIT 1 0 0 00 1 7 5 00

ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER NAME

DATE DESCRIPTION 2013 Feb. 25 Invoice 2207

NAME

POST. REF.

DEBIT

4 5 0 00

POST. REF. S5 J10

DEBIT 1 0 5 0 00

232 Chapter 7

POST. REF.

DEBIT

S5 S5

7 0 0 00 6 5 0 00

n/30

BALANCE 4 5 0 00

CREDIT

n/30

BALANCE

1 0 5 0 00 1 0 0 00 9 5 0 00

TERMS

Lovelace Nursery

DESCRIPTION DATE 2013 Feb. 10 Invoice 2204 20 Invoice 2205

CREDIT

TERMS

DeSoto Flower Shop

DATE DESCRIPTION 2013 Feb. 9 Invoice 2203 15 Credit Memo 105

NAME

TERMS

Denton Flower Shop

CREDIT

n/30

BALANCE 7 0 0 00 1 3 5 0 00

PROBLEM 7.4B (continued) ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER NAME

DATE DESCRIPTION 2013 Feb. 8 Invoice 2202 NAME

POST. REF.

DEBIT

8 0 0 00

CREDIT

DEBIT

8 5 0 00

CREDIT

BALANCE

TERMS

POST. REF. S5 S5 J10

DEBIT

n/30

8 5 0 00

Thompson Funeral Home

DATE DESCRIPTION 2013 Feb. 3 Invoice 2201 27 Invoice 2208 28 Credit Memo 106

BALANCE

TERMS POST. REF.

n/30

8 0 0 00

Southwest Nursery

DATE DESCRIPTION 2013 Feb. 22 Invoice 2206

NAME

TERMS

Meadows Nursery

CREDIT

4 0 0 00 7 5 0 00 7 5 00

n/30

BALANCE 4 0 0 00 1 1 5 0 00 1 0 7 5 00

The Vintage Nursery Schedule of Accounts Receivable February 28, 2013 Denton D t Fl Flower Sh Shop DeSoto Flower Shop Lovelace Nursery Meadows Nursery Southwest Nursery Thompson Funeral Home Total

Balance of Accounts Receivable account:

4 5 0 00 9 5 0 00 1 3 5 0 00 8 0 0 00 8 5 0 00 1 0 7 5 00 5 4 7 5 00

$5,475.00

Analyze: Damaged goods decreased net sales revenue by $175 and by 3% ($175 ÷ $5,650 = .03).

Chapter 7 233

CRITICAL THINKING PROBLEM 7.1 PAGE

SALES JOURNAL

1 2 3 4 5 6 7 8 9 10 11

DATE 2013 Aug. 1 5 9 14 22 26 30 31

SALES SLIP NO. 1001 1002 1003 1004 1005 1006 1007

CUSTOMER’S NAME

ACCOUNTS POST. RECEIVABLE REF. DR./ SALES CR.

Bombay's Department Store Reader's Bookstore Super Game Center Little Annie's Toy Store The Game Store Bombay's Department Store Pinkerton Toy Center Total

✔ ✔ ✔ ✔ ✔ ✔ ✔

11 14 5 15 9 14 13 85 (1

1 7 0 0 00 2 8 7 5 00 3 2 5 0 00 4 8 4 0 00 5 7 2 0 00 6 4 2 0 00 7 6 8 0 00 8 4 8 5 00 9 1 1/ 4 01) 10 11

PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 Aug. 18 Sales Returns and Allowances Accounts Receivable/Super Game Center 3 4 5 6 7

Accepted returns of damaged merchandise, Credit Memo 151; original sale made on Invoice 1003, August 9

234 Chapter 7

POST. REF.

DEBIT

451 5 2 111 ✔

CREDIT 1 2 3

5 00 5 2 5 0 00

4 5 6 7

CRITICAL THINKING PROBLEM 7.1 (continued) GENERAL LEDGER ACCOUNT

DATE DESCRIPTION 2013 Aug. 1 Balance 18 31

ACCOUNT

ACCOUNT NO.

Accounts Receivable POST. REF. ✔ J25 S9

DEBIT

CREDIT

5 2 5 0 00 85 4 8 5 00

DATE DESCRIPTION 2013 Aug. 31

POST. REF.

DEBIT

CREDIT

78 4 1 0 00 73 1 6 0 00 158 6 4 5 00

POST. DESCRIPTION REF. J25

DEBIT

85 4 8 5 00

ACCOUNT NO.

CREDIT

5 2 5 0 00

401

BALANCE DEBIT CREDIT

85 4 8 5 00

ACCOUNT Sales Returns and Allowances

DATE 2013 Aug. 18

BALANCE DEBIT CREDIT

ACCOUNT NO.

Sales

111

451

BALANCE DEBIT CREDIT 5 2 5 0 00

Chapter 7 235

CRITICAL THINKING PROBLEM 7.1 (continued) ACCOUNTS RECEIVABLE LEDGER NAME

DESCRIPTION DATE 2013 Aug. 1 Balance 1 Invoice 1001 26 Invoice 1006

NAME

POST. REF. ✔ S9 S9

DATE 2013 Aug. 22 Invoice 1005

DEBIT

POST. REF.

236 Chapter 7

28 9 0 0 00 40 6 0 0 00 55 0 2 0 00

✔ S9

CREDIT

9 7 2 0 00

CREDIT

BALANCE

TERMS

DEBIT

13 6 8 0 00

n/45

30 5 0 0 00 46 3 4 0 00

15 8 4 0 00

POST. REF.

n/45

BALANCE

TERMS

DEBIT

n/45

BALANCE

TERMS

Pinkerton Toy Center

DATE DESCRIPTION 2013 Aug. 30 Invoice 1007

CREDIT

11 7 0 0 00 14 4 2 0 00

Little Annie's Toy Store

DESCRIPTION DATE 2013 Aug. 1 Balance 14 Invoice 1004

NAME

DEBIT

The Game Store POST. DESCRIPTION REF.

NAME

TERMS

Bombay's Department Store

CREDIT

n/45

BALANCE 13 6 8 0 00

CRITICAL THINKING PROBLEM 7.1 (continued) ACCOUNTS RECEIVABLE LEDGER NAME

TERMS

Reader's Bookstore

DATE DESCRIPTION 2013 Aug. 5 Invoice 1002

NAME

POST. REF.

DEBIT

14 8 7 5 00

CREDIT

BALANCE 14 8 7 5 00

TERMS

Super Game Center

DATE DESCRIPTION 2013 Aug. 1 Balance 9 Invoice 1003 18 Credit Memo 151

POST. REF. ✔ S9 J25

DEBIT

n/45

CREDIT

BALANCE

5 2 5 0 00

19 0 1 0 00 24 2 6 0 00 19 0 1 0 00

5 2 5 0 00

Matrix Toy Company Income Statement (Partial) Month Ended August 31, 2013 Revenue Sales Less Sales Returns and Allowances Net Sales

85 4 8 5 00 5 2 5 0 00 80 2 3 5 00

Chapter 7 237

CRITICAL THINKING PROBLEM 7.1 (continued) Matrix Toy Company Schedule of Accounts Receivable August 31, 2013 Bombay's Department Store The Game Store Little Annie's Toy Store Pinkerton Toy Center Reader's Bookstore Super Game Center Total

55 0 2 0 00 9 7 2 0 00 46 3 4 0 00 13 6 8 0 00 14 8 7 5 00 19 0 1 0 00 158 6 4 5 00

Balance of Accounts Receivable account: $158,645.00 Analyze: The effect would be an increase in net sales. CRITICAL THINKING PROBLEM 7.2 1. An electronic system would prevent this mistake because the computer would automatically post and update the customer’s subsidiary ledger account. This mistake would not be identified in a manual system until the Accounts Receivable general ledger account was reconciled to the schedule of accounts receivable. 2. The use of an electronic scanner should reduce unrecorded sales. Each item has to be passed over the scanner, which automatically records the price. This process reduces the chance that an item is overlooked; but with either system, it is possible for the salesclerk to deliberately not charge a customer for a purchase. The owner and supervisors must be alert to this possibility and need to check the salesclerk’s work on a regular basis. Discrepancies in the inventory may identify extensive abuses of this nature. 3. The computer can be programmed to alert the salesclerk by means of a code number or flashing sign on the register/terminal display screen that a particular credit card number has been reported stolen. The register/ terminal will halt processing the transaction or instruct the salesclerk to check with a supervisor before proceeding with the transaction. With a manual system, the salesclerk would have to consult a separate list of stolen numbers before processing a credit card transaction. Provided the stolen credit card numbers are entered promptly in the computer files, the electronic system would prevent charging a sale on a stolen credit card. 4. An electronic scanner would prevent customers from being charged an incorrect price. Because the computer would be programmed with the sale prices, the scanner would automatically record the correct price. A manual system depends on the salesclerk’s memory of price changes or requires new price tags to be placed on sale items. An electronic system would be more dependable and efficient in this situation.

238 Chapter 7

SOLUTIONS TO BUSINESS CONNECTIONS Managerial Focus: 1. The Sales Returns and Allowances account contains a complete record of items returned. goods or Problems indicated could be deliveries of damaged goods, or delivery of items not ordered. 2. Advantages: minimized risk of receivable losses; reduced staffing costs. Disadvantages: discount fees; loss of sales if customers do not have credit cards. 3. Credit policies, customer account documentation. 4. The actual filing of a tax return is procedural, but expert advice is needed to comply with tax laws and minimize taxes. 5. Increase sales volume. 6. A lax credit policy may result in granting credit to customers who don't pay their bills. 7. To provide accurate and complete records. 8. Aid in extending credit, identify slow-paying customers. Ethical Dilemma: Watch when a customer pays a bill to see if Margarita puts the money in the cash register or just puts it in her pocket and writes a credit memo to remove it from the Accounts Receivable Ledger. Financial Statement Analysis: 1. Feb. 1 through Jan. 31. 2. Sales Returns and Allowances. 3. 14.4% ($77,349 - $66,176) ÷ $77,349 = 14.4 %. Analyze Online: Answers will vary depending on the year. Teamwork: Sales associate would not record a transaction. Louisa’s A/P clerk would process a purchase order for $50,000 and record a debit to purchases and a credit to A/P. The A/R clerk would create a sales invoice and record a debit to A/R and credit to Sales. Internet Connection: Auto creation of P.O. from Sales Order, create A/P and A/R Credit memos, quick conversion to other programs, invoice customers, track payments and sales taxes, print checks and create purchase orders from estimates.

Chapter 7 239

SOLUTIONS TO PRACTICE TEST Part A True-False 1. TRUE 2. FALSE 3. TRUE 4. TRUE 5. TRUE 6. TRUE 7. FALSE 8. TRUE 9. FALSE 10. FALSE

11. TRUE 12. FALSE 13. TRUE 14. TRUE 15. TRUE 16. FALSE 17. FALSE 18. FALSE 19. TRUE 20. TRUE

Part B Matching 1. b 2. d 3. f 4. g 5. c 6. e 7. a Part C Exercises 1. The balance was carried over from December 2012. 2. By referring to a copy of Sales Slip 101. 3. It was most likely a sales return or allowance. Refer to the January 18 entry on page 1 of the general journal.

240 Chapter 7

CHAPTER 8 ACCOUNTING FOR PURCHASES AND ACCOUNTS PAYABLE Chapter Opener: Thinking Critically Students may discuss one or more of the following merchandise selection tools: consumer surveys, customer requests, or sales history reports. Fast Facts Net revenues for 2009 declined 8%, from $3.4 billion in 2008 to $3.1 billion in 2009 • Williams-Sonoma, Inc. owns and operates six separate, home-centered retail businesses: Williams• Sonoma, Pottery Barn, Pottery Barn Kids, PBTeen, Williams-Sonoma Home and West Elm. The company operates 590 retail stores. • Managerial Implications: Thinking Critically Answers will vary. Students should recognize the need for checks and balances for avoiding theft and waste. Discussion Questions Note to instructor: These questions are designed to check students’ understanding of the new terms, concepts, and procedures presented in the chapter. 1. 2.

8. 9. 10. 11. 12.

Audit trail. Authorization of purchase, check-in of goods, verification of invoice, proper authorization of payment, division of labor and tasks, use of prenumbered forms. Documentation of credit issued. Allowance made for damaged merchandise. Documentation of returned merchandise. List of all creditors and the balance owed to each. Prepared so that its total can be proved against the balance of the Accounts Payable account. The Accounts Payable account is the control account; summarizes the balances of the creditor accounts. Individual accounts of all creditors. Helps pay bills promptly and maintain a good credit reputation. Add Freight In to Purchases, then deduct Purchases Returns and Allowances. Purchases journal. Purchase invoice denotes incoming merchandise, sales invoice denotes outgoing (sold) merchandise.

13. 14. 15.

Debit. Income Statement in the Cost of Goods Sold section. Business managers analyze this account to identify problem suppliers.

3. 4. 5. 6. 7.

Chapter 8  241

Discussion Questions (continued) 16.

a. Net amount of the invoice is due 30 days after the date of the invoice. b. If the invoice is paid within 10 days of its date, a 2 percent discount may be taken; otherwise, the total amount is due in 30 days. c. The amount of the invoice is due 10 days after the end of the month in which the invoice is issued. d. Payment in full is due 20 days after date of the invoice. e. If the invoice is paid within 10 days of its date, a 1% discount may be taken; otherwise the total amount is due in 20 days. f. If payment is made within 5 days of its date, a 3 percent discount may be taken; otherwise the total amount is due in 30 days. g. Payment in full is due 15 days after the end of the month in which the invoice is issued.

17.

Not entered in purchases journal; only used for recording merchandise purchased for resale. It should be recorded in the general journal.

242  Chapter 8

Cr. 205 503 101

DATE PURCHASED FROM 2013 July 1 Auto Parts Corp. 3 Aplex Company 5 The Custom Sounds Shop, Inc. 10 Speciality Tire Company

EXERCISE 8.3

Dr. 1. 501 2. 205 3. 205

EXERCISE 8.2

1. Purchases journal 2. General journal 3. Cash Payments journal

EXERCISE 8.1

6812 441 5601 1102

6/27 6/30 7/1 7/8

n/30 1/10, n/60 2/10, n/30 2/10, n/30

INVOICE INVOICE NUMBER DATE TERMS

PURCHASES JOURNAL

POST. REF.

2 0 8 2 00 3 2 2 9 00 2 4 8 7 00 4 1 7 0 00

PAGE

1 9 6 0 00 3 1 5 0 00 2 3 7 0 00 4 1 7 0 00

1 2 2 00 7 9 00 1 1 7 00

PURCHASES FREIGHT IN DEBIT DEBIT

Cr. 205 503 101

ACCOUNTS PAYABLE CREDIT

Dr. 4. 501, 502 5. 205 6. 501

4. Purchases journal 5. General journal 6. Cash Payments journal

EXERCISE 8.4 PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10

DATE DESCRIPTION 2013 Feb. 9 Accounts Payable/J&B Appliance Corporation Purchases Returns & Allowances Received Credit Memo 244 for damaged merchandise that was returned; original purchase made on Invoice 4101, January 3, 2013

POST. REF.

DEBIT

CREDIT

4 2 2 0 00 4 2 2 0 00

1 2 3 4 5 6 7 8 9 10

EXERCISE 8.5 PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 Mar. 17 Accounts Payable/Four Star Appliance Mart 3 Purchases Returns and Allowances 4 Received Credit Memo 112 for damaged 5 merchandise; original purchase made on 6 Invoice 911, February 20, 2013 7

244  Chapter 8

POST. REF.

DEBIT

CREDIT

1 1 2 5 00 1 1 2 5 00

1 2 3 4 5 6 7

EXERCISE 8.6 Purchases Freight In Delivered Cost of Purchases Less Purchases Returns and Allowances Net Delivered Cost of Purchases

$52,995 2,825 $55,820 5,120 $50,700

EXERCISE 8.7 a. The total of the schedule of accounts payable will not equal the balance of the Accounts Payable control account. b. The total of the schedule of accounts payable will not equal the balance of the Accounts Payable control account. c. Jackson Company will notify us that their invoice has not been paid. d. Statements from Jackson Company and Baxton Company will not agree with the balance reflected in the accounts payable subsidiary ledger.

EXERCISE 8.8 a. b. c. d.

Purchases, $93,425 Purchases Returns and Allowances, $3,875 Freight In, $6,230 Delivered Cost of Purchases $101,700

Chapter 8  245

PURCHASES JOURNAL

DATE 2013 June 1 Pro Photo Equipment 8 Photo Supplies 12 Nano Glass 20 Photo Supplies 23 Hi-Qual Case 28 Holtz Spectrum 30 Totals 4241 1102 7282 1148 3108 5027

5/27 6/3 6/9 6/15 6/18 6/24

n/60 n/45 1/10, n/60 n/45 n/45 2/10, n/30 ✔ ✔ ✔ ✔ ✔ ✔

INVOICE INVOICE POST. PURCHASED FROM NUMBER DATE TERMS REF.

PROBLEM 8.1A

2 1 3 1 3 8 9 0 1 1 6 1 9 4 2 4 8 10 0 1 ( 2 0

0 00 4 00 6 00 5 00 6 00 0 00 1 00 5)

ACCOUNTS PAYABLE CREDIT 1 9 5 1 3 8 9 0 1 1 0 1 9 4 2 3 7 9 6 5 ( 5 0

0 00 4 00 6 00 0 00 6 00 0 00 6 00 1)

PURCHASES DEBIT

1 1 0 00 3 5 5 00 ( 5 0 2)

6 5 00

1 8 0 00

FREIGHT IN DEBIT

PAGE

PROBLEM 8.1A (continued) PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 June 18 Accounts Payable/Pro Photo Equipment 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

Purchases Returns and Allowances Received Credit Memo 110 for defective cameras that were returned; original purchase made on Invoice 4241, May 27, 2013 30 Accounts Payable/Hi-Qual Case Purchases Returns and Allowances Received Credit Memo 1108 for allowance for damaged merchandise; original purchase made on Invoice 3108, June 18, 2013

POST. REF.

DEBIT

CREDIT 1 2

205 ✔ 503

3 5 0 00 3 5 0 00

205 ✔ 503

2 6 0 00

3 4 5 6 7 8

2 6 0 00 9 10 11 12 13 14 15 16 17

Chapter 8  247

PROBLEM 8.1A (continued) GENERAL LEDGER ACCOUNT

ACCOUNT NO.

Accounts Payable POST. DESCRIPTION REF.

DATE 2013 June 1 Balance 18 30 30

ACCOUNT

DATE 2013 June 30

ACCOUNT

DATE 2013 June 30

ACCOUNT

✔ J38 J38 P14

DEBIT

CREDIT

205

BALANCE DEBIT CREDIT 13 9 0 4 00 13 5 5 4 00 13 2 9 4 00 23 3 0 5 00

3 5 0 00 2 6 0 00 10 0 1 1 00

Purchases

ACCOUNT NO.

POST. DESCRIPTION REF.

BALANCE CREDIT DEBIT

P14

DEBIT

CREDIT

9 6 5 6 00

ACCOUNT NO.

Freight In POST. DESCRIPTION REF. P14

DEBIT

CREDIT

3 5 5 00

248  Chapter 8

POST. REF. J38 J38

DEBIT

502

BALANCE CREDIT DEBIT 3 5 5 00

ACCOUNT NO.

Purchases Returns and Allowances

DATE DESCRIPTION 2013 June 18 30

501

CREDIT 3 5 0 00 2 6 0 00

503

BALANCE DEBIT CREDIT 3 5 0 00 6 1 0 00

PROBLEM 8.1A (continued) Purchases Freight In Delivered Cost of Purchases Less Purchases Returns and Allowances Net Delivered Cost of Purchases

$9,656 355 $10,011 610 $9,401

Analyze: Total purchases in June were $9,656.

Chapter 8  249

PROBLEM 8.2A ACCOUNTS PAYABLE SUBSIDIARY LEDGER NAME

TERMS

Hi-Qual Case POST. REF.

DATE DESCRIPTION 2013 June 1 Balance 23 Invoice 3108, 6/18/13 30 Credit Memo 1108 NAME

✔ P14 J38

POST. REF.

1 9 4 6 00

1 2 0 0 00 3 1 4 6 00 2 8 8 6 00

2 6 0 00

DEBIT

P14

BALANCE

2 4 8 0 00

TERMS POST. REF.

DEBIT

✔ P14

CREDIT

✔ P14 P14

BALANCE

1 3 8 4 00 1 1 6 5 00

10 4 8 0 00 11 8 6 4 00 13 0 2 9 00

TERMS

250  Chapter 8

POST. REF.

DEBIT

P14 J38

3 5 0 00

n/45

CREDIT

Pro Photo Equipment

DATE DESCRIPTION 2013 June 1 Invoice 4241, 5/27/13 18 Credit Memo 110

2 2 2 4 00 3 1 3 0 00

TERMS

DEBIT

1/10, n/60

BALANCE

9 0 6 00

Photo Supplies POST. REF.

2/10, n/30

CREDIT

Nano Glass

DATE DESCRIPTION 2013 June 1 Balance 8 Invoice 1102, 6/3/13 20 Invoice 1148, 6/15/13 NAME

BALANCE

TERMS

DATE DESCRIPTION 2013 June 1 Balance 12 Invoice 7282, 6/9/13 NAME

CREDIT

Holtz Spectrum

DATE DESCRIPTION 2013 June 28 Invoice 5027, 6/24/13 NAME

DEBIT

n/45

n/60

CREDIT

BALANCE

2 1 3 0 00

2 1 3 0 00 1 7 8 0 00

PROBLEM 8.2A (continued) Qwik Photo Club Schedule of Accounts Payable June 30, 2013 Hi-Qual Case Holtz Spectrum Nano Glass Photo Supplies Pro Photo Equipment Total

Analyze:

2 2 3 13 1 23

8 4 1 0 7 3

8 8 3 2 8 0

6 00 0 00 0 00 9 00 0 00 5 00

The balance owed to Nano Glass on June 30 is $3,130.

Chapter 8  251

DATE PURCHASED FROM 2013 July 1 Brown Corporation 5 Brooks Garden Furniture Co. 9 Lawn and Gardens Supply 19 Lawn and Gardens Supply 21 Cameron Rubber Company 31 Wilson Industrial Products

PROBLEM 8.3A

INVOICE DATE 6/26 7/2 7/5 7/15 7/17 7/26

INVOICE NUMBER 1011 639 8164 9050 1785 8985

n/60 n/45 n/30 n/30 1/15, n/60 2/10, n/30

TERMS

PURCHASES JOURNAL

✔ ✔ ✔ ✔ ✔ ✔

POST. REF.

30 1 6 0 00 ( 5 0 1)

( 2 0 5)

9 2 1 0 00 4 3 7 0 00 1 3 9 0 00 1 2 0 0 00 3 6 8 0 00 10 3 1 0 00

PURCHASES DEBIT

31 7 1 9 00

9 4 5 9 00 4 9 2 2 00 1 3 9 0 00 1 4 5 6 00 3 9 0 4 00 10 5 8 8 00

ACCOUNTS PAYABLE CREDIT

( 5 0 2)

1 5 5 9 00

2 5 6 00 2 2 4 00 2 7 8 00

2 4 9 00 5 5 2 00

FREIGHT IN DEBIT

PAGE

PROBLEM 8.3A (continued) PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 July 16 Accounts Payable/Brooks Garden Furniture Company 3 4 5 6 7 8 9 10 11 12 13 14 15

Purchases Returns and Allowances Received Credit Memo 110 for allowance for damaged merchandise; original purchase made on Invoice 639, July 2

28 Accounts Payable/Cameron Rubber Company Purchases Returns and Allowances Received Credit Memo 223 for damaged merchandise that was returned; original purchase made on Invoice 1785, July 17

POST. REF.

DEBIT

CREDIT 1 2

205 ✔ 503

6 0 0 00 6 0 0 00

3 4 5 6 7 8

4 3 0 00

9 10 11 12 13 14 15

205 ✔ 503

4 3 0 00

Chapter 8  253

PROBLEM 8.3A (continued) GENERAL LEDGER ACCOUNT

DATE DESCRIPTION 2013 July 1 Balance 16 28 31

ACCOUNT

DATE 2013 July 31

ACCOUNT

DATE 2013 July 31

ACCOUNT

ACCOUNT NO.

Accounts Payable POST. REF. ✔ J20 J20 P8

DEBIT

CREDIT

205

BALANCE DEBIT CREDIT 35 8 8 0 00 35 2 8 0 00 34 8 5 0 00 66 5 6 9 00

6 0 0 00 4 3 0 00 31 7 1 9 00

Purchases

ACCOUNT NO.

POST. DESCRIPTION REF.

BALANCE CREDIT DEBIT

DEBIT

CREDIT

30 1 6 0 00

501

30 1 6 0 00

Freight In

ACCOUNT NO.

POST. DESCRIPTION REF.

BALANCE CREDIT DEBIT

DEBIT

CREDIT

1 5 5 9 00

ACCOUNT NO.

Purchases Returns and Allowances

DATE DESCRIPTION 2013 July 16 28

254  Chapter 8

POST. REF. J20 J20

DEBIT

502

CREDIT 6 0 0 00 4 3 0 00

503

BALANCE DEBIT CREDIT 6 0 0 00 1 0 3 0 00

PROBLEM 8.3A (continued) Purchases Freight In Delivered Cost of Purchases Less Purchases Returns and Allowances Net Delivered Cost of Purchases

$30,160 1,559 $31,719 1,030 $30,689

Chapter 8  255

PROBLEM 8.3A (continued) ACCOUNTS PAYABLE SUBSIDIARY LEDGER NAME

POST. REF.

DATE DESCRIPTION 2013 July 1 Balance 5 Invoice 639, 7/2/13 16 CM 110

NAME

✔ P8 J20

POST. REF. ✔ P8

POST. REF. P8 J20

DEBIT

BALANCE

9 4 5 9 00

18 1 2 0 00 27 5 7 9 00

✔ P8 P8

DEBIT

1/15, n/60

CREDIT

BALANCE

3 9 0 4 00

3 9 0 4 00 3 4 7 4 00

TERMS POST. REF.

n/60

CREDIT

4 3 0 00

Lawn & Gardens Supply

256  Chapter 8

4 9 2 2 00

11 1 2 0 00 16 0 4 2 00 15 4 4 2 00

TERMS

Cameron Rubber Company

DATE DESCRIPTION 2013 July 1 Balance 9 Invoice 8164, 7/5/13 19 Invoice 9050, 7/15/13

BALANCE

6 0 0 00

DEBIT

n/45

CREDIT

TERMS

DATE DESCRIPTION 2013 July 21 Invoice 1785, 7/17/13 28 Credit Memo 223

NAME

DEBIT

Brown Corporation

DATE DESCRIPTION 2013 July 1 Balance 1

NAME

TERMS

Brooks Garden Furniture Company

n/30

CREDIT

BALANCE

1 3 9 0 00 1 4 5 6 00

6 6 4 0 00 8 0 3 0 00 9 4 8 6 00

PROBLEM 8.3A (continued) NAME

TERMS

Wilson Industrial Products

DATE DESCRIPTION 2013 July 31 Invoice 8985, 7/26/13

POST. REF.

DEBIT

2/10, n/30

CREDIT

BALANCE

10 5 8 8 00

The English Garden Shop Schedule of Accounts Payable July 31, 2013

Brooks Garden Furniture Company Brown Corporation Cameron Rubber Company Lawn and Gardens Supply Wilson Industrial Products Total

15 4 4 2 00 27 5 7 9 00 3 4 7 4 00 9 4 8 6 00 10 5 8 8 00 66 5 6 9 00

Analyze: Total freight charges for the month of July were $1,559.

Chapter 8  257

DATE PURCHASED FROM 2013 Sept. 3 Dalton Office Furniture Co. 7 Apex Office Machines, Inc. 16 Davis Corporation 20 Apex Office Machines, Inc. 23 Brown Paper Company 30 Zenn Furniture, Inc.

PROBLEM 8.4A

4213 9217 8066 11011 6498 696

8/29 9/2 9/11 9/15 9/18 9/25

INVOICE INVOICE NUMBER DATE n/30 n/60 n/30 n/60 1/10, n/30 2/10, n/30

TERMS ✔ ✔ ✔ ✔ ✔ ✔

POST. REF.

PURCHASES JOURNAL

1 3 6 0 6 0

3 0 8 0 0 0

2 00 0 00 0 00 0 00 0 00 0 00

( 2 0

34 7 1 2 00

8 11 2 1 7 4

ACCOUNTS PAYABLE CREDIT

( 5 0 1)

34 1 1 6 00

7 9 2 0 00 11 3 0 0 00 2 5 5 6 00 1 0 0 0 00 7 5 0 0 00 3 8 4 0 00

PURCHASES DEBIT

( 5 0 2)

5 9 6 00

1 0 0 00 1 6 0 00

1 2 4 00

2 1 2 00

FREIGHT IN DEBIT

PAGE

PROBLEM 8.4A (continued) PAGE

GENERAL JOURNAL

1 2

DATE DESCRIPTION 2013 Sept. 10 Accounts Payable/Dalton Office Furniture Co.

POST. REF.

Purchases Returns and Allowances Received Credit Memo 511 for allowance for damaged merchandise; original purchase made on Invoice 4213, August 29 28 Accounts Payable/Apex Office Machines, Inc.

1 2

Purchases Returns & Allowances Received Credit Memo 312 for damaged merchandise that was returned; original purchase made on Invoice 11011, September 15

6 0 0 00

503

6 0 0 00

3 4 5 6 7 8

8 8 0 00

9 10 11 12 13 14 15

205 ✔

9 10 11 12 13 14 15

CREDIT

205 ✔

3 4 5 6 7 8

DEBIT

503

8 8 0 00

Chapter 8  259

PROBLEM 8.4A (continued) GENERAL LEDGER ACCOUNT Accounts Payable

DATE DESCRIPTION 2013 Sept. 1 Balance 10 28 30

ACCOUNT NO. POST. REF. ✔ J14 J14 P5

DEBIT

CREDIT

DATE DESCRIPTION 2013 Sept. 30

ACCOUNT NO. POST. REF.

DEBIT

34 1 1 6 00

CREDIT

260  Chapter 8

BALANCE DEBIT CREDIT

ACCOUNT NO. POST. REF.

DEBIT

5 9 6 00

POST. REF. J14 J14

DEBIT

501

34 1 1 6 00

CREDIT

502

BALANCE CREDIT DEBIT 5 9 6 00

ACCOUNT Purchases Returns and Allowances

DATE DESCRIPTION 2013 Sept. 10 28

28 2 5 6 00 27 6 5 6 00 26 7 7 6 00 61 4 8 8 00

34 7 1 2 00

ACCOUNT Freight In

DATE DESCRIPTION 2013 Sept. 30

BALANCE DEBIT CREDIT

6 0 0 00 8 8 0 00

ACCOUNT Purchases

205

ACCOUNT NO.

CREDIT 6 0 0 00 8 8 0 00

503

BALANCE DEBIT CREDIT 6 0 0 00 1 4 8 0 00

PROBLEM 8.4A (continued) Purchases Freight In Delivered Cost of Purchases Less Purchases Returns and Allowances Net Delivered Cost of Purchases

$34,116 596 $34,712 1,480 $33,232

Chapter 8  261

PROBLEM 8.4A (continued) ACCOUNTS PAYABLE SUBSIDIARY LEDGER NAME

POST. REF.

DATE DESCRIPTION 2013 Sept. 1 Balance 7 Invoice 9217, 9/2/13 20 Invoice 11011, 7/2/13 28 Credit Memo 312 NAME

NAME

DEBIT

✔ P5

POST. REF. ✔ P5 J14

DEBIT

262  Chapter 8

10 9 6 0 00 22 2 6 0 00 23 2 6 0 00 22 3 8 0 00

BALANCE

7 6 0 0 00

2 1 2 0 00 9 7 2 0 00

DEBIT

BALANCE

8 1 3 2 00

9 5 7 6 00 17 7 0 8 00 17 1 0 8 00

✔ P5

DEBIT

n/30

CREDIT

BALANCE

2 6 8 0 00

TERMS POST. REF.

n/30

CREDIT

TERMS POST. REF.

1/10, n/30

CREDIT

6 0 0 00

Zenn Furniture, Inc.

DATE DESCRIPTION 2010 Sept. 1 Balance 30 Invoice 696, 9/25/13

11 3 0 0 00 1 0 0 0 00

TERMS

Davis Corporation

DATE DESCRIPTION 2010 Sept. 16 Invoice 8066, 9/11/13

BALANCE

TERMS POST. REF.

n/60

CREDIT

8 8 0 00

Dalton Office Furniture Company

DATE DESCRIPTION 2013 Sept. 1 Balance 3 Invoice 4213, 8/29/13 10 Credit Memo 511 NAME

✔ P5 P5 J14

DEBIT

Brown Paper Company

DATE DESCRIPTION 2013 Sept. 1 Balance 23 Invoice 6498, 9/18/13 NAME

TERMS

Apex Office Machines, Inc.

2/10, n/30

CREDIT

BALANCE

4 0 0 0 00

5 6 0 0 00 9 6 0 0 00

PROBLEM 8.4A (continued) Professional Office Products Center Schedule of Accounts Payable September 30, 2013 Apex Office Machines, Inc. Brown Paper Company Dalton Office Furniture Company Davis Corporation Zenn Furniture, Inc. Total

Analyze:

22 3 8 0 00 9 7 2 0 00 17 1 0 8 00 2 6 8 0 00 9 6 0 0 00 61 4 8 8 00

Total purchases returns and allowances for September were $1,480. This represents 4.34% of the total purchases ($1,480/$34,116).

Chapter 8  263

PURCHASED FROM DATE 2013 May 1 East Coast Snow Shop 8 May-Day Ski Shop 12 Fashion Ski Wear 16 May-Day Ski Shop 22 Winter Sports Clothing 31 Golden Skis & Clothing 31

PROBLEM 8.1B

6572 4916 986 5011 4019 8354

4/28 5/2 5/11 5/15 5/16 5/27

INVOICE INVOICE NUMBER DATE n/45 n/30 n/60 n/30 1/10, n/60 2/10, n/30

TERMS ✔ ✔ ✔ ✔ ✔ ✔

POST. REF.

PURCHASES JOURNAL

5 7 2 0 00 12 5 0 0 00 5 0 0 0 00 2 6 5 0 00 3 1 6 0 00 3 8 5 0 00 32 8 8 0 00 ( 2 0 5)

ACCOUNTS PAYABLE CREDIT 5 6 0 0 00 12 5 0 0 00 5 0 0 0 00 2 6 5 0 00 3 1 6 0 00 3 6 3 0 00 32 5 4 0 00 ( 5 0 1)

PURCHASES DEBIT

2 2 0 00 3 4 0 00 ( 5 0 2)

1 2 0 00

FREIGHT IN DEBIT

PAGE

PROBLEM 8.1B (continued) PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 May 9 Accounts Payable/East Coast Snow Shop 3 4 5 6 7 8 9 10 11 12 13 14

Purchases Returns and Allowances Received Credit Memo 155 for damaged ski boots that were returned; original sale made on Invoice 6572, April 28, 2013 28 Accounts Payable/May-Day Ski Shop Purchases Returns and Allowances Received Credit Memo 38 for defective ski poles that were returned; original purchase made on Invoice 5011, May 15, 2013

POST. REF.

DEBIT

CREDIT 1 2

205 ✔ 1 2 5 0 00 503

1 2 5 0 00

3 4 5 6 7 8

3 8 0 00

9 10 11 12 13 14

205 ✔ 503

3 8 0 00

Chapter 8  265

PROBLEM 8.1B (continued) GENERAL LEDGER ACCOUNT

Accounts Payable

ACCOUNT NO.

POST. DESCRIPTION REF.

BALANCE CREDIT DEBIT

DATE 2013 May 1 Balance 10 28 31

ACCOUNT

DATE 2013 May 31

ACCOUNT

DATE 2013 May 9 28

CREDIT

21 6 0 8 00 20 3 5 8 00 19 9 7 8 00 52 8 5 8 00

1 2 5 0 00 3 8 0 00 32 8 8 0 00

Purchases

ACCOUNT NO.

POST. DESCRIPTION REF.

BALANCE CREDIT DEBIT

P15

DEBIT

CREDIT

32 5 4 0 00

ACCOUNT NO. POST. REF.

DEBIT

P15

3 4 0 00

501

32 5 4 0 00

Freight In

DATE DESCRIPTION 2013 May 31

ACCOUNT

✔ J38 J38 P15

DEBIT

205

CREDIT

502

BALANCE CREDIT DEBIT 3 4 0 00

Purchases Returns and Allowances

ACCOUNT NO.

POST. DESCRIPTION REF.

BALANCE DEBIT CREDIT

266  Chapter 8

J38 J38

DEBIT

CREDIT 1 2 5 0 00 3 8 0 00

503

1 2 5 0 00 1 6 3 0 00

PROBLEM 8.1B (continued) Purchases Freight In Delivered Cost of Purchases Less Purchases Returns and Allowances Net Delivered Cost of Purchases

$32,540 340 $32,880 1,630 $31,250

Analyze: Total accounts payable of $32,880 was posted from the purchases journal to the general ledger for May.

Chapter 8  267

PROBLEM 8.2B ACCOUNTS PAYABLE SUBSIDIARY LEDGER NAME

TERMS

East Coast Snow Shop POST. REF.

DATE DESCRIPTION 2013 May 1 Balance 1 Invoice 6572, 4/28/13 9 CM 155 NAME

✔ P15 J38

POST. REF.

DEBIT

✔ P15

POST. REF.

DEBIT

P15

POST. REF. ✔ P15 P15 J38

DEBIT

BALANCE

5 0 0 0 00

8 7 2 0 00 13 7 2 0 00

✔ P15

DEBIT

2/10, n/30

CREDIT

BALANCE

3 8 5 0 00

3 8 5 0 00 n/30

CREDIT

BALANCE

12 5 0 0 00 2 6 5 0 00

1 7 0 0 00 14 2 0 0 00 16 8 5 0 00 16 4 7 0 00

TERMS POST. REF.

n/60

CREDIT

3 8 0 00

Winter Sports Clothing

268  Chapter 8

6 1 8 8 00 11 9 0 8 00 10 6 5 8 00

TERMS

May-Day Ski Shop

DATE DESCRIPTION 2013 May 1 Balance 22 Invoice 4019, 5/16/13

5 7 2 0 00

TERMS

Golden Skis & Clothing

DATE DESCRIPTION 2013 May 1 Balance 8 Invoice 4916, 5/2/13 16 Invoice 5011, 5/15/13 28 CM 38 NAME

BALANCE

TERMS

DATE DESCRIPTION 2013 May 31 Invoice 8354, 5/27/13 NAME

CREDIT

1 2 5 0 00

Fashion Ski Wear

DATE DESCRIPTION 2013 May 1 Balance 12 Invoice 986, 5/11/13 NAME

DEBIT

n/45

1/10, n/60

CREDIT

BALANCE

3 1 6 0 00

5 0 0 0 00 8 1 6 0 00

PROBLEM 8.2B (continued) Eskimo Ski Shop Schedule of Accounts Payable May 31, 2013 East Coast Snow Shop Fashion Ski Wear Golden Skis & Clothing May-Day Ski Shop Winter Sports Clothing Total

Analyze:

10 6 5 8 00 13 7 2 0 00 3 8 5 0 00 16 4 7 0 00 8 1 6 0 00 52 8 5 8 00

Eskimo Ski Shop owed East Coast Snow Shop $10,658 on May 31.

Chapter 8  269

PURCHASED FROM DATE 2013 Dec. 1 Selby Corporation 5 Patio Furniture Shop 9 Spring Lawn Center 19 Spring Lawn Center 21 Delta Rubber Company 31 Cason Industries 31

PROBLEM 8.3B

2110 633 1127 1131 8517 8819

11/26 12/2 12/4 12/15 12/17 12/26

INVOICE INVOICE NUMBER DATE n/45 1/15, n/60 n/30 n/30 n/60 2/10, n/30

TERMS

PURCHASES JOURNAL

✔ ✔ ✔ ✔ ✔ ✔

POST. REF. 5 9 3 6 00 5 8 0 0 00 1 1 4 8 00 1 7 5 6 00 8 3 6 00 3 7 8 0 00 19 2 5 6 00 ( 2 0 5)

ACCOUNTS PAYABLE CREDIT 5 7 8 0 00 5 7 0 0 00 1 1 4 8 00 1 6 0 0 00 7 6 0 00 3 7 0 0 00 18 6 8 8 00 ( 5 0 1)

PURCHASES DEBIT

1 5 6 00 7 6 00 8 0 00 5 6 8 00 ( 5 0 2)

1 5 6 00 1 0 0 00

FREIGHT IN DEBIT

PAGE

PROBLEM 8.3B (continued) PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 Dec. 16 Accounts Payable/Patio Furniture Shop 3 4 5 6 7 8 9 10 11 12 13 14 15

Purchases Returns and Allowances Received Credit Memo 101 for allowance for damaged merchandise; original purchase made on Invoice 633, December 2 28 Accounts Payable/Delta Rubber Company Purchases Returns and Allowances Received Credit Memo 210 for damaged merchandise that was returned; original purchase made on Invoice 8517, December 17

POST. REF.

DEBIT

CREDIT 1 2

205 ✔ 503

4 0 0 00 4 0 0 00

3 4 5 6 7 8

1 5 0 00

9 10 11 12 13 14 15

205 ✔ 503

1 5 0 00

Chapter 8  271

PROBLEM 8.3B (continued) GENERAL LEDGER ACCOUNT

Accounts Payable

ACCOUNT NO.

POST. DESCRIPTION REF.

BALANCE DEBIT CREDIT

DATE 2013 Dec. 1 Balance 16 28 30

ACCOUNT

DATE 2013 Dec. 31

ACCOUNT

DATE 2013 Dec. 16 28

CREDIT

13 4 9 0 00 13 0 9 0 00 12 9 4 0 00 32 1 9 6 00

4 0 0 00 1 5 0 00 19 2 5 6 00

ACCOUNT NO.

Purchases

DATE DESCRIPTION 2013 Dec. 31

ACCOUNT

✔ J20 J20 P8

DEBIT

POST. REF.

DEBIT

18 6 8 8 00

CREDIT

205

501

BALANCE DEBIT CREDIT 18 6 8 8 00

Freight In

ACCOUNT NO.

POST. DESCRIPTION REF.

BALANCE DEBIT CREDIT

DEBIT

CREDIT

5 6 8 00

502

5 6 8 00

Purchases Returns and Allowances

ACCOUNT NO.

POST. DESCRIPTION REF.

BALANCE DEBIT CREDIT

272  Chapter 8

J20 J20

DEBIT

CREDIT 4 0 0 00 1 5 0 00

503

4 0 0 00 5 5 0 00

PROBLEM 8.3B (continued) Purchases Freight In Delivered Cost of Purchases Less Purchases Returns and Allowances Net Delivered Cost of Purchases

$18,688 568 $19,256 550 $18,706

Chapter 8  273

PROBLEM 8.3B (continued) ACCOUNTS PAYABLE SUBSIDIARY LEDGER NAME

TERMS

Cason Industries

DATE DESCRIPTION 2013 Dec. 1 Balance 31 Invoice 8819, 12/26/13 NAME

POST. REF. ✔ P8 J20

DEBIT

BALANCE

3 7 8 0 00

2 1 5 0 00 5 9 3 0 00

BALANCE

8 3 6 00

3 8 5 0 00 4 6 8 6 00 4 5 3 6 00

TERMS POST. REF. P8 J20

DEBIT

BALANCE

5 8 0 0 00

5 8 0 0 00 5 4 0 0 00

4 0 0 00

DEBIT

✔ P8

DATE DESCRIPTION 2013 Dec. 1 Balance 9 Invoice 1127, 12/4/13 19 Invoice 1131, 12/15/13

✔ P8 P8

DEBIT

n/45

CREDIT

BALANCE

5 9 3 6 00

4 8 4 2 00 10 7 7 8 00

TERMS POST. REF.

1/15, n/60

CREDIT

TERMS POST. REF.

n/60

CREDIT

1 5 0 00

Spring Lawn Center

274  Chapter 8

CREDIT

TERMS

Selby Corporation

DATE DESCRIPTION 2013 Dec. 1 Balance 1 Invoice 2110, 11/26/13 NAME

✔ P8

Patio Furniture Shop

DATE DESCRIPTION 2013 Dec. 5 Invoice 633, 12/2/13 16 CM 101 NAME

DEBIT

Delta Rubber Company

DATE DESCRIPTION 2013 Dec. 1 Balance 21 Invoice 8517, 12/17/13 28 CM 210 NAME

POST. REF.

2/10, n/30

n/30

CREDIT

BALANCE

1 1 4 8 00 1 7 5 6 00

2 6 4 8 00 3 7 9 6 00 5 5 5 2 00

PROBLEM 8.3B (continued) The Landscape Supply Center Schedule of Accounts Payable December 31, 2013 Cason Industries Delta Rubber Company Patio Furniture Shop Selby Corporation Spring Lawn Center Total

Analyze:

5 9 3 0 00 4 5 3 6 00 5 4 0 0 00 10 7 7 8 00 5 5 5 2 00 32 1 9 6 00

Accounts Payable increased by $18,706 during the month of December.

Chapter 8  275

DATE 2013 Feb. 5 Packing & Mail Supply Center 8 center 12 Gifts and Holiday Cards 13 Specialty Business Cards 19 Business Forms, Inc. 21 Specialty Business Cards 28

PURCHASED FROM

PROBLEM 8.4B

502 2808 2904 2013 2019 1376

2/2 2/5 2/8 2/9 2/16 2/19

INVOICE INVOICE NUMBER DATE

2/10, n/30 2/10, n/30 2/10, n/30 1/10, n/45 n/30 1/10, n/45

TERMS

PURCHASES JOURNAL

✔ ✔ ✔ ✔ ✔ ✔

POST. REF.

2 1 0 0 00 1 9 0 0 00 1 2 0 0 00 1 1 0 0 00 2 0 4 0 00 3 7 1 0 00 12 0 5 0 00 ( 2 0 3)

ACCOUNTS PAYABLE CREDIT

2 0 0 0 00 1 9 0 0 00 1 2 0 0 00 1 1 0 0 00 1 9 8 0 00 3 6 0 0 00 11 7 8 0 00 ( 5 0 1)

PURCHASES DEBIT

6 0 00 1 1 0 00 2 7 0 00 ( 5 0 2)

1 0 0 00

FREIGHT IN DEBIT

PAGE

PROBLEM 8.4B (continued) PAGE

GENERAL JOURNAL

1 2

DATE DESCRIPTION 2013 Feb. 20 Accounts Payable/Gifts and Holiday Cards

POST. REF.

Purchases Returns and Allowances Received Credit Memo 102 for damaged merchandise; original purchase made on Invoice 2808, dated February 5 28 Accounts Payable/Gifts and Holiday Cards

203

Purchases Returns & Allowances Received Credit Memo 118 for damaged merchandise; original purchase made on Invoice 2904, February 12

2 0 0 00

503

2 0 0 00

3 4 5 6 7 8

2 4 0 00

9 10 11 12 13 14 15

203 ✔

9 10 11 12 13 14 15

CREDIT 1 2

✔ 3 4 5 6 7 8

DEBIT

503

2 4 0 00

Chapter 8  277

PROBLEM 8.4B (continued) GENERAL LEDGER ACCOUNT Accounts Payable

ACCOUNT NO.

POST. DESCRIPTION REF.

DATE 2013 Feb. 1 Balance 20 27 28

ACCOUNT

DATE 2013 Feb. 28

ACCOUNT

DATE 2013 Feb. 28

ACCOUNT

DATE 2013 Feb. 20 27

✔ J12 J12 P4

DEBIT

CREDIT

203

BALANCE DEBIT CREDIT 15 2 0 0 00 15 0 0 0 00 14 7 6 0 00 26 8 1 0 00

2 0 0 00 2 4 0 00 12 0 5 0 00

Purchases

ACCOUNT NO.

POST. DESCRIPTION REF.

BALANCE DEBIT CREDIT

DEBIT

CREDIT

11 7 8 0 00

501

11 7 8 0 00

Freight In

ACCOUNT NO.

POST. DESCRIPTION REF.

BALANCE DEBIT CREDIT

DEBIT

CREDIT

2 7 0 00

502

2 7 0 00

Purchases Returns and Allowances

ACCOUNT NO.

POST. DESCRIPTION REF.

BALANCE DEBIT CREDIT

278  Chapter 8

J12 J12

DEBIT

CREDIT 2 0 0 00 2 4 0 00

503

2 0 0 00 4 4 0 00

PROBLEM 8.4B (continued) Purchases Freight In Delivered Cost of Purchases Less Purchases Returns and Allowances Net Delivered Cost of Purchases

$11,780 270 $12,050 440 $11,610

Chapter 8  279

PROBLEM 8.4B (continued) ACCOUNTS PAYABLE SUBSIDIARY LEDGER NAME DATE 2013 Feb.

DESCRIPTION

DEBIT

DESCRIPTION

1 Balance 8 Invoice 2808, 2/5/13 12 Invoice 2904, 2/8/13 20 CM 102 27 CM 118

NAME

✔ P4 P4 J12 J12

DEBIT

2013 Feb.

DESCRIPTION

POST.REF.

1 Balance 5 Invoice 502, 2/2/13

NAME

DEBIT

13 Invoice 2013, 2/9/13 21 Invoice 1376, 2/19/13

280  Chapter 8

4 0 0 0 00 5 9 0 0 00 7 1 0 0 00 6 9 0 0 00 6 6 6 0 00

P4 P4

DEBIT

2/10, n/30

CREDIT

BALANCE

2 1 0 0 00

3 2 0 0 00 5 3 0 0 00

TERMS

POST.REF.

2/10, n/30

BALANCE

TERMS

✔ P4

DESCRIPTION

CREDIT

2 0 0 00 2 4 0 00

Specialty Business Cards

DATE

2 0 4 0 00

8 0 0 0 00 10 0 4 0 00

1 9 0 0 00 1 2 0 0 00

Packing and Mail Supply Center

DATE

BALANCE

TERMS

POST.REF.

n/30

CREDIT

✔

Gifts and Holiday Cards

DATE

2013 Feb.

POST.REF.

1 Balance 19 Invoice 2019, 2/16/13

NAME

2013 Feb.

TERMS

Business Forms, Inc.

1/10, n/45

CREDIT

BALANCE

1 1 0 0 00 3 7 1 0 00

1 1 0 0 00 4 8 1 0 00

PROBLEM 8.4B (continued) Simpson’s Card and Novelty Shop Schedule of Accounts Payable February 28, 2013 Business Forms, Inc. Gifts and Holiday Cards Packing and Mailing Supply Center Specialty Business Cards Total

Analyze:

10 0 4 0 00 6 6 6 0 00 5 3 0 0 00 4 8 1 0 00 26 8 1 0 00

Total freight charges for the month of February were $270. This represents 2.24% ($270 ÷ $12,050) of delivered cost of purchases.

Chapter 8  281

PURCHASED FROM DATE 2013 Jan. 3 Fashion Expo 5 Tru Totes & Co. 7 Extreme Fashions 9 Comfy Casuals 12 Professional Wears 18 City Walks 25 Silky Legs Express 29 Comfy Casuals 31 Special Occasions Dress Shop

CRITICAL THINKING PROBLEM 8.1

101 223 556 110 104 118 1012 315 1044

12/26 12/28 1/3 1/5 1/9 1/14 1/20 1/26 1/27

INVOICE INVOICE NUMBER DATE n/30 2/10, n/30 2/10, n/30 n/30 2/10, n/30 n/60 2/10, n/30 n/30 2/10, n/30 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔

POST. TERMS REF.

PURCHASES JOURNAL

33 7 4 9 00 ( 2 0 5)

4 6 2 0 00 3 5 6 9 00 3 0 7 5 00 2 3 6 0 00 6 5 5 0 00 3 2 0 0 00 1 0 2 5 00 1 6 0 0 00 7 7 5 0 00

ACCOUNTS PAYABLE CREDIT 0 00 0 00 0 00 0 00 0 00 0 00 5 00 0 00 0 00 32 9 8 5 00 ( 5 0 1)

4 5 0 3 4 8 3 0 0 2 3 6 6 4 0 3 1 2 1 0 2 1 6 0 7 5 0

PURCHASES DEBIT

7 6 4 00 ( 5 0 2)

2 5 0 00

1 5 0 00 8 0 00

1 2 0 00 8 9 00 7 5 00

FREIGHT IN DEBIT

PAGE

CRITICAL THINKING PROBLEM 8.1 (continued) PAGE

SALES JOURNAL

DATE 1 2013 2 Jan. 4 3 5 4 6 5 10 6 14 7 8 9 10 11 12

17 21 24 25 29 31

SALES SLIP NO.

CUSTOMER'S NAME

POST. REF.

101 102 103 104 105

Vivian Cho Dina Bates Julia Adams Cheryl Scott Aileen De Revere

✔ ✔ ✔ ✔ ✔

6 5 4 3 5

4 6 3 7 4

8 00 7 00 2 00 8 00 0 00

4 4 3 2 4

8 00 2 00 2 00 8 00 0 00

6 5 4 3 5

0 2 0 5 0

0 00 5 00 0 00 0 00 0 00

106 107 108 109 110 111

Sasha Ramirez Elaine Patterson Andrea Aguilar Tracy Mai Toni Garcia Linda Martin

✔ ✔ ✔ ✔ ✔ ✔

6 1 6 5 3 6 1 0

7 2 4 2 4 2

5 00 0 00 0 00 4 00 8 00 6 00

5 1 2 4 2 4 7

0 00 0 00 0 00 4 00 8 00 6 00

6 1 5 5 3 6 9

2 0 0 0 0 5

5 00 7 0 00 8 0 00 9 0 00 10 0 00 11 0 00 12

Totals

ACCOUNTS RECEIVABLE DEBIT

SALES TAX PAYABLE CREDIT

7 3 9 8 00 ( 1 1

5 4 8 00 ( 2 3 1)

SALES CREDIT 1 2 3 4 5 6

6 8 5 0 00 13 ( 4 0 1)

14 15

Chapter 8  283

CRITICAL THINKING PROBLEM 8.1 (continued) ACCOUNTS PAYABLE SUBSIDIARY LEDGER NAME

TERMS

City Walks

DATE DESCRIPTION 2013 Jan. 18 Invoice 118, 1/14/13

NAME

POST. REF.

DEBIT

P6 P6

BALANCE

3 2 0 0 00

POST. REF.

DEBIT

BALANCE

2 3 6 0 00 1 6 0 0 00

2 3 6 0 00 3 9 6 0 00

DATE DESCRIPTION 2013 Jan. 3 Invoice 101, 12/26/12

POST. REF. P6

DEBIT

2/10, n/30

CREDIT

BALANCE

3 0 7 5 00

TERMS

Fashion Expo

n/30

CREDIT

TERMS

Extreme Fashions

284  Chapter 8

CREDIT

TERMS

DATE DESCRIPTION 2013 Jan. 7 Invoice 556, 1/3/13

NAME

DEBIT

Comfy Casuals

DATE DESCRIPTION 2013 Jan. 9 Invoice 110, 1/5/13 29 Invoice 315, 1/26/13

NAME

POST. REF.

n/60

n/30

CREDIT

BALANCE

4 6 2 0 00

CRITICAL THINKING PROBLEM 8.1 (continued) ACCOUNTS PAYABLE SUBSIDIARY LEDGER NAME

DATE DESCRIPTION 2013 Jan. 12 Invoice 104, 1/9/13

NAME

DEBIT

POST. REF.

DEBIT

6 5 5 0 00

POST. REF.

DEBIT

2/10, n/30

CREDIT

BALANCE

1 0 2 5 00

2/10, n/30

CREDIT

BALANCE

7 7 5 0 00

TERMS

Tru Totes & Co.

DATE DESCRIPTION 2013 Jan. 5 Invoice 223, 12/28/12

BALANCE

TERMS POST. REF.

2/10, n/30

CREDIT

TERMS

Special Occasions Dress Shop

DATE DESCRIPTION 2013 Jan. 31 Invoice 1044, 1/27/13

NAME

POST. REF.

Silky Legs Express

DATE DESCRIPTION 2013 Jan. 25 Invoice 1012, 1/20/13

NAME

TERMS

Professional Wears

2/10, n/30

CREDIT

BALANCE

3 5 6 9 00

Chapter 8  285

CRITICAL THINKING PROBLEM 8.1 (continued) ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER NAME

TERMS

Julia Adams

DATE DESCRIPTION 2013 Jan. 6 Sales Slip 103

NAME

BALANCE

4 3 2 00

POST. REF. S1

DEBIT

4 3 2 00

CREDIT

5 4 0 00

TERMS POST. REF. S1

DEBIT

CREDIT

5 6 7 00

TERMS

DATE DESCRIPTION 2013 Jan. 4 Sales Slip 101

POST. REF. S1

DEBIT 6 4 8 00

n/30

BALANCE

5 6 7 00

Vivian Cho

n/30

BALANCE

5 4 0 00

Dina Bates

286  Chapter 8

CREDIT

TERMS

DATE DESCRIPTION 2013 Jan. 5 Sales Slip 102

NAME

DEBIT

Andrea Aguilar

DATE DESCRIPTION 2013 Jan. 24 Sales Slip 108

NAME

POST. REF.

n/30

CREDIT

n/30

BALANCE 6 4 8 00

CRITICAL THINKING PROBLEM 8.1 (continued) ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER NAME

DATE DESCRIPTION 2013 Jan. 14 Sales Slip 105

NAME

DEBIT

POST. REF. S1

DEBIT

5 4 0 00

CREDIT

6 4 8 00

DEBIT

6 4 8 00

CREDIT

3 2 4 00

TERMS

DEBIT

1 0 2 6 00

n/30

BALANCE

3 2 4 00

POST. REF.

n/30

BALANCE

TERMS POST. REF.

n/30

BALANCE

TERMS

Linda Martin

DATE DESCRIPTION 2013 Jan. 31 Sales Slip 111

CREDIT

5 4 0 00

Tracy Mai

DATE DESCRIPTION 2013 Jan. 25 Sales Slip 109

NAME

POST. REF.

Toni Garcia

DATE DESCRIPTION 2013 Jan. 29 Sales Slip 110

NAME

TERMS

Aileen De Revere

CREDIT

n/30

BALANCE 1 0 2 6 00

Chapter 8  287

CRITICAL THINKING PROBLEM 8.1 (continued) ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER NAME

TERMS

Elaine Patterson

DESCRIPTION DATE 2013 Jan. 21 Sales Slip 107

NAME

DEBIT

1 6 2 0 00

POST. REF.

DEBIT

6 7 5 00

BALANCE 1 6 2 0 00

CREDIT

DATE DESCRIPTION 2013 Jan. 10 Sales Slip 104

POST. REF.

DEBIT

3 7 8 00

n/30

BALANCE 6 7 5 00

TERMS

Cheryl Scott

288  Chapter 8

CREDIT

TERMS

Sasha Ramirez

DATE DESCRIPTION 2013 Jan. 17 Sales Slip 106

NAME

POST. REF.

n/30

CREDIT

n/30

BALANCE 3 7 8 00

CRITICAL THINKING PROBLEM 8.1 (continued) GENERAL LEDGER ACCOUNT

DATE 2013 Jan. 31

ACCOUNT

DATE 2013 Jan. 31

ACCOUNT

Accounts Receivable

ACCOUNT NO.

POST. DESCRIPTION REF.

BALANCE DEBIT CREDIT

DEBIT

CREDIT

7 3 9 8 00

111

7 3 9 8 00

Accounts Payable

ACCOUNT NO.

POST. DESCRIPTION REF.

BALANCE DEBIT CREDIT

DEBIT

CREDIT 33 7 4 9 00

DATE DESCRIPTION 2013 Jan. 31

33 7 4 9 00

ACCOUNT NO.

Sales Tax Payable POST. REF. S1

DEBIT

CREDIT 5 4 8 00

205

231

BALANCE DEBIT CREDIT 5 4 8 00

Chapter 8  289

CRITICAL THINKING PROBLEM 8.1 (continued) GENERAL LEDGER ACCOUNT

DATE DESCRIPTION 2013 Jan. 31

ACCOUNT

POST. REF.

DEBIT

CREDIT

DEBIT

32 9 8 5 00

CREDIT

290  Chapter 8

BALANCE DEBIT CREDIT

ACCOUNT NO. POST. REF. P6

DEBIT 7 6 4 00

501

32 9 8 5 00

Freight In

DATE DESCRIPTION 2013 Jan. 31

6 8 5 0 00

ACCOUNT NO. POST. REF.

401

BALANCE DEBIT CREDIT

6 8 5 0 00

Purchases

DATE DESCRIPTION 2013 Jan. 31

ACCOUNT

ACCOUNT NO.

Sales

CREDIT

502

BALANCE DEBIT CREDIT 7 6 4 00

CRITICAL THINKING PROBLEM 8.1 (continued) Fashion Standards Schedule of Accounts Payable January 31, 2013 3 2 0 0 00 3 9 6 0 00 3 0 7 5 00 4 6 2 0 00 6 5 5 0 00 1 0 2 5 00 7 7 5 0 00 3 5 6 9 00 33 7 4 9 00

City Walks Comfy Casuals Extreme Fashions Fashion Expo Professional Wears Silky Legs Express Special Occasions Dress Shop Tru Totes & Co. Total

Fashion Standards Schedule of Accounts Receivable January 31, 2013 Julia Adams Andrea Aguilar Dina Bates Vivian Cho Aileen De Revere Toni Garcia Tracy Mai Linda Martin Elaine Patterson Sasha Ramirez Cheryl Scott Total

4 3 2 00 5 4 0 00 5 6 7 00 6 4 8 00 5 4 0 00 6 4 8 00 3 2 4 00 1 0 2 6 00 1 6 2 0 00 6 7 5 00 3 7 8 00 7 3 9 8 00

Chapter 8  291

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CRITICAL THINKING PROBLEM 8.1 (continued) Analyze:

Net delivered cost of purchases: Purchases Freight In Delivered Cost of Purchases

$32,985 764 $33,749

CRITICAL THINKING PROBLEM 8.2 1. To determine whether Passions Linen Shop was billed in error: a Review Passions Linen Shop’s purchase order file for duplicate orders to Sensuous Linen Company. If two orders were placed for the same merchandise, check the receiving reports to determine if both shipments were received. If Passions Linen Shop does not prenumber its purchase orders, two orders may have been issued for the same merchandise. If only, one purchase order was placed, check the receiving reports for a duplicate shipment. b If no duplicate purchase order or duplicate receipt of merchandise is found, ask Sensuous Linen Company to identify why they made two shipments of sheets. If Sensuous Linen Company made the second shipment in error, they will be obligated to accept return of the sheets. 2.

To prevent this situation from occurring again: a Prenumber all purchase order forms and periodically check to be sure that all forms can be accounted for. b Require all purchase orders to have proper authorization before they are issued. Alexander can authorize all purchase orders, or she can designate appropriate personnel to handle this function. c Require all shipments of merchandise received by the shop to be compared to the corresponding purchase order and the invoice received from the supplier. Any shipment for which there is no purchase order should be questioned immediately. d Require the purchase order and corresponding receiving report to be attached to the invoice before it is presented for payment. Alexander can establish internal control procedures to reduce the possibility of issuing duplicate purchase orders, but she cannot prevent suppliers from making duplicate shipments in error. If the appropriate documentation accompanies invoices, though, she will know that the error is not Passions Linen Shop’s.

292  Chapter 8

SOLUTIONS TO BUSINESS CONNECTIONS Managerial Focus: 1. Maintenance of good credit reputation, taking advantage of cash discounts. 2. Allows a business to buy on credit, using resources more effectively. 3. It is important to establish a good credit rating for future cash needs. Additionally, cash could be used for other purposes. 4. Protect against fraud and excessive investment in merchandise. 5. Ensures authorized-only purchases, verifies receipt of goods and accuracy of invoices, distributes tasks. 6. Creates a storage problem, risks obsolescence of the merchandise, and ties up funds. Ethical Dilemma: Anait’s actions are not ethical. If she cannot get a raise from this company, she should find a new job. When she performs the unethical action of getting money from a fictitious vendor she is stealing dollar for dollar from her company. Her money comes right out of net income for this company. When Anait finds how easy it is to perpetrate this fraud, she will create more vendors and more invoices. To prevent these actions the controller should require each new vendor to receive his/her approval. The procedure to only view the checks over $100 can still be maintained with this one approval process. Financial Statement Analysis: 1. 2010: 66.1%. 2009: 66.3% 2. Answers will vary. Students may suggest price changes on merchandise from suppliers, discounts, or shipping costs variances. Analyze Online: Answers will vary depending on the year. Teamwork: The most advantageous would be net 45 days to pay the vendors, with customers on terms of 2/10 net 30. Your customers would then be paying you before you need to pay vendors. Internet Connection: Your Company address and phone number and the vendor’s name and address. The amount of the check or purchase order. Reference for the purchase order number of purchase requisition.

Chapter 8  293

SOLUTIONS TO PRACTICE TEST Part A True-False 1. FALSE 2. TRUE 3. TRUE 4. TRUE 5. TRUE 6. TRUE 7. FALSE 8. TRUE 9. TRUE 10. TRUE

11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

TRUE FALSE TRUE FALSE FALSE TRUE TRUE FALSE TRUE FALSE

Part B Exercises 1. An expense. 2. Accounts Payable Credit = Purchases Debit + Freight In Debit. 3. All columns. 4. It is not recorded in the purchases journal at all; it is entered in the cash payments journal. 5. The Accounts Payable column. 6. The General Journal. 7. In the Cost of Goods Sold section.

294  Chapter 8

CHAPTER 9 CASH RECEIPTS, CASH PAYMENTS, AND BANKING PROCEDURES Chapter Opener: Thinking Critically Office expenditures may include petty cash disbursements for office supplies and postage. Cash expenditures might also include payments for rent and utilities. Receipts might include cash sales for services or payments for services on account. Fast Facts • H&R Block worked with the IRS to file the first electronic tax returns in 1986, 22,000 in all. In 2009, H&R Block filed over 22 million tax returns electronically. • The company’s 120,000 tax professionals have an average of five years experience and more than 300 hours of training. • H&R Block prepares 1 in every 7 U.S. tax returns and has a retail office within 5 miles of most Americans. • H&R Block has helped clients obtain more than $50 billion in tax refunds, credits and other government benefits in fiscal 2010. Managerial Implications: Thinking Critically Answers will vary, but should recognize the need to weigh the earning power (interest income) and the need for liquidity (access to the cash). Discussion Questions Note to instructor : These questions are designed to check students’ understanding of new concepts, and procedures presented in the chapter. 1. Access to checkbook is restricted; use of prenumbered check forms; checks examined by someone who did not prepare them before they are signed; bank statement reconciled by someone other than employees who handle cash. 2. To record items not yet entered in firm’s records. 3. Outstanding checks, deposits in transit, service charges. 4. Balance of Cash account in the general ledger. 5. To reconcile any difference between depositor’s checkbook, Cash account, and bank statement. 6. Day-by-day checking account activity, as well as beginning and ending balances. 7. Date, amount, payee, current balance, purpose of check. Stub should be prepared before the check so that it will not be forgotten. 8. Signed, authorized written order instructing a bank to pay a specific sum of money to a designated person. 9. Electronic processing of documents. 10. Restrictive endorsement. 11. Shortages are debited and overages are credited to the Cash Short or Over account.

Chapter 9  295

Discussion Questions (continued) 12. Use only for minor payments; establishment check made out to person to be in charge of funds; keep funds locked; payments made from funds should be documented with signatures of recipient. 13. At month-end or when petty cash is replenished. 14. Contra cost account, deduction from Purchases. 15. Cash Payments Journal: total amount of purchase is a debit to Accounts Payable. Discount is recorded as a credit to Purchases Discounts. Amount of cash paid is recorded as a credit to Cash. 16. Cash Receipts Journal: Original sale was recorded as a Credit to Accounts Receivable; amount of the discount is recorded as a debit to Sales Discounts. Amount of cash received is recorded as a debit to Cash. 17. Encourages fast payment. 18. Written promise to pay amount on specific date. Dr. Cash, Cr. Notes Rec., Cr. Interest Income. Cash receipts journal. 19. Payments made by check and issued only with approved invoice; invoices approved only by designated personnel; checks prepared and recorded in the checkbook or check register by someone different from the person who approves the payments; use prenumbered checks. 20. Employees are investigated by an insurance company, and, if their backgrounds are satisfactory, their employer is insured against losses that may occur because of employee theft or mishandling of funds. 21. Only approved employees can handle cash; keep cash in locked location; record cash receipts as they arrive; check funds against receipt log before bank deposits are made; make deposits promptly; separation of cash deposits, recording, reconciliation duties. 22. See Glossary for terms and definitions.

296  Chapter 9

1 Cash sales

Oct.

DATE 2013

DESCRIPTION

6 Cash sales

3850 October rent

3851 Fisher Company

3852 Bought equipment

3853 Paid sales tax

3854 Sports Emporium

3855 Cash purchase

3856 Withdrawal by owner

CK. NO.

DESCRIPTION

4 Investment by owner

3 Cash sales

2 James Wu

EXERCISE 9.2

Oct.

DATE 2013

EXERCISE 9.1

7 9 0 00

A/C RECV. CR.

5 1 2 00

4 2 0 00

4 4 8 00

SALES TAX PAY. CR.

POST. REF.

1 5 0 0 00

2 9 5 0 00

A/C PAY. DEBIT

ACCOUNT NAME

Eddie Reynolds, Capital

Eddie Reynolds, Drawing

Purchases

Sales Tax Payable

Equipment

Rent Expense

2 1 0 0 00

3 6 7 5 00

1 4 2 0 00

12 1 0 0 00

2 6 0 0 00

3 0 00

PUR. DIS. CR.

( 2 0 00)

19 0 0 0 00

1 2 00

AMOUNT

PAGE

POST. REF.

AMOUNT

6 4 0 0 00 Cash Short or Over

5 2 5 0 00

5 6 0 0 00 Cash Short or Over

SALES CREDIT

PAGE OTHER ACCOUNTS CREDIT

OTHER ACCOUNTS DEBIT POST. REF. ACCOUNT NAME

CASH PAYMENTS JOURNAL

POST. REF.

CASH RECEIPTS JOURNAL

2 1 0 0 00

3 6 7 5 00

1 4 7 0 00

1 4 2 0 00

12 1 0 0 00

2 9 5 0 00

2 6 0 0 00

CASH CREDIT

6 8 9 2 00

19 0 0 0 00

5 6 7 0 00

7 9 0 00

6 0 6 0 00

CASH DEBIT

ACCOUNTS PAYABLE DEBIT

POST. REF.

ACOUNTS PAYABLE DEBIT Supplies Delivery Expense Miscellaneous Expense

4 8 00 8 9 00 2 4 00

OTHER ACCOUNTS DEBIT POST. ACCOUNT NAME AMOUNT REF.

1 PURCHASES DISCOUNT CREDIT

PAGE

3 5 0 00

PURCHASES DISCOUNT CREDIT

PAGE OTHER ACCOUNTS DEBIT POST. ACCOUNT NAME AMOUNT REF.

Petty Cash

CASH PAYMENTS JOURNAL

DATE DESCRIPTION 2013 Jan. 31 3159 Replenished petty cash fund

CK. NO.

EXERCISE 9.4

POST. REF.

CASH PAYMENTS JOURNAL

DATE DESCRIPTION 2013 Jan. 2 2108 Established petty cash fund

CK. NO.

EXERCISE 9.3

1 6 1 00

CASH CREDIT

3 5 0 00

CASH CREDIT

EXERCISE 9.5 Chin Corporation Bank Reconciliation October 31, 2013 Balance on bank statement Additions: Deposit in transit

14 7 0 0 00 8 5 7 00 15 5 5 7 00

Deductions for outstanding checks: Check 7017 Check h k 7098 Check 7107 Total outstanding checks Adjusted bank balance

1 2 4 00 5 5 00 1 5 6 0 00 1 7 3 9 00 13 8 1 8 00 14 2 6 2 00

Balance in books D d ti Deductions: Bank service charge NSF check Adjusted book balance

2 0 00 4 2 4 00

PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7 8

DESCRIPTION DATE 2013 Oct. 31 Miscellaneous Expense Cash Bank service charge for October

POST. REF.

31 Accounts Receivable/James Dear Cash To record check returned by the bank

DEBIT

4 4 4 00 13 8 1 8 00

CREDIT

2 0 00 2 0 00

4 2 4 00 4 2 4 00

1 2 3 4 5 6 7 8

Chapter 9  299

EXERCISE 9.6

1. 2. 3. 4. 5. 6. 7.

Bank Balance X

Book Balance

Accounting Entry

X X X

X X

EXERCISE 9.7 Cantu Office Supply Company Bank Reconciliation Statement March 31, 2013 68 0 0 5 00

Balance on bank statement Additions: Deposit in transit Check incorrectly charged

3 7 0 0 00 2 4 8 00

Deductions for outstanding checks: Check 3782 Check 3840 Total outstanding checks Adjusted bank balance

2 2 0 0 00 1 5 1 00 2 3 5 1 00 69 6 0 2 00

Balance in books Additions: Noninterest-bearing note collected by bank Deductions: Bank collection fee for note NSF check Adjusted book balance

300  Chapter 9

3 9 4 8 00 71 9 5 3 00

69 4 8 7 00 6 3 0 0 00 75 7 8 7 00 5 0 00 6 1 3 5 00

6 1 8 5 00 69 6 0 2 00

EXERCISE 9.7 (continued) PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 March 31 Cash 3 Notes Receivable 4 To record receipt of note collected by bank 5 6 31 Miscellaneous Expense 7 Cash 8 To record bank collection fee 9 10 31 Accounts Receivable/Wilson Construction Company 11 Cash 12 To record NSF check returned by bank

POST. REF.

DEBIT 6 3 0 0 00

5 0 00

6 1 3 5 00

CREDIT 1 2 6 3 0 0 00 3 4 5 6 5 0 00 7 8 9 10 6 1 3 5 00 11 12

EXERCISE 9.8 Fierro Company Bank Reconciliation Statement November 30, 2013 Balance on Bank Statement Additions: Check incorrectly charged Check 2782 written for $200; paid by bank as $1,200 Check 2920 for $85 paid by the bank twice

12 8 0 0 00 1 5 1 00 1 0 0 0 00 8 5 00 1 2 3 6 00 14 0 3 6 00

Deductions: November 22 deposit of $580 credited by bank for $850 Outstanding checks Adjusted Bank Balance

2 7 0 00 2 1 5 0 00

2 4 2 0 00 11 6 1 6 00

Chapter 9  301

EXERCISE 9.9

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

DATE DESCRIPTION 2013 Sept. 22 Ronnie Hunter, Drawing Cash To record ATM withdrawal by Ronnie Hunter for personal use. 22 Cash Accounts Receivable/Edwards UK To record wire-transfer of funds received on account from Edwards UK 23 Utilities Expense Cash To record on-line payment to Orange Trash Services 24 Note Payable Cash To record loan payment to Central Motors

302  Chapter 9

PAGE

GENERAL JOURNAL POST. REF.

DEBIT

CREDIT

2 4 0 00 2 4 0 00

8 9 0 0 00 8 9 0 0 00

2 6 05 2 6 05

4 0 0 0 00

00 4000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

28 Totals

16 Sadie Nelson 19 Collected promissory note and interest 21 Cash Sales 25 Alfred Herron 28 Cash Sales

7 Cash Sales 9 Additional Investment 12 Kyela Jones 14 Cash Sales

DATE DESCRIPTION 2013 Feb. 3 Danielle Pelzel 5 Refund for damaged goods

PROBLEM 9.1A

Supplies

ACCOUNT NAME

( 4 0 1)

( 2 3 1)

( 1 1 1)

4 1 0 0 00 Cash Short or Over

4 5 5 0 00

Notes Receivable Interest Income

4 0 5 0 00 Cash Short or Over

1 2 0 00

AMOUNT

PAGE

5 0 0 00 1 2 0 00

CASH DEBIT

620

109 491

8 3 2 00 4 9 1 4 00 5 8 0 00 4 3 9 2 00 (X )

( 1 0 1)

15 8 8 4 00 36 6 9 4 00

( 3 6 00)

8 0 0 00 3 2 00

4 5 0 00

620 ( 6 0 00) 5 1 2 4 00 301 15 0 0 0 00 15 0 0 0 00 3 8 0 00 620 2 8 00 4 4 0 2 00

129

POST. REF.

OTHER ACCOUNTS CREDIT

4 8 0 0 00 Cash Short or Over Jason Wilson, Capital

1 4 0 0 00 17 5 0 0 00

3 2 8 00

3 6 4 00

3 2 4 00

3 8 4 00

SALES CREDIT

1 9 1 0 00

5 8 0 00

4 5 0 00

3 8 0 00

5 0 0 00

ACCOUNTS SALES TAX POST. RECEIVABLE PAYABLE REF. CREDIT CREDIT

CASH RECEIPTS JOURNAL

PROBLEM 9.1A (continued) GENERAL LEDGER ACCOUNT Cash

DATE DESCRIPTION 2013 Feb. 1 Balance 28

ACCOUNT NO. 101 POST. REF.

DEBIT

✔ CR4

36 6 9 4 00

CREDIT

4 9 6 0 00 41 6 5 4 00

ACCOUNT Notes Receivable

DATE DESCRIPTION 2013 Feb. 1 Balance 19

ACCOUNT NO. 109 POST. REF.

DEBIT

✔ CR4

CREDIT

BALANCE DEBIT CREDIT

8 0 0 00

8 0 0 00 –0–

ACCOUNT Accounts Receivable

DATE DESCRIPTION 2013 Feb. 1 Balance 28

ACCOUNT NO. 111 POST. REF.

DEBIT

✔ CR4

CREDIT

BALANCE DEBIT CREDIT

1 9 1 0 00

4 0 7 5 00 2 1 6 5 00

ACCOUNT Supplies

DATE DESCRIPTION 2013 Feb. 1 Balance 5

304 n Chapter 9

BALANCE DEBIT CREDIT

ACCOUNT NO. 129 POST. REF. ✔ CR4

DEBIT

CREDIT

BALANCE DEBIT CREDIT

1 2 0 00

6 1 0 00 4 9 0 00

PROBLEM 9.1A (continued) GENERAL LEDGER ACCOUNT Sales Tax Payable

DATE DESCRIPTION 2013 Feb. 1 Balance 28

ACCOUNT NO. 231 POST. REF.

DEBIT

✔ CR4

CREDIT

BALANCE DEBIT CREDIT

1 4 0 0 00

2 9 5 00 1 6 9 5 00

ACCOUNT Jason Wilson, Capital

DATE DESCRIPTION 2013 Feb. 1 Balance 9

ACCOUNT NO. 301 POST. REF.

DEBIT

✔ CR4

CREDIT

BALANCE DEBIT CREDIT

15 0 0 0 00

34 0 0 0 00 49 0 0 0 00

ACCOUNT Sales

DATE 2013 Feb. 28

DESCRIPTION

ACCOUNT NO. 401 POST. REF.

DEBIT

CR4

CREDIT

BALANCE DEBIT CREDIT

17 5 0 0 00

ACCOUNT Interest Income

DATE 2013 Feb. 19

DESCRIPTION

ACCOUNT NO. 491 POST. REF.

DEBIT

CREDIT

BALANCE DEBIT CREDIT

3 2 00

CR4

Chapter 9  305

PROBLEM 9.1A (continued) GENERAL LEDGER ACCOUNT Cash Short or Over

DATE 2013 Feb. 7 14 28

DESCRIPTION

ACCOUNT NO. POST. REF. CR4 CR4 CR4

DEBIT

CREDIT

6 0 00 2 8 00 3 6 00

620

BALANCE DEBIT CREDIT 6 0 00 3 2 00 6 8 00

Analyze: Total Accounts Receivable collected was $1,910.

306  Chapter 9

27 30 30 30

10 12 14 17 20

DATE 2013 June 1 2 3 4 7

DESCRIPTION

Totals

4131 Classy Creations 4132 Monthly salaries 4133 Withdrawal by owner 4134 Replenish petty cash fund

POST. REF.

(X )

7 6 7 5 00 5 0 0 0 00 3 0 00 4 2 00 5 0 00 2 4 00

8 6 0 00

2 0 0 00 3 2 0 0 00 1 2 8 00 5 9 4 00 2 7 6 00

2 5 0 0 00 4 2 0 0 00

AMOUNT

( 2 0 5)

623 302 129 611 635 302

129

105 201 634 451 626

620 231

POST. REF.

24 7 7 9 00

Salaries Expense Larry Jennings, Drawing Supplies Delivery Expense Miscellaneous Expense Larry Jennings, Drawing

Supplies

Petty Cash Fund Notes Payable Interest Expense Sales Returns & Allowances Telephone Expense

Rent Expense Sales Tax Payable

ACCOUNT NAME

OTHER ACCOUNTS DEBIT

15 9 3 0 00

3 6 5 0 00

3 5 0 0 00

6 0 0 0 00

2 7 8 0 00

ACCOUNTS PAYABLE DEBIT

CASH PAYMENTS JOURNAL

4121 Monthly rent 4122 Tax remittance 4123 Perfect Timing Watch Co. 4124 Established petty cash fund 4125 Paid promissory note and Interest to Perry Corp. 4126 Cash refund 4127 Monthly telephone bill 4128 International Jewelry Co. 4129 Store supplies 4130 Nelson’s Jewelry and Accessories

CK. NO.

PROBLEM 9.2A

1 4 6 00

3 6 5 0 00 7 6 7 5 00 5 0 0 0 00

3 3 2 8 00 5 9 4 00 2 7 6 00 5 8 8 0 00 8 6 0 00 3 4 3 0 00

2 5 0 0 00 4 2 0 0 00 2 7 8 0 00 2 0 0 00

CASH CREDIT

( 5 0 4)

( 1 0 1)

1 9 0 00 40 5 1 9 00

7 0 00

1 2 0 00

PURCHASES DISCOUNT CREDIT

PAGE

2013 June

— Balance on hand — Replenish fund — Carried forward

30 30 30

Store windows washed Delivery service Totals Balance on hand

5 6 — —

25 30 30 30

Establish fund Office supplies Postage stamps Delivery service Personal withdrawal

DESCRIPTION

— 1 2 3 4

VOU. NO.

4 5 8 15 22

DATE

PROBLEM 9.2A (continued)

2 0 0 00 5 4 00 1 4 6 00 2 0 0 00

2 0 0 00

RECEIPTS

PAGE

3 0 00 2 4 00 1 4 6 00 5 4 00 2 0 0 00

3 0 00 2 0 00 1 8 00 2 4 00

3 0 00

2 4 00 4 2 00

1 8 00

5 0 00

3 0 00

2 0 00 Larry Jennings, Drawing

2 4 00

DISTRIBUTION OF PAYMENTS DELIVERY MISC. OTHER ACCOUNTS DEBIT ACCOUNT SUPPLIES EXPENSE EXPENSE NAME PAYMENTS AMOUNT DEBIT DEBIT DEBIT

PETTY CASH ANALYSIS SHEET

PROBLEM 9.2A (continued) GENERAL LEDGER ACCOUNT Cash

DATE DESCRIPTION 2013 June 1 Balance 30

ACCOUNT NO. POST. REF.

DEBIT

CREDIT

DESCRIPTION

ACCOUNT NO. POST. REF.

DEBIT

CP8

2 0 0 00

CREDIT

✔ CP8 CP8

DEBIT

CREDIT

BALANCE DEBIT CREDIT

8 6 0 00 3 0 00

ACCOUNT NO. POST. REF. ✔ CP8

DEBIT

129

1 0 6 0 00 1 9 2 0 00 1 9 5 0 00

ACCOUNT Notes Payable

DATE DESCRIPTION 2013 June 1 Balance 7

BALANCE CREDIT DEBIT

ACCOUNT NO. POST. REF.

105

2 0 0 00

ACCOUNT Supplies

DESCRIPTION DATE 2013 June 1 Balance 17 30

BALANCE DEBIT CREDIT

42 8 4 0 00 40 5 1 9 00 2 3 2 1 00

✔ CP8

ACCOUNT Petty Cash Fund

DATE 2013 June 4

101

CREDIT

3 2 0 0 00

201

BALANCE DEBIT CREDIT 3 2 0 0 00 –0–

Chapter 9  309

PROBLEM 9.2A (continued) GENERAL LEDGER ACCOUNT Accounts Payable

DATE DESCRIPTION 2013 June 1 Balance 30

ACCOUNT NO. POST. REF. ✔ CP8

DEBIT

CREDIT

DATE DESCRIPTION 2013 June 1 Balance 2

15 9 3 0 00

ACCOUNT NO.

✔ CP8

DEBIT

CREDIT

DESCRIPTION

ACCOUNT NO.

DEBIT

CP8 CP8

5 0 0 0 00 2 4 00

CREDIT

310  Chapter 9

DESCRIPTION

BALANCE CREDIT DEBIT

ACCOUNT NO.

POST. REF.

DEBIT

CP8

5 9 4 00

302

5 0 0 0 00 5 0 2 4 00

ACCOUNT Sales Returns and Allowances

DATE 2013 June 10

BALANCE DEBIT CREDIT

4 2 0 0 00

POST. REF.

231

4 2 0 0 00 –0–

ACCOUNT Larry Jennings, Drawing

DATE 2013 June 30 30

BALANCE DEBIT CREDIT 18 8 8 0 00 2 9 5 0 00

ACCOUNT Sales Tax Payable POST. REF.

205

CREDIT

451

BALANCE DEBIT CREDIT 5 9 4 00

PROBLEM 9.2A (continued) GENERAL LEDGER ACCOUNT Purchases Discounts

DATE 2013 June 30

DESCRIPTION

ACCOUNT NO. POST. REF.

DEBIT

CP8

CREDIT

BALANCE DEBIT CREDIT

1 9 0 00

ACCOUNT Delivery Expense

DATE 2013 June 30

DESCRIPTION

ACCOUNT NO. POST. REF. CP8

DEBIT

CREDIT

4 2 00

DATE 2013 June 1

DESCRIPTION

CP8

2 5 0 0 00

CREDIT

DESCRIPTION

BALANCE DEBIT CREDIT

ACCOUNT NO. POST. REF.

DEBIT

CP8

7 6 7 5 00

620

2 5 0 0 00

ACCOUNT Salaries Expense

DATE 2013 June 30

BALANCE DEBIT CREDIT

ACCOUNT NO.

DEBIT

611

4 2 00

ACCOUNT Rent Expense POST. REF.

504

CREDIT

623

BALANCE DEBIT CREDIT 7 6 7 5 00

Chapter 9  311

PROBLEM 9.2A (continued) GENERAL LEDGER ACCOUNT

DATE 2013 June 12

ACCOUNT

DESCRIPTION

POST. REF.

DEBIT

CP8

2 7 6 00

CREDIT

POST. REF.

DEBIT

CP8

1 2 8 00

CREDIT

DESCRIPTION

BALANCE DEBIT CREDIT

ACCOUNT NO. POST. REF. CP8

DEBIT

634

1 2 8 00

Miscellaneous Expense

DATE 2013 June 30

BALANCE DEBIT CREDIT

ACCOUNT NO.

DESCRIPTION

626

2 7 6 00

Interest Expense

DATE 2013 June 7

ACCOUNT

ACCOUNT NO.

Telephone Expense

CREDIT

5 0 00

635

BALANCE DEBIT CREDIT 5 0 00

Analyze: Total Payments from the Petty Cash Fund for the month were $146.

312  Chapter 9

PROBLEM 9.3A PAGE

SALES JOURNAL

1 2 3 4 5 6 7 8

DATE 2013 April 1 8 19 30 30

INVOICE NO. 9312 9313 9314 9315

CUSTOMER’S NAME Soprano Music Center Music Warehouse Eagleton Music Center Contemporary Sounds, Inc. Total

POST. REF.

ACCOUNTS RECEIVABLE DR./ SALES CR. 3 4 10 9 28 (1

9 0 5 0 5 0 8 0 7 0 1 1/

0 00 0 00 0 00 0 00 0 00 4 01)

1 2 3 4 5 6 7 8

Chapter 9  313

DATE DESCRIPTION 2013 April 3 Music Supply Store 5 Cash sales 10 Soprano Music Center 23 Sounds From Yesterday 28 Eagleton Music Center 30 Totals

PROBLEM 9.3A (continued)

POST. REF.

( 4 0 1)

( 1 1 1)

( 4 5 2)

3 1 8 00

1 5 7 5 00

18 8 7 5 00

( 1 0 1)

20 1 3 2 00

10 2 9 0 00

1 4 7 0 00 1 5 7 5 00 3 8 2 2 00

CASH DEBIT

2 1 0 00

7 8 00

3 0 00

SALES DISCOUNT DEBIT

10 5 0 0 00

OTHER ACCOUNTS CREDIT POST. AMOUNT ACCOUNT NAME REF.

2 9 7 5 00

1 5 7 5 00

SALES CREDIT

PAGE

2 9 7 5 00

3 9 0 0 00

1 5 0 0 00

ACCOUNTS RECEIVABLE CREDIT

CASH RECEIPTS JOURNAL

PROBLEM 9.3A (continued) PAGE

GENERAL JOURNAL

DATE 2013

April

3 4 5 6 7 8

DESCRIPTION

POST. REF. 451 111

15 Sales Returns and Allowances Accounts Receivable/Music Warehouse Accepted a return of damaged merchandise, Credit Memo 105, sale originally made on IInvoice i 9313 9313, A April il 8 26 Notes Receivable Accounts Receivable/Country Music Store

DEBIT

CREDIT 1 2

8 0 0 00 8 0 0 00

✔

109 111 ✔

4 5 6 7 8

5 5 0 0 00 5 5 0 0 00

Received a 2-month, 12% note from Country Music Store to replace open account

10 11 12

9 10 11 12

GENERAL LEDGER (PARTIAL) ACCOUNT

ACCOUNT NO.

Cash

DATE DESCRIPTION 2013 April 1 Balance 30

POST.R EF. ✔ CR7

DEBIT

CREDIT

20 1 3 2 00

101

BALANCE DEBIT CREDIT 16 4 0 0 00 36 5 3 2 00

Chapter 9  315

PROBLEM 9.3A (continued) GENERAL LEDGER (PARTIAL) ACCOUNT

DESCRIPTION

DATE 2013 April 26

ACCOUNT

POST. REF.

DEBIT

J17

5 5 0 0 00

CREDIT

✔ J17 J17 S7 CR7

DEBIT

CREDIT

316  Chapter 9

DESCRIPTION

BALANCE DEBIT CREDIT

ACCOUNT NO. POST. REF. S7 CR7

111

21 0 0 0 00 8 0 0 00 20 2 0 0 00 5 5 0 0 00 14 7 0 0 00 28 7 0 0 00 43 4 0 0 00 18 8 7 5 00 24 5 2 5 00

Sales

DATE 2013 April 30 30

BALANCE CREDIT DEBIT

ACCOUNT NO. POST. REF.

109

5 5 0 0 00

Accounts Receivable

DESCRIPTION DATE 2013 April 1 Balance 15 26 30 30

ACCOUNT

ACCOUNT NO.

Notes Receivable

DEBIT

CREDIT 28 7 0 0 00 1 5 7 5 00

401

BALANCE DEBIT CREDIT 28 7 0 0 00 30 2 7 5 00

PROBLEM 9.3A (continued) GENERAL LEDGER (PARTIAL) ACCOUNT

DATE 2013 April 15

ACCOUNT

DATE 2013 April 30

ACCOUNT NO.

Sales Returns and Allowances

DESCRIPTION

POST. REF.

DEBIT

J17

8 0 0 00

CREDIT

BALANCE DEBIT CREDIT 8 0 0 00

ACCOUNT NO.

Sales Discounts

DESCRIPTION

POST. REF.

DEBIT

CR7

3 1 8 00

451

CREDIT

452

BALANCE DEBIT CREDIT 3 1 8 00

Unlimited Sounds Partial Income Statement Month Ended April 30, 2013 Revenue Sales Less: Sales Returns and Allowances Sales Discounts Net Sales

30 2 7 5 00 8 0 0 00 3 1 8 00

1 1 1 8 00 29 1 5 7 00

Analyze: Total sales on account before returns and allowances were $28,700.

Chapter 9  317

PROBLEM 9.4A PAGE

PURCHASES JOURNAL

DATE

PURCHASED FROM

2013 June 3 Perfect Fit Shoe Shop 12 Juanda’s Coat Shop 23 Motor Speedway 30 Jogging Shoes Store 30 Total

318  Chapter 9

INVOICE NUMBER

INVOICE DATE

TERMS

746 9922 1927 4713

5/30 6/9 6/20 6/26

2/10, n/30 n/30 2/10, n/30 1/10, n/30

POST. REF.

PURCHASES DR./ ACCOUNTS PAYABLE CR.

2 6 0 0 00 2 0 5 0 00 5 4 0 0 00 1 9 8 0 00 12 0 3 0 00 (50 1 / 2 05)

PROBLEM 9.4A (continued) PAGE

GENERAL JOURNAL

1 2 3

DATE DESCRIPTION 2013 June 5 Equipment Accounts Payable/Middleton Company

POST. REF. 131 205

DEBIT

CREDIT

4 5 0 0 00 4 5 0 0 00

1 2 3

✔ 4 5 6 7

Purchased new store equipment, Invoice 9067 dated June 4, payable in 30 days 18 Accounts Payable/Juanda’s Coat Shop

205

4 5 6 7

5 5 0 00 ✔

8 9 10 11 12 13 14 15 16

Purchases Returns and Allowances Returned defective goods, receiving Credit Memo 203, original purchase made on Invoice 9922, June 9 21 Equipment Notes Payable Issued 3-month, 12% note to Warren Company to purchase new store equipment

503

131 201

5 5 0 00

9 5 0 0 00 9 5 0 0 00

8 9 10 11 12 13 14 15 16

Chapter 9  319

Totals

8 1103 Perfect Fit Shoe Shop 15 1104 Monthly telephone bill 25 1105 Jaunda’s Coat Shop 28 1106 Motor Speedway 30 1107 Monthly salaries

POST. REF.

(X )

4 8 0 0 00

2 2 8 00

2 4 0 0 00

( 2 0 5)

614

617

611

AMOUNT

7 4 2 8 00

Salaries Expense

Telephone Expense

Rent Expense

ACCOUNT NAME

POST. REF.

OTHER ACCOUNTS DEBIT

10 7 2 0 00

1 2 5 0 00 5 4 0 0 00

2 6 0 0 00

1 4 7 0 00

ACCOUNTS PAYABLE DEBIT

CASH PAYMENTS JOURNAL

DATE DESCRIPTION 2013 June 1 1101 Monthly rent 7 1102 Leisure Wear Clothing Co.

CK. NO.

PROBLEM 9.4A (continued)

( 5 0 4)

1 6 0 00

1 0 8 00

5 2 00

PURCHASES DISCOUNT CREDIT

CASH CREDIT

( 1 0 1)

17 9 8 8 00

2 5 4 8 00 2 2 8 00 1 2 5 0 00 5 2 9 2 00 4 8 0 0 00

2 4 0 0 00 1 4 7 0 00

PAGE

PROBLEM 9.4A (continued) GENERAL LEDGER ACCOUNT

DATE DESCRIPTION 2013 June 1 Balance 30

ACCOUNT

DATE 2013 June 21

POST. REF.

DEBIT

✔ CP8

CREDIT

17 9 8 8 00

18 5 0 0 00 5 1 2 00

ACCOUNT NO. POST. REF. ✔ J20 J20

DEBIT

CREDIT

DESCRIPTION

4 5 0 0 00 9 5 0 0 00

BALANCE DEBIT CREDIT

ACCOUNT NO.

J20

DEBIT

131

56 0 0 0 00 60 5 0 0 00 70 0 0 0 00

Notes Payable POST. REF.

101

BALANCE DEBIT CREDIT

Equipment

DATE DESCRIPTION 2013 June 1 Balance 5 21

ACCOUNT

ACCOUNT NO.

Cash

CREDIT 9 5 0 0 00

201

BALANCE CREDIT DEBIT 9 5 0 0 00

Chapter 9  321

PROBLEM 9.4A (continued) GENERAL LEDGER ACCOUNT

DATE DESCRIPTION 2013 June 1 Balance 5 18 30 30

ACCOUNT

DESCRIPTION

✔ J20 J20 P8 CP8

DEBIT

CREDIT

DESCRIPTION

12 0 3 0 00 10 7 2 0 00

ACCOUNT NO.

DEBIT

12 0 3 0 00

POST. REF.

DEBIT

J20

CREDIT

322  Chapter 9

DESCRIPTION

BALANCE DEBIT CREDIT

ACCOUNT NO.

CREDIT 5 5 0 00

CP8

DEBIT

CREDIT 1 6 0 00

503

BALANCE DEBIT CREDIT 5 5 0 00

ACCOUNT NO.

POST. REF.

501

12 0 3 0 00

Purchases Discounts

DATE 2013 June 30

4 8 8 0 00 9 3 8 0 00 8 8 3 0 00 20 8 6 0 00 10 1 4 0 00

4 5 0 0 00

POST. REF.

205

BALANCE CREDIT DEBIT

5 5 0 00

Purchases Returns and Allowances

DATE 2013 June 18

ACCOUNT

POST. REF.

Purchases

DATE 2013 June 30

ACCOUNT

ACCOUNT NO.

Accounts Payable

504

BALANCE DEBIT CREDIT 1 6 0 00

PROBLEM 9.4A (continued) GENERAL LEDGER ACCOUNT

DATE 2013 June 1

ACCOUNT

DATE 2013 June 30

ACCOUNT

DATE 2013 June 15

ACCOUNT NO.

Rent Expense

DESCRIPTION

POST. REF.

DEBIT

CP8

2 4 0 0 00

CREDIT

ACCOUNT NO. POST. REF.

DEBIT

CP8

4 8 0 0 00

CREDIT

BALANCE DEBIT CREDIT

ACCOUNT NO. POST. REF.

DEBIT

CP8

2 2 8 00

614

4 8 0 0 00

Telephone Expense

DESCRIPTION

BALANCE DEBIT CREDIT 2 4 0 0 00

Salaries Expense

DESCRIPTION

611

CREDIT

617

BALANCE DEBIT CREDIT 2 2 8 00

The Hiker and Biker Outlet Center Partial Income Statement Month Ended June 30, 2013 Purchases Less: Purchases Returns and Allowances Purchases Discount Net Purchases

12 0 3 0 00 5 5 0 00 1 6 0 00

7 1 0 00 11 3 2 0 00

Analyze: Total liabilities at month-end were $19,640.

Chapter 9  323

PROBLEM 9.5A Vacation Paradise Bank Reconciliation Statement April 30, 2013 Balance on bank statement Additions: Deposit of April 30 in transit

3 6 3 9 00 2 0 0 00 3 8 3 9 00

Deductions for outstanding checks: Check 1214 of April 28 Check 1215 of April 30 T t l outstanding Total t t di checks h k Adjusted bank balance

1 8 00 1 5 00 3 3 00 3 8 0 6 00

Balance in books Deductions: NSF check Bank service charge Adjusted book balance

3 9 7 2 00 1 6 0 00 6 00

PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 April 30 Accounts Receivable/Doris Fisher 3 Cash 4 To record NSF check returned by bank 5 6 30 Miscellaneous Expense 7 Cash 8 To record bank charges 9

1 6 6 00 3 8 0 6 00

POST. REF.

DEBIT

CREDIT

1 6 0 00 1 6 0 00

6 00 6 00

1 2 3 4 5 6 7 8 9

Analyze: Outstanding checks are 1214 and 1215 totaling $33.00.

324  Chapter 9

PROBLEM 9.6A Sonoma Inn Bank Reconciliation Statement August 31, 2013 Balance on bank statement Additions: Deposit of August 30 in transit Deposit of August 31 in transit Deductions for outstanding checks: Check 712 Check h k 713 Check 716 Check 736 Check 739 Check 741 Total outstanding checks Adjusted bank balance Balance in books Additions: Note receivable collected by bank Interest on note receivable Deductions: NSF check Bank service charge Adjusted book balance

13 1 9 7 00 1 4 5 0 00 7 0 1 00

2 1 5 1 00 15 3 4 8 00

1 1 0 00 1 2 5 00 2 3 8 00 5 7 7 00 7 8 00 1 2 0 00 1 2 4 8 00 14 1 0 0 00 12 2 8 1 00 2 0 8 4 00 6 3 00

3 2 0 00 8 00

2 1 4 7 00 14 4 2 8 00

3 2 8 00 14 1 0 0 00

Chapter 9  325

PROBLEM 9.6A (continued) PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

DATE DESCRIPTION 2013 Aug. 31 Cash Notes Receivable Interest Income To record receipt of amount due on note plus interest collected by bank in August

POST. REF.

31 Accounts Receivable/Art Corts Cash To record NSF check returned by bank 31 Miscellaneous Expense Cash To record bank service charge for August

Analyze:

DEBIT

CREDIT

2 1 4 7 00 2 0 8 4 00 6 3 00

3 2 0 00 3 2 0 00

8 00 8 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Net effect on the accounting equation of the journal entries recorded as a result of the bank reconciliation was an increase in assets by $55 and an increase in equity by $55 ($63 - $8).

PROBLEM 9.7A Fontes Company Bank Reconciliation Statement April 30, 2013 Balance in books Additions: Check 2206 dated April 17 was recorded as $695; check was actually written for $14 Deductions: Check 2247 dated April 20 was recorded as $130; check was actually written for $164 Adjusted book balance

326  Chapter 9

20 2 7 5 00

6 8 1 00 20 9 5 6 00

3 4 00 20 9 2 2 00

PROBLEM 9.7A (continued) PAGE

GENERAL JOURNAL

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

DATE DESCRIPTION 2013 Apr. 30 Cash Supplies To correct error in entry for check 2206 of April 17

POST. REF.

30 Utilities Expense Cash To correct error in entry for check 2247 of April 20

Analyze:

DEBIT 6 8 1 00

3 4 00

CREDIT 1 2 6 8 1 00 3 4 5 6 7 3 4 00 8 9 10 11 12 13

Net income would have been overstated by $34.

Chapter 9  327

PROBLEM 9.8A Far West Imports Bank Reconciliation July 31, 2013 Balance on Bank Statement Additions: Deposit of July 31 in transit Check 1422 for $1,200 incorrectly charged as $1,280

28 7 6 0 00 9 0 0 00 8 0 00

Deductions for outstanding checks: Check 1429 Check 1430 Total outstanding checks Adjusted Bank Balance

1 2 4 9 00 1 4 1 00 1 3 9 0 00 28 3 5 0 00

Balance in Books Additions: EFT received on account from Foncier Ricard

14 2 4 2 00 14 4 0 0 00 28 6 4 2 00

Deductions: Check 1425 written for $90; incorrectly recorded as $60 Online payment on July 31 to CentralComm Adjusted Book Balance

3 0 00 2 6 2 00

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

31 Supplies Cash To correct error for Check 1425 31 Telephone Expense Cash To record online payment to CentralComm

2 9 2 00 28 3 5 0 00

PAGE

GENERAL JOURNAL

DATE DESCRIPTION 2013 July 31 Cash Accounts Receivable/Foncier Ricard EFT received on account from Foncier Ricard

9 8 0 00 29 7 4 0 00

POST. REF.

DEBIT

CREDIT

14 4 0 0 00 14 4 0 0 00

3 0 00 3 0 00

2 6 2 00 2 6 2 00

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

Analyze: Total expenses will increase by $262 as a result of the general journal entries recorded.

328  Chapter 9

June

2013

DESCRIPTION

30 Totals

27 Alex Holloway ( 1 1 1)

5 6 1 0 00

8 5 0 00

1 3 0 0 00

21 Cash sales

19 Nancy Matthews

1 2 0 0 00

5 0 0 00

1 7 6 0 00

POST. REF.

( 2 3 1)

4 0 8 00

1 4 4 00

1 2 8 00

1 3 6 00

ACCOUNTS SALES TAX RECEIVABLE PAYABLE CREDIT CREDIT

( 4 0 1)

5 1 0 0 00

1 8 0 0 00

1 6 0 0 00

1 7 0 0 00

SALES CREDIT

CASH RECEIPTS JOURNAL

18 Karen Cho

14 Cash sales

13 Additional investment

10 Linda Park

5 Refund for damaged supplies 7 Cash sales

Do It Yourself Copy 3 Center 4 Collected note and interest

DATE

PROBLEM 9.1B

791

Tina Kapoor, Capital

302

129

Interest Income Office Supplies

115

POST. REF.

Notes Receivable

ACCOUNT NAME

(X )

15 1 1 2 00

13 0 0 0 00

3 1 0 00

1 0 2 00

1 7 0 0 00

AMOUNT

OTHER ACCOUNTS CREDIT

( 1 0 2)

26 2 3 0 00

8 5 0 00

1 9 4 4 00

1 3 0 0 00

1 7 6 0 00

1 7 2 8 00

13 0 0 0 00

1 2 0 0 00

1 8 3 6 00

3 1 0 00

1 8 0 2 00

5 0 0 00

CASH DEBIT

PAGE

PROBLEM 9.1B (continued) GENERAL LEDGER ACCOUNT

ACCOUNT NO.

Cash POST. REF.

DATE DESCRIPTION 2013 June 1 Balance 30

ACCOUNT

26 2 3 0 00

ACCOUNT NO. POST. REF.

DEBIT

✔ CR14

CREDIT

5 6 1 0 00

8 4 0 0 00 2 7 9 0 00

ACCOUNT NO. POST. REF.

DEBIT

✔ CR14

330  Chapter 9

✔ CR14

DEBIT

115

CREDIT

BALANCE CREDIT DEBIT

1 7 0 0 00

1 7 0 0 00 –0–

ACCOUNT NO. POST. REF.

111

BALANCE CREDIT DEBIT

Office Supplies

DATE DESCRIPTION 2013 June 1 Balance 5

BALANCE DEBIT CREDIT 1 2 0 0 00 27 4 3 0 00

Notes Receivable

DATE DESCRIPTION 2013 June 1 Balance 4

ACCOUNT

CREDIT

Accounts Receivable

DATE DESCRIPTION 2013 June 1 Balance 30

ACCOUNT

✔ CR14

DEBIT

102

CREDIT

3 1 0 00

129

BALANCE DEBIT CREDIT 1 0 0 0 00 6 9 0 00

PROBLEM 9.1B (continued) GENERAL LEDGER ACCOUNT

DATE DESCRIPTION 2013 June 1 Balance 30

ACCOUNT

DATE 2013 June 30

ACCOUNT

DATE 2013 June 4

POST. REF.

DEBIT

✔ CR14

CREDIT

POST. REF.

DEBIT

✔ CR14

CREDIT

13 0 0 0 00

302

BALANCE DEBIT CREDIT 7 6 0 0 00 20 6 0 0 00

ACCOUNT NO. POST. REF.

DEBIT

CR14

CREDIT 5 1 0 0 00

401

BALANCE DEBIT CREDIT 5 1 0 0 00

ACCOUNT NO.

Interest Income

DESCRIPTION

4 0 0 00 8 0 8 00

ACCOUNT NO.

Sales

DESCRIPTION

231

BALANCE DEBIT CREDIT

4 0 8 00

Tina Kapoor, Capital

DATE DESCRIPTION 2013 June 1 Balance 13

ACCOUNT

ACCOUNT NO.

Sales Tax Payable

POST. REF. CR14

DEBIT

CREDIT 1 0 2 00

791

BALANCE DEBIT CREDIT 1 0 2 00

Analyze: Total assets for The Book Peddler at June 30, 2013 are $30,910 ($27,430 + $2,790 + $690).

Chapter 9  331

Sept.

2013

1 5 0 0 00

9 405 Store equipment

302

Miscellaneous Expense Fred Lynn, Drawing

Totals

614

Delivery Expense

30 414 Replenish petty cash

511

Salaries Expense

9 8 5 7 00 (X)

( 2 0 5)

1 0 00

2 9 00

2 2 00

2 5 0 0 00

1 5 0 0 00

4 0 00

1 0 0 0 00

1 8 7 00

4 2 5 00

1 0 0 0 00

1 0 0 00

1 3 4 4 00 1 7 0 0 00

AMOUNT

4 5 6 0 00

623

Fred Lynn, Drawing

302

611

201

30 413 Monthly salaries

1 2 4 0 00

Interest Expense

Notes Payable

626

451

141

105

231 620

28 412 Personal withdrawal

26 411 Atlantic Ceramics

and interest

24 410 Paid promissory note

8 5 0 00

Telephone Expense

18 408 Monthly telephone bill

21 409 African Imports

Sales Returns & Allowances

9 7 0 00

14 407 Cash refund

Equipment

Petty Cash Fund

5 404 Elegant Glassware

4 403 Established petty cash

ACCOUNT NAME

POST. REF.

OTHER ACCOUNTS DEBIT

Sales Tax Payable Rent Expense

POST. REF.

ACCOUNTS PAYABLE DEBIT

CASH PAYMENTS JOURNAL

1 401 Tax remittance 2 402 Monthly rent

DESCRIPTION

13 406 Taylor Company

DATE

CK. NO.

PROBLEM 9.2B

( 5 0 4)

4 7 00

1 7 00

3 0 00

PURCHASES DISCOUNT CREDIT

( 1 0 1)

14 3 7 0 00

6 1 00

2 5 0 0 00

1 5 0 0 00

1 2 4 0 00

1 0 4 0 00

8 3 3 00

1 8 7 00

4 2 5 00

9 7 0 00

1 0 0 0 00

1 4 7 0 00

1 0 0 00

1 3 4 4 00 1 7 0 0 00

CASH CREDIT

PAGE

Establish fund Delivery service Bought office supplies Personal withdrawal Bought stamps Delivery service

— 1 2 3 4 5

—

DATE 2013 Sept. 4 6 11 16 23 27

Carried forward

Replenish fund

Balance on hand

Totals

DESCRIPTION

VOU. NO.

PROBLEM 9.2B (continued)

1 0 0 00

6 1 00

3 9 00

1 0 0 00

RECEIPTS

1 0 0 00

3 9 00

6 1 00

1 2 00 1 6 00 1 0 00 1 3 00 1 0 00

PAYMENTS

2 2 00

1 0 00

1 2 00

DELIVERY EXPENSE DEBIT

PETTY CASH ANALYSIS SHEET

2 9 00

1 3 00

1 6 00

MISC. EXPENSE DEBIT

Fred Lynn, Drawing

1 0 00

OTHER ACCOUNTS DEBIT ACCOUNT NAME AMOUNT

DISTRIBUTION OF PAYMENTS

PAGE

PROBLEM 9.2B (continued) GENERAL LEDGER ACCOUNT

DATE DESCRIPTION 2013 Sept. 1 Balance 30

ACCOUNT

DESCRIPTION

DEBIT

✔ CP12

CREDIT

14 3 7 0 00

21 5 3 0 00 7 1 6 0 00

ACCOUNT NO. POST. REF.

DEBIT

CP12

1 0 0 00

CREDIT

✔ CP12

DEBIT

1 0 0 00

CREDIT

DATE DESCRIPTION 2013 Sept. 1 Balance 24

1 0 0 0 00

334  Chapter 9

BALANCE CREDIT DEBIT

ACCOUNT NO.

✔ CP12

DEBIT

1 0 0 0 00

141

43 0 0 0 00 44 0 0 0 00

Notes Payable POST. REF.

105

BALANCE DEBIT CREDIT

ACCOUNT NO. POST. REF.

101

BALANCE DEBIT CREDIT

Equipment

DATE DESCRIPTION 2013 Sept. 1 Balance 9

ACCOUNT

POST. REF.

Petty Cash Fund

DATE 2013 Sept. 4

ACCOUNT

ACCOUNT NO.

Cash

CREDIT

201

BALANCE CREDIT DEBIT 1 0 0 0 00 –0–

PROBLEM 9.2B (continued) GENERAL LEDGER ACCOUNT

DATE DESCRIPTION 2013 Sept. 1 Balance 30

ACCOUNT

DATE 2013 Sept. 28 30

ACCOUNT

DATE 2013 Sept. 14

POST. REF. ✔ CP12

DEBIT

CREDIT

4 5 6 0 00

✔ CP12

DEBIT

CREDIT

ACCOUNT NO.

DEBIT

CP12 CP12

1 5 0 0 00 1 0 00

CREDIT

BALANCE DEBIT CREDIT

ACCOUNT NO.

POST. REF.

DEBIT

CP12

4 2 5 00

302

1 5 0 0 00 1 5 1 0 00

Sales Returns and Allowances

DESCRIPTION

BALANCE DEBIT CREDIT

1 3 4 4 00

POST. REF.

231

1 3 4 4 00 –0–

Fred Lynn, Drawing

DESCRIPTION

BALANCE DEBIT CREDIT

ACCOUNT NO. POST. REF.

205

9 8 0 0 00 5 2 4 0 00

Sales Tax Payable

DATE DESCRIPTION 2013 Sept. 1 Balance 1

ACCOUNT

ACCOUNT NO.

Accounts Payable

CREDIT

451

BALANCE CREDIT DEBIT 4 2 5 00

Chapter 9  335

PROBLEM 9.2B (continued) GENERAL LEDGER ACCOUNT

DATE 2013 Sept. 30

ACCOUNT

DESCRIPTION

DEBIT

CREDIT

POST. REF. CP12

DEBIT

CREDIT

2 2 00

DESCRIPTION

CP12

DEBIT

CREDIT

4 0 00

DESCRIPTION

BALANCE CREDIT DEBIT

ACCOUNT NO. POST. REF. CP12

DEBIT 2 9 00

611

4 0 00

Miscellaneous Expense

336  Chapter 9

BALANCE DEBIT CREDIT

ACCOUNT NO. POST. REF.

511

2 2 00

Interest Expense

DATE 2013 Sept. 30

4 7 00

ACCOUNT NO.

DESCRIPTION

504

BALANCE DEBIT CREDIT

4 7 00

Delivery Expense

DATE 2013 Sept. 24

ACCOUNT

POST. REF. CP12

DATE 2013 Sept. 30

ACCOUNT

ACCOUNT NO.

Purchases Discounts

CREDIT

614

BALANCE DEBIT CREDIT 2 9 00

PROBLEM 9.2B (continued) GENERAL LEDGER ACCOUNT

DATE 2013 Sept. 2

ACCOUNT

DATE 2013 Sept. 30

ACCOUNT

DATE 2013 Sept. 18

ACCOUNT NO.

Rent Expense

DESCRIPTION

POST. REF.

DEBIT

CP12

1 7 0 0 00

CREDIT

ACCOUNT NO. POST. REF.

DEBIT

CP12

2 5 0 0 00

CREDIT

BALANCE DEBIT CREDIT

ACCOUNT NO. POST. REF.

DEBIT

CP12

1 8 7 00

623

2 5 0 0 00

Telephone Expense

DESCRIPTION

BALANCE DEBIT CREDIT 1 7 0 0 00

Salaries Expense

DESCRIPTION

620

CREDIT

626

BALANCE CREDIT DEBIT 1 8 7 00

Analyze: Total debits made to general ledger liability accounts during the month of September were $6,904.

Chapter 9  337

Aug.

DATE 2013 A/C REC. CR

7 0 5 0 00 ( 4 0 1)

18 5 5 0 00 6 0 0 0 00 50 6 0 0 00 ( 1 1 1)

31 Totals

7 0 5 0 00

SALES CREDIT

16 Branch Construction Co. 24 Garcia Homes Center

14 Cash Sales

6 6 0 0 00

POST. REF.

CASH RECEIPTS JOURNAL

(1 1 1/ 4 01) 7

62 2 9 0 00 6

19 4 5 0 00

DESCRIPTION

Total

17 4 4 0 00 5

18 5 5 0 00 3 6 8 5 0 00 4

Branch Construction Co Contemporary Homes Denton County Builders

19 4 5 0 00 2

1 Jamison Builders

ACCOUNTS RECEIVABLE DR./ SALES CR.

1 Construction Supply Co.

2981

2979 2980

2978

CUSTOMER’S NAME

POST. REF.

PAGE

11 Jamison Builders

7 22

Aug.

3 4

DATE 2013

SALES JOURNAL

INVOICE NO.

PROBLEM 9.3B

A/C NAME

POST. REF.

AMT

OTHER ACCOUNTS CREDIT

( 4 5 2)

8 9 2 00

3 7 1 00

3 8 9 00

1 3 2 00

SALES DIS. DR

PAGE

( 1 0 1)

56 7 5 8 00

18 1 7 9 00 6 0 0 0 00

7 0 5 0 00

19 0 6 1 00

6 4 6 8 00

CASH DR

PROBLEM 9.3B (continued) PAGE

GENERAL JOURNAL

DATE 2013

Aug.

3 4 5 6 7 8

DESCRIPTION 4 Notes Receivable Accounts Receivable/Davis Custom Homes Received a 3-month, 12% note from Davis Custom Homes to replace open account

26 Sales Returns and Allowances Accounts Receivable/Contemporary Homes

9 10 11 12

POST. REF.

DEBIT

CREDIT

109 12 0 0 0 00 111 ✔ 12 0 0 0 00

451 111 ✔

5 5 0 00 5 5 0 00

Accepted a return of damaged merchandise, Credit Memo 101; sale originally made on Invoice 2980, August 22

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

GENERAL LEDGER ACCOUNT

DATE DESCRIPTION 2013 Aug. 1 Balance 31

ACCOUNT

DATE 2013 Aug. 4

ACCOUNT NO.

Cash POST.R EF. ✔ CR10

DEBIT

CREDIT

ACCOUNT NO.

Notes Receivable

DESCRIPTION

BALANCE DEBIT CREDIT 15 0 7 0 00 71 8 2 8 00

56 7 5 8 00

POST.R EF.

DEBIT

J24

12 0 0 0 00

101

CREDIT

109

BALANCE DEBIT CREDIT 12 0 0 0 00

Chapter 9  339

PROBLEM 9.3B (continued) GENERAL LEDGER ACCOUNT Accounts Receivable

DATE DESCRIPTION 2013 Aug. 1 Balance 4 26 31 31

ACCOUNT NO. POST. REF. ✔ J24 J24 S10 CR10

DEBIT

CREDIT

DATE 2013 Aug. 31 31

DESCRIPTION

ACCOUNT NO.

DEBIT

S10 CR10

DESCRIPTION

CREDIT 62 2 9 0 00 7 0 5 0 00

62 2 9 0 00 69 3 4 0 00

ACCOUNT NO.

POST. REF.

DEBIT

J24

5 5 0 00

CREDIT

DATE 2013 Aug. 31

340  Chapter 9

DESCRIPTION

BALANCE DEBIT CREDIT

ACCOUNT NO.

DEBIT

CR10

8 9 2 00

451

5 5 0 00

ACCOUNT Sales Discounts POST. REF.

401

BALANCE DEBIT CREDIT

ACCOUNT Sales Returns and Allowances

DATE 2013 Aug. 26

BALANCE DEBIT CREDIT

22 5 0 7 00 12 0 0 0 00 10 5 0 7 00 5 5 0 00 9 9 5 7 00 62 2 9 0 00 72 2 4 7 00 50 6 0 0 00 21 6 4 7 00

ACCOUNT Sales POST. REF.

111

CREDIT

452

BALANCE DEBIT CREDIT 8 9 2 00

PROBLEM 9.3B (continued) Royal Construction Company Partial Income Statement Month Ended August 31, 2013 Revenue Sales Less: Sales Returns and Allowances

69 3 4 0 00 5 5 0 00

Sales Discounts

8 9 2 00

1 4 4 2 00

Net Sales

67 8 9 8 00

Analyze: Total sales on account in August 2010 were $61,740.

PROBLEM 9.4B PAGE

PURCHASES JOURNAL

PURCHASED FROM

Dec.

PURCHASES DR./ ACCOUNTS PAYABLE

INVOICE NO.

INVOICE DATE

TERMS

1 Alexis Products for Homes

6559

11/28

2/10, n/30

10 Baxter Corporation

5119

12/7

2/10, n/30

9 2 0 0 00

18 Household Appliance Center

7238

12/16

3/10, n/30

12 4 0 0 00

22 Zale Corporation

3161

12/19

n/30

5 8 0 0 00

DATE 2013

31 Total

POST. REF.

6 6 0 0 00

34 0 0 0 00 (50 1 / 2 05)

Chapter 9  341

PROBLEM 9.4B (continued) PAGE

GENERAL JOURNAL

DATE 1 2013

DESCRIPTION

DEBIT

131 201

14 0 0 0 00

131 205 ✔

6 0 0 0 00

14 0 0 0 00

6 0 0 0 00

Purchased new store equipment, Inv. 536, dated December 17, payable in 45 days 28 Accounts Payable/Zale Corporation

13 14 15 16 17

342  Chapter 9

CREDIT 1

2 Dec. 4 Equipment 3 Notes Payable 4 Issued 2-month, 10% note to Kesterson 5 Company to purchase new store equipment 6 7 20 Equipment 8 Accounts Payable/Safety Security Systems, Inc. 9 10 11 12

POST. REF.

Purchases Returns and Allowances Returned damaged goods, receiving Credit Memo 201; original purchase made on Invoice 3161, December 19

205 ✔ 503

1 0 5 0 00

2 3 4 5 6 7 8 9 10 11 12

1 0 5 0 00 13 14 15 16 17

PROBLEM 9.4B (continued) GENERAL LEDGER ACCOUNT

DATE DESCRIPTION 2013 Dec. 1 Balance 31

ACCOUNT

POST. REF.

DEBIT

✔ CP12

CREDIT

41 4 7 7 00

POST. REF. ✔ J30 J30

DEBIT

CREDIT

DESCRIPTION DATE 2013 Dec. 4

60 7 0 0 00 19 2 2 3 00

14 0 0 0 00 6 0 0 0 00

BALANCE DEBIT CREDIT

ACCOUNT NO.

J30

DEBIT

131

68 0 0 0 00 82 0 0 0 00 88 0 0 0 00

Notes Payable POST. REF.

101

BALANCE DEBIT CREDIT

ACCOUNT NO.

Equipment

DATE DESCRIPTION 2013 Dec. 1 Balance 4 20

ACCOUNT

ACCOUNT NO.

Cash

CREDIT 14 0 0 0 00

201

BALANCE CREDIT DEBIT 14 0 0 0 00

Chapter 9  343

PROBLEM 9.4B (continued) GENERAL LEDGER ACCOUNT

DATE DESCRIPTION 2013 Dec. 1 Balance 20 28 31 31

ACCOUNT

✔ J30 J30 P12 CP12

DEBIT

CREDIT

34 0 0 0 00 32 4 0 0 00

ACCOUNT NO.

DEBIT

P12

34 0 0 0 00

CREDIT

POST. REF.

DEBIT

J30

344  Chapter 9

BALANCE DEBIT CREDIT

ACCOUNT NO.

CREDIT 1 0 5 0 00

CP12

DEBIT

CREDIT 6 8 8 00

503

BALANCE DEBIT CREDIT 1 0 5 0 00

ACCOUNT NO.

POST. REF.

501

34 0 0 0 00

Purchases Discounts

DATE DESCRIPTION 2013 Dec. 31

7 6 0 0 00 13 6 0 0 00 12 5 5 0 00 46 5 5 0 00 14 1 5 0 00

6 0 0 0 00

POST. REF.

205

BALANCE CREDIT DEBIT

1 0 5 0 00

Purchases Returns and Allowances

DATE DESCRIPTION 2013 Dec. 28

ACCOUNT

POST. REF.

Purchases

DATE DESCRIPTION 2013 Dec. 31

ACCOUNT

ACCOUNT NO.

Accounts Payable

504

BALANCE DEBIT CREDIT 6 8 8 00

PROBLEM 9.4B (continued) GENERAL LEDGER ACCOUNT Rent Expense

DATE 2013 Dec. 2

DESCRIPTION

ACCOUNT NO. POST. REF.

DEBIT

CP12

3 0 0 0 00

CREDIT

DESCRIPTION

ACCOUNT NO. POST. REF.

DEBIT

CP12

6 5 0 0 00

CREDIT

DESCRIPTION

BALANCE DEBIT CREDIT

ACCOUNT NO. POST. REF.

DEBIT

CP12

2 6 5 00

614

6 5 0 0 00

ACCOUNT Telephone Expense

DATE 2013 Dec. 13

BALANCE DEBIT CREDIT 3 0 0 0 00

ACCOUNT Salaries Expense

DATE 2013 Dec. 31

611

CREDIT

617

BALANCE DEBIT CREDIT 2 6 5 00

Contemporary Appliance Center Partial Income Statement Month Ended December 31, 2013 Purchases Less: Purchases Returns and Allowances Purchases Discount Net Purchases

34 0 0 0 00 1 0 5 0 00 6 8 8 00

1 7 3 8 00 32 2 6 2 00

Analyze: Business expense transactions took place on December 2, 13, and 31.

Chapter 9  345

Dec.

2013

2 1801 Monthly rent 6 1802 Alexis Products for Homes

DESCRIPTION

Totals

(X)

6 5 0 0 00

2 6 5 00

3 0 0 0 00

( 2 0 5)

614

617

611

9 7 6 5 00

Salaries Expense

Telephone Expense

Rent Expense

OTHER ACCOUNTS DEBIT POST. ACCOUNT NAME REF. AMOUNT

32 4 0 0 00

24 1806 Household Appliance

31 1807 Monthly salaries

4 2 0 0 00 12 4 0 0 00

21 1805 Chain Lighting and Appliances

6 6 0 0 00

ACCOUNTS PAYABLE DEBIT

9 2 0 0 00

POST. REF.

CASH PAYMENTS JOURNAL

15 1804 Baxter Corporation

13 1803 Monthly telephone bill

DATE

CK. NO.

PROBLEM 9.4B (continued)

( 5 0 4)

6 8 8 00

3 7 2 00

1 8 4 00

1 3 2 00

PURCHASES DISCOUNT CREDIT

PAGE

( 1 0 1)

41 4 7 7 00

6 5 0 0 00

12 0 2 8 00

4 2 0 0 00

9 0 1 6 00

2 6 5 00

3 0 0 0 00 6 4 6 8 00

CASH CREDIT

PROBLEM 9.5B Peter Chen, Attorney-at-Law Bank Reconciliation Statement September 30, 2013 Balance on bank statement Additions: Deposit of September 28 in transit

7 3 2 3 50 9 0 0 00 8 2 2 3 50

Deductions for outstanding checks: Check 108 of September 15 Check 112 of September 27 Total outstanding checks Adjusted bank balance

7 5 00 1 4 0 00 2 1 5 00 8 0 0 8 50

Balance in books Deductions: NSF check Bank service charge Adjusted book balance

8 1 3 4 00 1 1 8 00 7 50

PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7 8

DATE DESCRIPTION 2013 Sept. 30 Accounts Receivable/Annette Cole Cash To record NSF check returned by bank 30 Miscellaneous Expense Cash To record bank service charge for September

1 2 5 50 8 0 0 8 50

POST. REF.

DEBIT 1 1 8 00

7 50

CREDIT 1 2 1 1 8 00 3 4 5 7 50 6 7 8

Analyze: Seven checks were paid.

Chapter 9  347

PROBLEM 9.6B Stacked Stone Masonry Bank Reconciliation Statement July 31, 2013 Balance on bank statement Additions: Deposit of July 31 in transit

8 4 4 2 03 9 9 4 07 9 4 3 6 10

Deductions for outstanding checks: Check 533 Check 535 Check 537 Total outstanding checks Adjusted bank balance

1 4 8 95 1 2 2 50 4 2 5 40 6 9 6 85 8 7 3 9 25

Balance in books Additions: Note receivable collected by bank Interest on note receivable Deductions: NSF check Bank service charge Adjusted book balance

348  Chapter 9

7 3 1 8 59 1 5 5 0 00 3 0 00

1 4 5 00 1 4 34

1 5 8 0 00 8 8 9 8 59

1 5 9 34 8 7 3 9 25

PROBLEM 9.6B (continued) PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 July 31 Cash Notes Receivable 3 Interest Income 4 To record receipt of amount due on note 5 plus interest collected 6 7 8 31 Accounts Receivable/Robert Briggs Cash 9 To record NSF check returned by bank 10 11 12 31 Miscellaneous Expense 13 Cash 14 To record bank service charge for July 15

POST. REF.

DEBIT

CREDIT

1 5 8 0 00 1 5 5 0 00 3 0 00

1 4 5 00 1 4 5 00

1 4 34 1 4 34

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Analyze: After all journal entries have been posted, the balance in the Cash account is $8,739.25.

PROBLEM 9.7B Big Guy Movers Bank Reconciliation Statement February 28, 2013 Balance in books Additions: Check 1301 dated February 18 was recorded as $361; check was actually written for $316 Deductions: Check 1322 dated February 24 was recorded as $404; check was actually written for $440 Adjusted book balance

19 4 5 1 00

4 5 00 19 4 9 6 00

3 6 00 19 4 6 0 00

Chapter 9  349

PROBLEM 9.7B (continued) PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10

DATE DESCRIPTION 2013 Feb. 28 Cash Hauling Expense To correct error in entry for check 1301 of February 18

POST. REF.

28 Telephone Expense Cash To correct error in entry for check 1322 of February 24

DEBIT 4 5 00

3 6 00

CREDIT 1 2 4 5 00 3 4 5 6 7 3 6 00 8 9 10

Analyze: The net change to the Cash account was an increase of $9. PROBLEM 9.8B Euro Specialty Products Bank Reconciliation November 30, 2013 Balance on Bank Statement Additions: Deposit of November 30 in transit Deductions: Deductions for outstanding checks: Check 4129 Check 4130 Total outstanding checks Check 4122 written for $1,200, paid by bank as $1,000 Adjusted Bank Balance Balance in Books Additions: EFT received on account from Cantori Cucine Check 4125 written for $890; incorrectly recorded as $980 Deductions: Online payment on November 30 to ClearComm Adjusted book balance

350  Chapter 9

29 7 3 4 00 1 2 2 4 00 30 9 5 8 00

1 3 2 2 00 2 3 9 00 1 5 6 1 00 2 0 0 00 29 1 9 7 00 16 6 3 0 00 12 8 0 0 00 9 0 00 12 8 9 0 00 29 5 2 0 00 3 2 3 00 29 1 9 7 00

PROBLEM 9.8B (continued) PAGE

GENERAL JOURNAL

DATE 1 2013

POST. REF.

DESCRIPTION

DEBIT

CREDIT 1

2 Nov. 30 Cash 3 Accounts Receivable/Cantori Cucine 4 EFT received on account from Cantori 5 Cucine 6 7 30 Cash 8 Equipment 9 To correct error for Check 4125 10 11 30 Telephone Expense 12 Cash 13 To record online payment to ClearComm 14

12 8 0 0 00

2 12 8 0 0 00 3 4 5 6 9 0 00 7 9 0 00 8 9 10 3 2 3 00 11 3 2 3 00 12 13 14

Analyze: The journal entries recorded as a result of the bank reconciliation decreased total assets by $323.

CRITICAL THINKING PROBLEM 9.1 PAGE

SALES JOURNAL

DATE 1 2013 2 Sept. 3 3 8 4 19 5 29 6 7

SALES SLIP NO. 1850 1851 1852 1853

CUSTOMER’S NAME Pam Lawrence Henry Tolliver Rachel Carter Mesia Davis Totals

POST. REF. ✔ ✔ ✔ ✔

ACCOUNTS SALES TAX RECEIVABLE PAYABLE DEBIT CREDIT

SALES CREDIT

7 0 2 00 1 0 2 6 00 2 7 0 00 1 2 9 6 00

5 2 00 7 6 00 2 0 00 9 6 00

6 5 0 00 9 5 0 00 2 5 0 00 1 2 0 0 00

1 2 3 4 5

3 2 9 4 00

2 4 4 00

3 0 5 0 00

( 1 1 1)

( 2 3 1)

( 4 0 1)

Chapter 9  351

CRITICAL THINKING PROBLEM 9.1 (continued) PAGE

PURCHASES JOURNAL

DATE 2013 Sept.

PURCHASED FROM

Reed Millings 6 Company 14 Wells Products 21 Nelson Craft Products 27 Booker, Inc. 30 Totals

352  Chapter 9

INVOICE INVOICE NUMBER DATE

TERMS

POST. REF.

ACCOUNTS PAYABLE

PURCHASES FREIGHT-IN DEBIT DEBIT

827

9/3

2/10, n/30

✔

4 4 5 0 00

9453 677

9/11 9/18

n/30 2/10, n/30

✔ ✔

3 7 8 4 00 2 8 0 0 00

3 7 0 0 00 2 8 0 0 00

1368

9/23

n/45

✔

8 4 00

4 3 2 8 00

4 2 0 0 00

1 2 8 00

15 3 6 2 00

15 1 5 0 00

2 1 2 00

( 2 0 5)

( 5 0 1)

( 5 0 2)

CRITICAL THINKING PROBLEM 9.1 (continued) PAGE

GENERAL JOURNAL

DATE 1 2013 2 Sept. 8 Supplies 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

DESCRIPTION

Accounts Payable/Rocker Company Bought store supplies, Invoice 4204 dated September 6, net amount due in 30 days 11 Notes Receivable Accounts Receivable/Jason Williams Received a 2-month, 10% note from Jason Williams to replace open account 17 Accounts Payable/McNight Corporation

POST. REF. 121 205 ✔

1 2

3 7 0 00 3 7 0 00

205

5 5 0 0 00

✔ 201

451 231 111 ✔

5 0 00 4 00

Granted allowance for damaged lamps, Credit Memo 151; original sale made on Sales Slip 1852, September 19 24 Accounts Payable/Nelson Craft Products

CREDIT

109 2 1 0 0 00 111 2 1 0 0 00 ✔

Notes Payable Issued a 2-month, 12% note to McNight Corp. to replace open account 23 Sales Returns and Allowances Sales Tax Payable Accounts Receivable/Rachel Carter

DEBIT

205

Purchases Returns and Allowances Returned a damaged rug, receiving Credit Memo 110; original purchase made on Invoice 677, September 18

✔ 503

3 0 0 00

3 4 5 6 7 8 9 10 11 12

5 5 0 0 00 13 14 15 16 17 18 5 4 00 19 20 21 22 23 24 3 0 0 00 25 26 27 28 29

Chapter 9  353

Sept.

2013

30 Totals

Sergio Cortez, Capital

ACCOUNT NAME

( 2 3 1)

( 1 1 1)

( 4 0 1)

1 4 5 2 00 18 1 5 0 00

1 5 0 0 00 Cash Short or Over

4 8 0 0 00

4 1 0 0 00 Cash Short or Over

3 8 5 0 00

611

301

POST. REF.

(X )

14 9 8 1

1 0

( 9 00)

( 2 0 00)

15 0 0 0

AMOUNT

OTHER ACCOUNTS CREDIT

3 9 0 0 00 Cash Short or Over

SALES CREDIT

4 0 4 0 00

1 2 0 00

30 Cash sales

1 7 3 0 00 3 8 4 00

✔

3 2 8 00

27 Cash sales

24 Robert Kent

20 Cash sales

1 2 6 0 00

3 0 8 00

15 Mesia Davis ✔

1 0 5 0 00

13 Cash sales

✔ 3 1 2 00

1 David Prater 5 Additional investment

DESCRIPTION

6 Cash sales

DATE

ACCOUNTS SALES TAX POST. RECEIVABLE PAYABLE REF. CREDIT CREDIT

CASH RECEIPTS JOURNAL

CRITICAL THINKING PROBLEM 9.1 (continued) 12

( 1 0 1)

38 6 2 3 00

1 6 3 0 00

5 1 8 4 00

1 7 3 0 00

4 4 1 9 00

1 2 6 0 00

4 1 5 8 00

4 1 9 2 00

15 0 0 0 00

1 0 5 0 00

CASH DEBIT

PAGE

Totals

DATE DESCRIPTION 2013 Sept. 1 1401 Sadler Floor Coverings 2 1402 Monthly rent 6 1403 Freight charge 11 1404 Reed Millings 22 1405 Utility bill 25 1406 Cash purchase 26 1407 Nelson Craft Products 28 1408 Wells Products 30 1409 Monthly salaries

CK. NO.

Salaries Expense

617

619 501

6 8 0 0 00

3 0 6 00 3 6 0 0 00

2 5 0 0 00 1 5 8 00

(X )

2 5 0 0 00 2 1 2 0 00

✔ ✔

Utilities Expense Purchases

614 502

13 3 6 4 00

4 4 5 0 00

✔

Rent Expense Freight-In

AMOUNT

( 2 0 5)

1 9 4 0 00

✔

ACCOUNT NAME

POST. REF.

11 0 1 0 00

ACCOUNTS PAYABLE DEBIT

POST. REF.

OTHER ACCOUNTS DEBIT

CASH PAYMENTS JOURNAL

CRITICAL THINKING PROBLEM 9.1 (continued)

( 5 0 4)

1 3 9 00

5 0 00

8 9 00

PURCHASES DISCOUNT CREDIT

1 9 4 0 00 2 5 0 0 00 1 5 8 00 4 3 6 1 00 3 0 6 00 3 6 0 0 00 2 4 5 0 00 2 1 2 0 00 6 8 0 0 00

CASH CREDIT

( 1 0 1)

24 2 3 5 00

PAGE

CRITICAL THINKING PROBLEM 9.1 (continued) GENERAL LEDGER ACCOUNT

DATE DESCRIPTION 2013 Sept. 1 Balance 30 30

ACCOUNT

POST. REF. ✔ CR12 CP12

DEBIT

CREDIT

DESCRIPTION

356  Chapter 9

BALANCE DEBIT CREDIT

ACCOUNT NO. POST. REF.

DEBIT

J32

2 1 0 0 00

CREDIT

BALANCE DEBIT CREDIT

ACCOUNT NO. POST. REF. ✔ J32 J32 S12 CR12

DEBIT

109

2 1 0 0 00

Accounts Receivable

DATE DESCRIPTION 2013 Sept. 1 Balance 11 23 30 30

101

18 9 4 5 00 38 6 2 3 00 57 5 6 8 00 24 2 3 5 00 33 3 3 3 00

Notes Receivable

DATE 2013 Sept. 11

ACCOUNT

ACCOUNT NO.

Cash

CREDIT

2 1 0 0 00 5 4 00 3 2 9 4 00 4 0 4 0 00

111

BALANCE DEBIT CREDIT 6 1 4 0 00 4 0 4 0 00 3 9 8 6 00 7 2 8 0 00 3 2 4 0 00

CRITICAL THINKING PROBLEM 9.1 (continued) GENERAL LEDGER ACCOUNT

DATE DESCRIPTION 2013 Sept. 1 Balance 8

ACCOUNT

DATE 2013 Sept. 17

ACCOUNT

POST. REF.

DEBIT

✔ J32

BALANCE DEBIT CREDIT

3 7 0 00

7 1 0 00 1 0 8 0 00

ACCOUNT NO. POST. REF.

DEBIT

CREDIT

DEBIT

J32

BALANCE CREDIT DEBIT

5 5 0 0 00

ACCOUNT NO. POST. REF. ✔ J32 J32 J32 P12 CP12

DEBIT

201

CREDIT

Accounts Payable

DATE DESCRIPTION 2013 Sept. 1 Balance 8 17 24 30 30

BALANCE DEBIT CREDIT

ACCOUNT NO. POST. REF.

131

29 3 6 5 00

✔

Notes Payable

DESCRIPTION

121

CREDIT

Inventory

DATE DESCRIPTION 2013 Sept. 1 Balance

ACCOUNT

ACCOUNT NO.

Supplies

CREDIT

3 7 0 00 5 5 0 0 00 3 0 0 00 15 3 6 2 00 11 0 1 0 00

205

BALANCE DEBIT CREDIT 9 5 6 0 00 9 9 3 0 00 4 4 3 0 00 4 1 3 0 00 19 4 9 2 00 8 4 8 2 00

Chapter 9  357

CRITICAL THINKING PROBLEM 9.1 (continued) GENERAL LEDGER ACCOUNT

DATE 2013 Sept. 23 30 30

ACCOUNT

DESCRIPTION

DATE 2013 Sept. 30 30

ACCOUNT

DATE 2013 Sept. 23

POST. REF. J32 S12 CR12

DEBIT

CREDIT

4 00

POST. REF.

4 00

✔ CR 12

CREDIT

15 0 0 0 00

45 6 0 0 00 60 6 0 0 00

ACCOUNT NO. POST. REF.

DEBIT

S12 CR12

DESCRIPTION

CREDIT 3 0 5 0 00 18 1 5 0 00

3 0 5 0 00 21 2 0 0 00

ACCOUNT NO.

358  Chapter 9

J32

DEBIT 5 0 00

401

BALANCE CREDIT DEBIT

Sales Returns and Allowances POST. REF.

301

BALANCE CREDIT DEBIT

Sales

DESCRIPTION

2 4 0 00 1 6 9 2 00

ACCOUNT NO.

DEBIT

231

BALANCE DEBIT CREDIT

2 4 4 00 1 4 5 2 00

Sergio Cortez, Capital

DATE DESCRIPTION 2013 Sept. 1 Balance 5

ACCOUNT

ACCOUNT NO.

Sales Tax Payable

CREDIT

451

BALANCE DEBIT CREDIT 5 0 00

CRITICAL THINKING PROBLEM 9.1 (continued) GENERAL LEDGER ACCOUNT

DATE DESCRIPTION 2013 Sept. 25 Balance 30

ACCOUNT

DATE 2013 Sept. 6 30

ACCOUNT

DATE 2013 Sept. 24

ACCOUNT

DATE 2013 Sept. 30

ACCOUNT NO.

Purchases POST. REF.

DEBIT

CP12 P12

3 6 0 0 00 15 1 5 0 00

CREDIT

DESCRIPTION

ACCOUNT NO.

DEBIT

CP12 P12

1 5 8 00 2 1 2 00

CREDIT

POST. REF. J32

CREDIT 3 0 0 00

3 0 0 00

ACCOUNT NO. POST. REF. CP12

DEBIT

503

BALANCE DEBIT CREDIT

Purchases Discounts

DESCRIPTION

BALANCE DEBIT CREDIT

ACCOUNT NO.

DEBIT

502

1 5 8 00 3 7 0 00

Purchases Returns and Allowances

DESCRIPTION

BALANCE DEBIT CREDIT 3 6 0 0 00 18 7 5 0 00

Freight-In POST. REF.

501

504

CREDIT

BALANCE DEBIT CREDIT

1 3 9 00

Chapter 9  359

CRITICAL THINKING PROBLEM 9.1 (continued) GENERAL LEDGER ACCOUNT

DATE 2013 Sept. 6 20 30

ACCOUNT

DESCRIPTION

DEBIT

CREDIT

2 0 00 9 00 1 0 00

DESCRIPTION

POST. REF.

DEBIT

CP12

2 5 0 0 00

CREDIT

DESCRIPTION

DEBIT

CP12

6 8 0 0 00

CREDIT

360  Chapter 9

DESCRIPTION

DEBIT

CP12

3 0 6 00

617

BALANCE DEBIT CREDIT 6 8 0 0 00

ACCOUNT NO. POST. REF.

614

BALANCE DEBIT CREDIT

ACCOUNT NO.

Utilities Expense

DATE 2013 Sept. 22

2 0 00 2 9 00 1 9 00

2 5 0 0 00

Salaries Expense POST. REF.

611

BALANCE DEBIT CREDIT

ACCOUNT NO.

Rent Expense

DATE 2013 Sept. 30

ACCOUNT

POST. REF. CR12 CR12 CR12

DATE 2013 Sept. 2

ACCOUNT

ACCOUNT NO.

Cash Short or Over

CREDIT

619

BALANCE DEBIT CREDIT 3 0 6 00

CRITICAL THINKING PROBLEM 9.1 (continued) ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER NAME

DATE DESCRIPTION 2013 Sept. 19 Sales Slip 1852 23 Credit Memo 151

NAME

S12 J32

DEBIT

DESCRIPTION

✔ CR12 S12

DEBIT

5 4 00

2 7 0 00 2 1 6 00

BALANCE

1 2 6 0 00

1 2 6 0 00 –0– 1 2 9 6 00

TERMS POST. REF.

DEBIT

✔ CR12

DEBIT

S12

7 0 2 00

n/30

CREDIT

BALANCE

1 7 3 0 00

1 7 3 0 00 –0–

TERMS POST. REF.

n/30

CREDIT

1 2 9 6 00

Pam Lawrence

DATE DESCRIPTION 2013 Sept. 3 Sales Slip 1850

BALANCE

TERMS POST. REF.

n/30

CREDIT

2 7 0 00

Robert Kent

DATE 2013 Sept. 1 Balance 24

NAME

POST. REF.

Mesia Davis

DATE DESCRIPTION 2013 Sept. 1 Balance 15 29 Sales Slip 1853

NAME

TERMS

Rachel Carter

CREDIT

n/30

BALANCE 7 0 2 00

Chapter 9  361

CRITICAL THINKING PROBLEM 9.1 (continued) ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER NAME

TERMS

David Prater

DATE DESCRIPTION 2013 Sept. 1 Balance 1

NAME

DEBIT

✔ CR12

CREDIT

BALANCE

1 0 5 0 00

1 0 5 0 00 –0–

TERMS

Henry Tolliver

DATE DESCRIPTION 2013 Sept. 8 Sales Slip 1851

NAME

POST. REF.

DEBIT

S12

1 0 2 6 00

CREDIT

DATE DESCRIPTION 2013 Sept. 1 Balance 11 Transferred to Notes Receivable

POST. REF.

DEBIT

✔ J32

n/30

BALANCE 1 0 2 6 00

TERMS

Jason Williams

n/30

CREDIT

BALANCE

2 1 0 0 00

2 1 0 0 00 –0–

Interior Designs Specialty Shop Schedule of Accounts Receivable September 30, 2013 Rachel Carter Mesia Davis Pam Lawrence Henry Tolliver Total

362  Chapter 9

2 1 6 00 1 2 9 6 00 7 0 2 00 1 0 2 6 00 3 2 4 0 00

CRITICAL THINKING PROBLEM 9.1 (continued) ACCOUNTS PAYABLE SUBSIDIARY LEDGER NAME

DATE DESCRIPTION 2013 Sept. 27 Invoice 1368, 9/23/13

NAME

DEBIT

P12

POST. REF. ✔ J32

DEBIT

4 3 2 8 00

CREDIT

P12 J32 CP12

DEBIT

BALANCE

2 8 0 0 00

2 8 0 0 00 2 5 0 0 00 –0–

TERMS

DEBIT

P12 CP12

4 4 5 0 00

2/10, n/30

CREDIT

3 0 0 00 2 5 0 0 00

POST. REF.

1/10, n/30

5 5 0 0 00 –0–

5 5 0 0 00

Reed Millings Company

DATE DESCRIPTION 2013 Sept. 6 Invoice 827, 9/3/13 11

BALANCE

TERMS POST. REF.

n/45

CREDIT

TERMS

Nelson Craft Products

DATE DESCRIPTION 2013 Sept. 21 Invoice 677, 9/18/13 24 Credit Memo 110 26

NAME

POST. REF.

McKnight Corporation

DATE DESCRIPTION 2013 Sept. 1 Balance 17

NAME

TERMS

Booker, Inc.

2/10, n/30

CREDIT

BALANCE

4 4 5 0 00

4 4 5 0 00 –0–

Chapter 9  363

CRITICAL THINKING PROBLEM 9.1 (continued) ACCOUNTS PAYABLE SUBSIDIARY LEDGER NAME

TERMS

Rocker Company

DATE DESCRIPTION 2013 Sept. 8 Invoice 4204, 9/6/13

NAME

DEBIT

CREDIT

J32

BALANCE

3 7 0 00

TERMS

Sadler Floor Coverings

DATE DESCRIPTION 2013 Sept. 1 Balance 1 NAME

POST. REF.

POST. REF. ✔ CP12

DEBIT

CREDIT

BALANCE

1 9 4 0 00

TERMS

DATE DESCRIPTION 2013 Sept. 1 Balance 14 Invoice 9453, 9/11/13 28

✔ P12 CP12

DEBIT

n/30

1 9 4 0 00 –0–

Wells Products POST. REF.

n/30

CREDIT

BALANCE

3 7 8 4 00

2 1 2 0 00 5 9 0 4 00 3 7 8 4 00

2 1 2 0 00

Interior Design Specialty Shop Schedule of Accounts Payable September 30, 2013 Booker, Inc. Rocker Company Wells Products Total

Analyze:

4 3 2 8 00 3 7 0 00 3 7 8 4 00 8 4 8 2 00

Total cash disbursements for the month of September were $24,235.

364  Chapter 9

CRITICAL THINKING PROBLEM 9.2 Scavone Builders Bank Reconciliation Statement August 31, 2013 Balance on bank statement Addition: Deposit in transit, August 28 Deductions for outstanding checks Check 1590 Check 1680 Check 1724 Check 1780 Check 1784 Check 1806 Total outstanding checks Adjusted bank balance Balance in books Deduction: Bank service charge Adjusted book balance Less: Cash shortage Corrected adjusted book balance

16 5 8 9 00 4 9 9 2 00 21 5 8 1 00 2 6 3 00 1 9 1 8 00 4 8 6 00 7 9 2 00 1 8 1 9 00 4 8 4 00 5 7 6 2 00 15 8 1 9 00 18 7 9 6 00 1 0 00 18 7 8 6 00 2 9 6 7 00 15 8 1 9 00

The cash shortage is the difference between the adjusted bank balance of $15,819 and the adjusted book balance of $18,786. This is the amount needed to have both parts of the bank reconciliation equal. Gloria concealed her theft by omitting checks 1590 ($263), 1680 ($1,918), and 1724 ($486). The total amount of these checks is $2,667. Added to the $300 error made in adding the outstanding checks on Gloria Harris’ bank reconciliation, the total cash shortage is $2,967. Since Gloria Harris handled all cash records, it was relatively easy for her to conceal her theft. Tony should separate the jobs of receiving cash, making disbursements, maintaining accounting records, and preparing bank reconciliations. If the company is not large enough to permit different people to handle these jobs, then Tony should oversee the cash/accounting functions more closely, including reconciliation of the bank account. If Tony does not have the time to do this, he should consider hiring an independent accountant to review the cash/accounting records on a monthly basis and then report any discrepancies to him.

Chapter 9  365

SOLUTIONS TO BUSINESS CONNECTIONS Managerial Focus: 1. a. No assurance money taken actually accounted for. b. A gap in the control of cash exists, and unauthorized expenditures can be made. c. Increases the opportunity for theft; no current cash position is known. d. Increases risk of theft. e. Weakens internal control over cash receipts. 2. To pay bills in a timely fashion, anticipate fund shortages or overages, and take advantage of investment opportunities. 3. Errors noted by the bank may not be communicated to management. 4. a. Yes. Blank endorsements are not secure. b. Yes. Checkbook should be kept in a locked drawer and should be available only to specified employees. c. Yes. To deter fraud, different tasks should be assigned to different employees. d. Yes. Reconciliation should be done soon after receiving bank statement. e. Yes. Financial records should be maintained for a reasonable number of years in case of a tax audit. f. No. Most firms write several checks monthly, and the task would be impractical. 5. Essential assets should be safeguarded against loss and theft. 6. Up-to-date cash position; information for day-to-day business decisions. 7. Insures again losses. 8. Control of cash; audit trail. Ethical Dilemma: No, this was not an ethical action, as it was not Daniel's money. Daniel should admit his theft and make arrangements to repay the amount stolen. Financial Statement Analysis: 1. 10.20% 2. Increased by $902 million. 3. The balance reported for “Cash and cash equivalents” would be understated by $125,000. Teamwork: A Sales Invoice for each job should be given to each customer with a place to incorporate any additions or subtractions for service. Any changes must be communicated to the home office and an approval number will be given. The Sales Invoice, as well as each change, should be signed by the customer. Only cash and money orders should be allowed since the families have just moved and do not currently have a local bank. Internet Connection: Each bank should list the possible interest rates, both variable and fixed. Most banks will be within a few tenths of points of each other.

366  Chapter 9

SOLUTIONS TO PRACTICE TEST Part A True-False 1. TRUE 2. TRUE 3. TRUE 4. TRUE 5. FALSE 6. FALSE 7. FALSE 8. TRUE 9. FALSE 10. FALSE 11. TRUE

12. FALSE 13. TRUE 14. FALSE 15. TRUE 16. FALSE 17. TRUE 18. TRUE 19. TRUE 20. FALSE 21. TRUE 22. FALSE

Part B Matching 1. a 2. h 3. f 4. g 5. d 6. i 7. c 8. e 9. b 10. j 11. l 12. k 13. m

Chapter 9  367

CHAPTER 10 PAYROLL COMPUTATIONS, RECORDS, AND PAYMENT Chapter Opener: Thinking Critically Students might mention benefits like the company’s commitment to the environment and the appeal of a nontraditional environment that boasts climbing walls and yoga classes. Fast Facts • In 1990, Gary Erickson lived in a garage with his dog. • In 2000, Clif Bar was nearly sold to Quaker Oats for $120 million—Erickson backed out of the deal when he experienced panic attacks about the sale. The company has tripled in size since. •

Clif Bar currently has 230 employees and revenue of $150 million.

Managerial Implications: Thinking Critically Answers will vary, but students may suggest payroll audits, monitoring of cards, and division of labor for payroll tasks. Discussion Questions Note to instructor: These questions are designed to check students’ understanding of new concepts, and procedures presented in the chapter. 1. Earnings during the pay period, length of pay period, marital status, number of allowances. 2. Sets minimum hourly wages and maximum work hours per week. Applies to firms engaged directly or indirectly in interstate commerce. 3. Fair Labor Standards Act sets the minimum hourly rate of pay and maximum hours of work per week. It is also referred to as the Wage and Hour Law. 4. Two common payroll frauds are overstating hours worked and the issuance of checks to nonexistent employees. 5. Salaried employees who hold supervisory or managerial positions, not subject to maximum hours and overtime. 6. The Federal amounts can be reduced by amount charged by the state government. 7. No, levied on the employer only. 8. Number of hours worked is multiplied by the hourly wage. For hours above 40 in a week, the rate used is one and one-half times the regular hourly rate. 9. To provide medical care for the employee and the employee’s spouse after each has reached 65 years of age. 10. Used to finance retirement benefits for the employee, benefits for dependents of the retired employee, and benefits for a disabled employee. 11. Funds are automatically deposited in the employee’s account from the employer’s bank. 12. Hourly-rate, salary, commission, piece-rate. 13. Withholding tables 14. Circular E 15. One depends solely on the number of hours worked each week; the other is a fixed amount per month, per week, or other pay period.

368  Chapter 10

EXERCISE 10.1 EMPLOYEE NO.

HOURLY RATE

HOURS WORKED

GROSS EARNINGS

1 2 3 4

$9.21 8.75 9.42 8.63

39 31 34 33

$359.19 271.25 320.28 284.79

OVERTIME RATE

REGULAR HOURS WORKED

OVERTIME HOURS WORKED

40 40 39 40

5 6 0 7

DECEMBER SALARY

YEAR TO DATE EARNINGS THROUGH NOVEMBER 30

SOC. SEC. TAXABLE EARNINGS DECEMBER

SOCIAL SECURITY TAX 6.20%

$8,900.00 9,000.00 9,709.00 9,000.00

$97,900.00 72,000.00 106,800.00 99,000.00

$8,900.00 9,000.00 0.00 7,800.00

$551.80 558.00 0.00 483.60

EXERCISE 10.2

HOURLY RATE

$10.00 9.71 9.55 9.80

$15.00 14.57 14.33 14.70

REGULAR PAY

OVERTIME PAY

GROSS PAY

$400.00 388.40 372.45 392.00

$75.00 87.42 0.00 102.90

$475.00 475.82 372.45 494.90

EXERCISE 10.3

EMPLOYEE NO.

1 2 3 4

Chapter 10  369

EXERCISE 10.4

EMPLOYEE NO. 1 2 3 4

DECEMBER SALARY

MEDICARE TAXABLE EARNINGSDECEMBER

MEDICARE TAX 1.45%

$8,900.00 9,000.00 9,709.00 9,000.00

$129.05 130.50 140.78 130.50

EMPLOYEE NO.

MARITAL STATUS

WITHHOLDING ALLOWANCES

WEEKLY SALARY

INCOME TAX WITHHOLDING

1 2 3 4

M S M S

1 2 3 2

$650 595 735 590

$52 57 47 57

EXERCISE 10.5

EXERCISE 10.6 GENERAL JOURNAL

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

DATE 2013 Aug.

DESCRIPTION

PAGE POST. REF.

DEBIT

7 Office Salaries Expense Social Security Tax Payable Medicare Tax Payable Employee Income Tax Payable Salaries Payable Payroll for week

2 5 1 0 00

7 Salaries Payable Cash Issued checks, weekly payroll

1 7 5 0 30

370  Chapter 10

CREDIT

1 5 5 3 6 5 6 7 1 7 5 0

1 7 5 0

1 2 62 3 40 4 68 5 30 6 7 8 9 30 10 11 12 13

EXERCISE 10.7 PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 July 31 Sales Salaries Expense Office Salaries Expense 3 Social Security Tax Payable 4 Medicare Tax Payable 5 Employee Income Tax Payable 6 Salaries Payable 7 Payroll for month ended July 31, 2013 8 9 10 11 12 13 14 15

POST. REF.

DEBIT

CREDIT

30 5 5 8 46 8 0 4 1 54 2 3 9 3 20 5 5 9 70 3 0 5 5 96 32 5 9 1 14

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Chapter 10  371

PROBLEM 10.1A 1. EMPLOYEE NO.

REGULAR HOURS, HOURLY RATE

HOURS WORKED

REGULAR TIME EARNINGS

OVERTIME EARNINGS

GROSS EARNINGS

Kathy Burnett

$12.84

$513.60

$154.08

$667.68

Gross Pay Less: Social Security Tax Medicare Tax Income Tax Withholding Health & Disability United Way U.S. Savings Bond Net Pay 2.

1 2 3 4 5

$667.68 41.40 9.68 36.00 151.00 18.00 100.00 $311.60 PAGE 2 54

GENERAL JOURNAL

DATE DESCRIPTION 2013 Dec. 31 Salaries Payable Cash Issued check for weekly payroll

372  Chapter 10

POST. REF.

DEBIT

CREDIT

3 1 1 60 3 1 1 60

1 2 3 4 5

PROBLEM 10.1A (continued) Analyze: Kathy earned overtime pay of $1,960.48, calculated as follows: Cumulative earnings, prior to December 31 payroll Add: gross pay for week ending December 31 Gross pay for the year Less: regular pay (40 hrs X 52 weeks X $12.84) Overtime pay for the year

$28,000.00 667.68 $28,667.68 26,707.20 $1,960.48

Chapter 10  373

NAME Nelda Anderson Earl Benson Frank Cortez Winnie Wu

NO. OF ALLOW. 1 4 1 2

PAYROLL REGISTER

PROBLEM 10.2A

MARITAL STATUS M M M S 1 6 9 0 00

64 9

5 5

REGULAR TIME EARNINGS 4 7 0 00 4 2 0 00 4 1 0 00 3 9 0 00

June 24, 2013

CUMULATIVE NO. OF HRS. RATE EARNINGS 17 5 4 0 00 48 $11.75 16 8 7 5 00 49 10.50 15 9 8 0 00 40 10.25 14 5 6 0 00 52 9.75

WEEK BEGINNING

GROSS AMOUNT 6 1 1 04 5 6 1 75 4 1 0 00 5 6 5 56

4 5 8 35 2 1 4 8 35

1 7 5 56

OVERTIME EARNINGS 1 4 1 04 1 4 1 75

EARNINGS

67 1 0 3 35

CUMULATIVE EARNINGS 18 1 5 1 04 17 4 3 6 75 16 3 9 0 00 15 1 2 5 56

June 30, 2013

TAXABLE WAGES SOCIAL SECURITY MEDICARE FUTA 6 1 1 04 6 1 1 04 5 6 1 75 5 6 1 75 4 1 0 00 4 1 0 00 5 6 5 56 5 6 5 56 2 1 4 8 35 2 1 4 8 35

AND ENDING

PROBLEM 10.2A (continued)

SOCIAL SECURITY MEDICARE 3 7 88 8 86 3 4 83 8 15 2 5 42 5 95 3 5 06 8 20 1 3 3 19 3 1 16

DEDUCTIONS INCOME TAX 4 6 00 1 7 00 2 0 00 5 2 00 1 3 5 00

NET AMOUNT 5 1 8 30 5 0 1 77 3 5 8 63 4 7 0 30 1 8 4 9 00

PAID July 3, 2013

DISTRIBUTION CHECK WAGES NO. EXPENSE 6 1 1 04 5 6 1 75 4 1 0 00 5 6 5 56 2 1 4 8 35

PROBLEM 10.2A (continued) PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 June 30 Wages Expense Social Security Tax Payable 3 Medicare Tax Payable 4 Employee Income Tax Payable 5 Wages Payable 6 Weekly payroll 7 8 9 July 3 Wages Payable Cash 10 11 Issued check for weekly payroll 12

POST. REF.

DEBIT

CREDIT

2 1 4 8 35 1 3 3 19 3 1 16 1 3 5 00 1 8 4 9 00

1 8 4 9 00 1 8 4 9 00

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

Analyze: Nelda Anderson’s cumulative earnings at June 30, 2013 are $18,151.04.

376  Chapter 10

NAME Gloria Bahamon Alex Garcia Ron Price Sara Russell

NO. OF ALLOW. 4 1 3 0

PAYROLL REGISTER

PROBLEM 10.3A

MARITAL STATUS M S M S

REGULAR TIME EARNINGS 6 3 0 00 1 1 0 0 00 1 0 3 6 00 5 1 0 00 3 2 7 6 00

170 3 5 2 00

December 15, 2013

CUMULATIVE NO. OF HRS. RATE EARNINGS 32 7 6 0 00 46 $15.75 57 2 0 0 00 42 27.50 53 8 7 2 00 48 25.90 26 5 2 0 00 40 12.75

WEEK BEGINNING

5 3 5 08

OVERTIME EARNINGS 1 4 1 78 8 2 50 3 1 0 80

EARNINGS CUMULATIVE EARNINGS 33 5 3 1 78 58 3 8 2 50 55 2 1 8 80 27 0 3 0 00 3 8 1 1 08 174 1 6 3 08

GROSS AMOUNT 7 7 1 78 1 1 8 2 50 1 3 4 6 80 5 1 0 00

3 8 1 1 08

FUTA

December 21, 2013

TAXABLE WAGES SOCIAL SECURITY MEDICARE 7 7 1 78 7 7 1 78 1 1 8 2 50 1 1 8 2 50 1 3 4 6 80 1 3 4 6 80 5 1 0 00 5 1 0 00

AND ENDING

PROBLEM 10.3A (continued)

2 3 6 29

5 5 27

DEDUCTIONS SOCIAL SECURITY MEDICARE 4 7 85 1 1 19 7 3 32 1 7 15 8 3 50 1 9 53 3 1 62 7 40 7 0 6 00

INCOME TAX 1 0 3 00 2 9 9 00 2 4 1 00 6 3 00 2 8 1 3 52

NET AMOUNT 6 0 9 74 7 9 3 03 1 0 0 2 77 4 0 7 98

PAID December 23, 2013

1 2 8 1 78

5 1 0 00

DISTRIBUTION CHECK OFFICE NO. WAGES 7 7 1 78

2 5 2 9 30

1 1 8 2 50 1 3 4 6 80

DELIVERY WAGES

PROBLEM 10.3A (continued) PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 Dec. 21 Office Wages Delivery Wages 3 Social Security Tax Payable 4 5 Medicare Tax Payable 6 Employee Income Tax Payable 7 Wages Payable 8 Weekly payroll 9 10 23 Wages Payable 11 Cash 12 Payment of payroll 13

POST. REF.

DEBIT

CREDIT

1 2 8 1 78 2 5 2 9 30 2 3 6 29 5 5 27 7 0 6 00 2 8 1 3 52

2 8 1 3 52 2 8 1 3 52

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

Analyze: Delivery wages were 66.4% of total taxable wages.

Chapter 10  379

PROBLEM 10.4A

EMPLOYEE CUMULATIVE NAME. EARNINGS

Sara Parker Carolyn Wells James Wu Totals

$170,700 151,700 51,800 $374,200

MONTHLY PAY

SOCIAL SECURITY

$19,400 15,600 5,000 $40,000

310 $310

EMPLOYEE INCOME TAX MEDICARE WITHHOLDING

NET PAY

$281.30 226.20 72.50 $11,203.00

$14,030.70 10,985.80 3,470.50 $28,487.00

PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 Oct. 31 Salaries Expense 3 Social Security Tax Payable 4 Medicare Tax Payable 5 Employee Income Tax Payable 6 Salaries Payable 7 8 31 Salaries Payable 9 Cash 10 11 Analyze:

$5,088 4,388 1,147 $10,623

POST. REF.

DEBIT

CREDIT

40 0 0 0 00 3 1 0 00 5 8 0 00 10 6 2 3 00 28 4 8 7 00 28 4 8 7 00 28 4 8 7 00

1 2 3 4 5 6 7 8 9 10 11

An employee is hired by and works under the control and direction of the employer. An independent contractor is paid by the company to carry out a specific task but is not under the direct supervision or control of the company.

380  Chapter 10

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PROBLEM 10.1B 1. EMPLOYEE NO.

REGULAR HOURS, HOURLY RATE

HOURS WORKED

REGULAR TIME EARNINGS

OVERTIME EARNINGS

GROSS EARNINGS

Jacob Sandoval

$12.70

$508.00

$152.40

$660.40

Gross Pay Less: Social Security Tax Medicare Tax Income Tax Withholding Health Insurance Charitable Contribution Credit Union Savings Net Pay 2.

1 2 3 4 5 6

$660.40 40.94 9.58 36.00 165.00 19.00 75.00 $314.88 GENERAL JOURNAL

DATE DESCRIPTION 2013 Dec. 31 Salaries Payable Cash Issued check for weekly payroll

PAGE

POST. REF.

DEBIT 3 1 4 88

CREDIT 1 2 3 1 4 88 3 4 5 6

Chapter 10  381

PROBLEM 10.1B (continued) Analyze:

Jacob earned overtime pay of $2,244.40, calculated as follows: Cumulative earnings, prior to December 31 payroll Add: gross pay for week ending December 31 Gross pay for the year Less: regular pay (40 hrs. X 52 weeks X $12.70) Overtime pay for the year

382  Chapter 10

$28,000.00 660.40 $28,660.40 26,416.00 $2,244.40

NAME Barbara Brooks Cynthia Carter Mabel Easley James Periot

NO. OF ALLOW. 3 2 4 2

PAYROLL REGISTER

PROBLEM 10.2B

MARITAL STATUS M M M S 3 2 6 3 00

284 4

2 8

REGULAR TIME EARNINGS 5 1 0 00 5 3 0 00 1 1 8 0 00 1 0 4 3 00

December 25, 2013

CUMULATIVE NO. OF EARNINGS HRS. RATE 44 1 7 9 00 47 $12.75 53 0 1 5 00 48 13.25 82 7 4 8 00 44 29.50 104 4 8 6 00 28 37.25

WEEK BEGINNING

4 6 9 95

OVERTIME EARNINGS 1 3 3 91 1 5 9 04 1 7 7 00

EARNINGS

3 7 3 2 95 288 1 6 0 95

GROSS CUMULATIVE AMOUNT EARNINGS 6 4 3 91 44 8 2 2 91 6 8 9 04 53 7 0 4 04 1 3 5 7 00 84 1 0 5 00 1 0 4 3 00 105 5 2 9 00

3 7 3 2 95 3 7 3 2 95

SOCIAL SECURITY MEDICARE 6 4 3 91 6 4 3 91 6 8 9 04 6 8 9 04 1 3 5 7 00 1 3 5 7 00 1 0 4 3 00 1 0 4 3 00 FUTA

December 31, 2013

TAXABLE WAGES

AND ENDING

PROBLEM 10.2B (continued)

2 3 1 44

5 4 13

SOCIAL SECURITY MEDICARE 3 9 92 9 34 4 2 72 9 99 8 4 13 1 9 68 6 4 67 1 5 12

DEDUCTIONS

5 5 4 00

INCOME TAX 3 3 00 4 8 00 2 3 5 00 2 3 8 00 2 8 9 3 38

3 7 3 2 95

WAGES EXPENSE 6 4 3 91 6 8 9 04 1 3 5 7 00 1 0 4 3 00

DISTRIBUTION NET CHECK AMOUNT NO. 5 6 1 65 5 8 8 33 1 0 1 8 19 7 2 5 21

PAID December 31, 2013

OFFICE WAGES

PROBLEM 10.2B (continued) PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 Dec. 31 Wages Expense Social Security Tax Payable 3 Medicare Tax Payable 4 Employee Income Tax Payable 5 Wages Payable 6 Payroll for week ending December 31 7 8 9 31 Wages Payable Cash 10 11 Paid wages for week ending December 31 12

POST. REF.

DEBIT

CREDIT

3 7 3 2 95 2 3 1 5 4 5 5 4 2 8 9 3

2 8 9 3 38 2 8 9 3

1 2 44 3 13 4 00 5 38 6 7 8 9 38 10 11 12

Analyze: The difference is the total deductions of $839.57, which must be remitted to the IRS.

Chapter 10  385

NAME Kathryn Allen Calvin Cooke Maria Vasquez Hollie Visage

NO. OF ALLOW. 3 2 4 2

PAYROLL REGISTER

PROBLEM 10.3B

MARITAL STATUS M S M S 3 2 8 9 00

CUMULATIVE NO. OF EARNINGS HRS. RATE 26 5 6 5 00 43 10.50 25 9 3 3 00 36 10.25 75 2 6 8 00 45 29.75 82 8 5 8 00 41 32.75 210 6 2 4 00

November 6, 2013

REGULAR TIME EARNINGS 4 2 0 00 3 6 9 00 1 1 9 0 00 1 3 1 0 00

WEEK BEGINNING

3 1 9 53

2 2 3 15 4 9 13

OVERTIME EARNINGS 4 7 25

EARNINGS CUMULATIVE EARNINGS 27 0 3 2 25 26 3 0 2 00 76 6 8 1 15 84 2 1 7 13

3 6 0 8 53 214 2 3 2 53

GROSS AMOUNT 4 6 7 25 3 6 9 00 1 4 1 3 15 1 3 5 9 13

SOCIAL SECURITY 4 6 7 25 3 6 9 00 1 4 1 3 15 1 3 5 9 13 3 6 0 8 53

MEDICARE 4 6 7 25 3 6 9 00 1 4 1 3 15 1 3 5 9 13 3 6 0 8 53

FUTA

November 12, 2013

TAXABLE WAGES

AND ENDING

PROBLEM 10.3B (continued)

SOCIAL SECURITY MEDICARE 2 8 97 6 78 2 2 88 5 35 8 7 62 2 0 49 8 4 27 1 9 71 2 2 3 74 5 2 33

DEDUCTIONS

8 3 6 25

OFFICE WAGES 4 6 7 25 3 6 9 00

DISTRIBUTION CHECK INCOME NET NO. TAX AMOUNT 1 3 00 4 1 8 50 2 2 00 3 1 8 77 1 9 2 00 1 1 1 3 04 2 6 7 00 9 8 8 15 4 9 4 00 2 8 3 8 46

PAID November 12, 2013

1 1 2

4 3 7

1 3 15 5 9 13 7 2 28

CONSULTING WAGES

PROBLEM 10.3B (continued) PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 Nov. 12 Office Wages Consulting Wages 3 Social Security Tax Payable 4 5 Medicare Tax Payable 6 Employee Income Tax Payable 7 Wages Payable Record weekly Payroll 8 9 10 15 Wages Payable 11 Cash Paid payroll 12 13 14 Analyze:

POST. REF.

DEBIT

CREDIT

8 3 6 25 2 7 7 2 28 2 2 3 74 5 2 33 4 9 4 00 2 8 3 8 46

2 8 3 8 46 2 8 3 8 46

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

Total deductions of $770.07 were taken from employee paychecks for the period ended November 12.

388  Chapter 10

PROBLEM 10.4B

CUMULATIVE MONTHLY EMPLOYEE NAME. EARNINGS PAY

Tony Constantino Chris Stamos Elaine Hayakawa Totals

$180,000 150,000 64,000 $394,000

$18,000 15,000 6,400 $39,400

SOCIAL SECURITY

396.80 $396.80

EMPLOYEE INCOME TAX MEDICARE WITHHOLDING

$261.00 217.50 92.80 $10,581.30

1 2 3 4 5 6 7 8 9 10 11

$5,110 $12,629.00 3,700 11,082.50 1,200 4,710.40 $0 $28,421.90

PAGE

GENERAL JOURNAL

POST. REF. CREDIT DATE DESCRIPTION DEBIT 2013 Nov. 30 Salaries Expense 39 4 0 0 00 Social Security Tax Payable 3 9 6 80 Medicare Tax Payable 5 7 1 30 Employee Income Tax Payable 10 0 1 0 00 Salaries Payable 28 4 2 1 90 30 Salaries Payable Cash

NET PAY

28 4 2 1 90 28 4 2 1 90

1 2 3 4 5 6 7 8 9 10 11

Analyze: Chris Stamos reached the limit for social security withholdings in August 2013.

Chapter 10  389

CRITICAL THINKING PROBLEM 10.1

EMPLOYEE NAME

CUMULATIVE EARNINGS

MONTHLY PAY

SOCIAL SECURITY

MEDICARE

EMPLOYEE INCOME TAX WITH HOLDING

NET PAY

$154,000.00

$14,000.00

–0–

$203.00

$3,216.00

$10,581.00

Heather Anthony

72,000.00

12,000.00

744.00

174.00

2,646.00

8,436.00

Vlade Tepic

71,500.00

6,500.00

403.00

94.25

1,244.00

4,758.75

$297,500.00

$32,500.00

$1,147.00

$471.25

$7,106.00

$23,775.75

Mark Arnold

Totals

PAGE

GENERAL JOURNAL

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

DATE DESCRIPTION 2013 Dec. 31 Salaries Expense Social Security Tax Payable Medicare Tax Payable Employee Income Tax Payable Salaries Payable Monthly payroll 31 Salaries Payable Cash Payment of Monthly Payroll

POST. REF.

DEBIT

CREDIT

32 5 0 0 00 1 1 4 7 4 7 1 7 1 0 6 23 7 7 5

00 25 00 75

23 7 7 5 75 23 7 7 5 75

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

Analyze: The balance after all entries have been posted is zero.

390  Chapter 10

CRITICAL THINKING PROBLEM 10.2 1. Some of the weaknesses in Tito’s Tacos payroll system include: a. Managers are able to add new employees to the payroll without written authorization or verification. There is no check on the qualifications of employees hired and managers could add bogus employees to the payroll. b. Employees should not have access to blank time cards. c. Payroll functions should be allocated to more than one employee; there are no checks on the accuracy of Anna’s work. d. Anna should not sign the payroll checks. The person who prepares the checks should not sign the checks. 2. Since there are no checks on who the managers hire, it would be possible for a manager to add a fictitious employee to the payroll. This fraud would be further aided because the manager is responsible for sending time cards to headquarters and distributes the paychecks. 3. To prevent fictitious employees from being placed on the payroll: a. New employees should not be added to the payroll without written authorization from headquarters. b. Payroll checks should not be distributed by the managers. The paychecks could be mailed directly to the employees or someone from headquarters could distribute the checks.

Chapter 10  391

SOLUTIONS TO BUSINESS CONNECTIONS Managerial Focus: 1. If overtime is excessive, profits are drastically reduced. 2. Paying by check would eliminate security risk and reduce work involved in preparing pay envelopes. 3. Various federal, state, and local payroll laws require that detailed payroll records be maintained. These records provide management with information needed to make decisions about the firm’s needs. 4. Used by management to see that operations meet previously established goals and that related outlays for wages are within previously established limits. Ethical Dilemma: It is ethical for the company to offer the promotion, but they should allow the managers to decide whether to accept it. The managers should not accept the promotion since they will be receiving $10 less per day from $210 to $200. Financial Statement Analysis: 1. 12.2%. 2. Increased by $134 million. Teamwork: Employee signs the time card and gives it to the manager. The manager approves the hours and gives it to the payroll clerk. The payroll clerk runs the payroll and prints the checks. The treasurer signs the checks and gives them back to the payroll clerk who gives them to the manager. The controller enters any necessary adjusting entry. The manager gives the check to the employee. Internet Connection: Experience necessary is 3 out of 5 years preceding the date of the exam. Exam is offered in April and October at several testing sites. The fee for the CPP exam for the period September 11, 2010 to October 9, 2011 is $360. Testing includes: Core Payroll Concepts (27.5%), Compliance (23%), Principles of Paycheck Calculations (20%), Payroll Process and Systems (8.5%), Management and Administration (15%) and Accounting (6%).

392  Chapter 10

SOLUTIONS TO PRACTICE TEST Part A True-False 1. FALSE 2. FALSE 3. FALSE 4. TRUE 5. FALSE 6. FALSE 7. FALSE 8. FALSE 9. FALSE 10. TRUE 11. FALSE 12. FALSE Part B Matching 1. a 2. g 3. h 4. f 5. k 6. c 7. b 8. e 9. i 10. j

Chapter 10  393

CHAPTER 11 PAYROLL TAXES, DEPOSITS, AND REPORTS Chapter Opener: Thinking Critically Payroll accountants are responsible for keeping accurate records of all employees so paychecks can be processed properly and so that wage and tax statements can be prepared. A lower staff turnover rate means fewer new employees to enter into the accounting system—a time saver for payroll accountants. Fast Facts • New Castle Hotels and Resorts has been in business over 25 years. • New Castle’s management services group has engineered the financial turnaround of over 60 hotels. • New Castle Hotels & Resorts’ 32-hotel portfolio of both owned and managed hotels, includes upscale, upper upscale, and select-service properties that are branded as well as independent. Managerial Implications: Thinking Critically The 941 is prepared from the Quarterly Summary of Earnings. Discussion Questions Note to instructor : These questions are designed to check students’ understanding of the new Questions terms, concepts, and procedures presented in the chapter. 1. b, c, d 2. Federal deposits are due on the 15th day of the following month. 3. Federal deposits are due on either Wednesdays or Fridays, depending on the employer’s payday. 4. Electronic Federal Tax Payment System; use if the annual federal tax deposits are more than $200,000. 5. Used if the employer has been assigned a federal ID but has not yet received its supply of Forms 8109. 6. Unique ID number assigned by the federal government to employers. 7. SUTA, FUTA, social security, and Medicare 8. A four-quarter period ending June 30 of the preceding year. 9. Summarizes employees’ earnings and deductions for the year; sent with W-2 forms to Social Security Administration by last day of February following close of calendar year. 10. To each employee by January 31 following the close of the calendar year. 11. Employer is responsible and must pay any taxes due. 12. Form 8109 13. Circular E 14. Start of the year 15. Employer

394  Chapter 11

Discussion Questions (continued) 16. Reports employee earnings subject to federal income, social security, and Medicare taxes. Filed quarterly. 17. Yes, if FUTA payable is $500 or more, deposit by last day of month following end of quarter. 18. 5.4 percent 19. Filed once a year, it reports net federal unemployment tax; indicates amount of additional tax due. 20. Intended to encourage states to adopt state unemployment tax programs. 21. To alleviate hardship on employees who lose their jobs.

Chapter 11  395

EXERCISE 11.1 1. No deposit is necessary at this time since tax due is less than $2,500. 2. No deposit is necessary at this time since the tax due is less than $2,500. 3. No deposit is necessary at this time since tax due is less than $2,500. 4. March 15, 2013. A deposit is required by the 15th of the month following the period where $2,500 or more in tax is owed. In 1, 2, and 3, the taxes may be paid with Form 941 on or before April 30, 2013.

EXERCISE 11.2 PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7

DATE DESCRIPTION 2013 July 16 Social Security Tax Payable Medicare Tax Payable Employee Income Tax Payable Cash Deposit payroll taxes

POST. REF.

DEBIT

CREDIT

19 7 0 0 00 4 1 9 6 00 18 2 6 0 00 42 1 5 6 00

1 2 3 4 5 6 7

EXERCISE 11.3 TAX

BASE

RATE

AMOUNT

Social Security Medicare FUTA SUTA Total

$70,900.00 70,900.00 40,850.00 40,850.00

6.2% 1.45% 0.8% 5.4%

$4,395.80 1,028.05 326.80 2,205.90 $7,956.55

396  Chapter 11

EXERCISE 11.4 PAGE

GENERAL JOURNAL

1 2 3 4 5

DATE DESCRIPTION 2013 Apr. 30 Federal Unemployment Tax Payable Cash FUTA deposit

POST. REF.

DEBIT

CREDIT

1 4 9 7 00 1 4 9 7 00

1 2 3 4 5

EXERCISE 11.5 SUTA = $1,407.70 ($100,550 x 0.014)

EXERCISE 11.6 PAGE

GENERAL JOURNAL

1 2 3 4 5

DATE DESCRIPTION 2013 July 31 State Unemployment Tax Payable Cash SUTA deposit

POST. REF.

DEBIT

CREDIT

2 0 9 8 00 2 0 9 8 00

1 2 3 4 5

EXERCISE 11.7 Gross tax (0.008 × $128,692) Less Deposit Net tax payable

= = =

$1,029.54 750.00 $279.54

Chapter 11  397

EXERCISE 11.8 WORK CLASSIFICATION

ESTIMATED EARNINGS

RATE

$205,000 960,000

Office Factory Total

ESTIMATED PREMIUM

$ .57/$100 $8.31/$100

$1,168.50 79,776.00 $80,944.50

PROBLEM 11.1A TAX Social Security Medicare FUTA SUTA Total

RATE

BASE $3,500.00 3,500.00 3,500.00 3,500.00

AMOUNT

PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7 8

DATE DESCRIPTION 2013 July 14 Payroll Taxes Expense Social Security Tax Payable Medicare Tax Payable Federal Unemployment Tax Payable State Unemployment Tax Payable Record employer’s payroll taxes

Analyze:

$217.00 50.75 28.00 189.00 $484.75

6.2% 1.45% 0.8% 5.4%

POST. REF.

DEBIT

CREDIT

4 8 4 75 2 1 7 00 5 0 75 2 8 00 1 8 9 00

1 2 3 4 5 6 7 8

Social Security and Medicare taxes are paid by the employee and matched by the employer.

398  Chapter 11

PROBLEM 11.2A PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

DATE DESCRIPTION 2013 April 8 Payroll Taxes Expense Social Security Tax Payable Medicare Tax Payable Federal Unemployment Tax Payable State Unemployment Tax Payable Payroll tax expense

POST. REF.

DEBIT 3 2 2 98

May 15 Social Security Tax Payable Medicare Tax Payable Employee Income Tax Payable Cash Deposit payroll taxes for April

1 1 7 3 04 2 7 4 34 9 3 5 00

June 17 Social Security Tax Payable Medicare Tax Payable Employee Income Tax Payable Cash Deposit payroll taxes for May

1 1 5 6 67 2 7 0 51 9 2 4 00

Analyze:

CREDIT 1 2 1 4 4 58 3 3 3 81 4 1 8 66 5 1 2 5 93 6 7 8 9 10 11 2 3 8 2 38 12 13 14 15 16 17 2 3 5 1 18 18 19 20

The amounts of income tax withheld were determined based on tables for the filing status and withholding allowances claimed by each employee.

Chapter 11  399

PROBLEM 11.3A PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7

DATE DESCRIPTION 2013 July 15 Social Security Tax Payable Medicare Tax Payable Employee Income Tax Payable Cash Deposit payroll taxes for June

Analyze:

POST. REF.

DEBIT

CREDIT

1 4 5 6 75 3 4 0 69 1 1 6 2 00 2 9 5 9 44

1 2 3 4 5 6 7

The balance of the Employee Income Tax Payable account is zero.

400  Chapter 11

PROBLEM 11.3A (continued)

Chapter 11  401

PROBLEM 11.3A (continued)

402  Chapter 11

PROBLEM 11.4A State unemployment insurance

0.017 × $25,863.00

$439.67

PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 April 30 State Unemployment Tax Payable 3 Cash 4 Payment of quarterly SUTA 5

Analyze:

POST. REF.

DEBIT

CREDIT

4 3 9 67 4 3 9 67

1 2 3 4 5

An employer’s experience rating determines the amount of state unemployment taxes paid. Generally, a more favorable rating will result in a lower state unemployment tax rate for the business.

PROBLEM 11.5A PAGE

GENERAL JOURNAL

1 2 3 4 5

DATE DESCRIPTION 2014 Jan. 28 Federal Unemployment Tax Payable Cash Pay balance of tax due

Analyze:

POST. REF.

DEBIT

CREDIT

9 4 16 9 4 16

1 2 3 4 5

The total debits made to liability accounts were $533.83.

Chapter 11  403

PROBLEM 11.5A (continued)

404  Chapter 11

PROBLEM 11.5A (continued)

Chapter 11  405

PROBLEM 11.6A 1. WORK CLASSIFICATION

Office work Shop work Total

ESTIMATED EARNINGS

INSURANCE RATE

ESTIMATED PREMIUMS

$54,000 $298,000

$0.40/$100 $5.00/$100

$216.00 14,900.00 $15,116.00

2. PAGE

GENERAL JOURNAL

1 2 3 4 5 6

DATE DESCRIPTION 2013 Jan. 15 Prepaid Workers’ Compensation Insurance Cash Pay estimated workers’ compensation for year

3. WORK CLASSIFICATION

Office work Shop work Total Estimated premiums paid Additional premium due

406  Chapter 11

ACTUAL EARNINGS $59,960 $305,320

POST. REF.

DEBIT

CREDIT

15 1 1 6 00 15 1 1 6 00

INSURANCE RATE $0.40/$100 $5.00/$100

1 2 3 4 5 6

ACTUAL PREMIUMS $239.84 15,266.00 15,505.84 15,116.00 $389.84

PROBLEM 11.6A (continued) 4. PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10

DATE DESCRIPTION 2013 Dec. 31 Workers’ Compensation Insurance Expense Workers’ Compensation Insurance Payable Adjust workers’ compensation insurance expense

POST. REF.

31 Workers’ Compensation Insurance Expense Prepaid Workers' Compensation Insurance Adjust prepaid workers’ compensation insurance

DEBIT

CREDIT

1 3 8 9 84 2 3 8 9 84 3 4 5 6 15 1 1 6 00 7 15 1 1 6 00 8 9 10

Analyze: The premium estimate would have been $17,600 ($54,000 + $298,000) x ($5.00/$100).

PROBLEM 11.1B TAX Social Security Medicare FUTA SUTA Total

BASE

RATE $4,000 4,000 4,000 4,000

6.2% 1.45% 0.8% 2.2%

AMOUNT $248.00 58.00 32.00 88.00 $426.00

Chapter 11  407

PROBLEM 11.1B (continued) PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7 8

DATE DESCRIPTION 2013 April 8 Payroll Taxes Expense Social Security Tax Payable Medicare Tax Payable Federal Unemployment Tax Payable State Unemployment Tax Payable Record taxes on payroll

Analyze:

POST. REF.

DEBIT

CREDIT

4 2 6 00 2 4 8 00 5 8 00 3 2 00 8 8 00

1 2 3 4 5 6 7 8

The total employer's payroll taxes would be $442.00 ($248 + $58 + $48 FUTA + $88).

408  Chapter 11

PROBLEM 11.2B PAGE

GENERAL JOURNAL

DATE DESCRIPTION 2013 July 7 Payroll Taxes Expense Social Security Tax Payable Medicare Tax Payable Federal Unemployment Tax Payable State Unemployment Tax Payable Payroll taxes for week ended July 6

POST. REF.

1 2 3 4 5 6 7 8 9 Aug. 15 Employee Income Tax Payable 10 Social Security Tax Payable 11 Medicare Tax Payable 12 Cash 13 Deposit of payroll taxes for July 14 15 Sept. 15 Employee Income Tax Payable 16 Social Security Tax Payable 17 Medicare Tax Payable 18 Cash 19 Deposit of payroll taxes for August 20

DEBIT 2 1 0 87

8 0 3 00 1 0 2 3 00 2 3 9 26

1 0 6 7 00 1 3 5 0 36 3 1 5 84

CREDIT 1 2 1 2 2 76 3 2 8 71 4 1 5 84 5 4 3 56 6 7 8 9 10 11 2 0 6 5 26 12 13 14 15 16 17 2 7 3 3 20 18 19 20

Analyze: A SUTA rate of .015 would reduce the amount of tax by $13.86 [(0.022 – 0.015) x $1,980].

Chapter 11  409

PROBLEM 11.3B PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7

DATE DESCRIPTION 2013 Oct. 15 Employee Income Tax Payable Social Security Tax Payable Medicare Tax Payable Cash Deposit payroll taxes for September

POST. REF.

DEBIT

CREDIT

1 0 6 1 50 1 3 5 0 36 3 1 5 84 2 7 2 7 70

1 2 3 4 5 6 7

Analyze: The total taxes deposited with the IRS for the quarter ended September 30 was $7,526.16, determined as follows: Social Security - employer Social Security - employee Medicare - employer Medicare - employee Income tax withheld

410  Chapter 11

$1,861.86 1,861.86 435.47 435.47 2,931.50 $7,526.16

PROBLEM 11.3B (continued)

Chapter 11  411

PROBLEM 11.3B (continued)

412  Chapter 11

PROBLEM 11.4B State unemployment insurance

0.023 × $20,335.00

PAGE

GENERAL JOURNAL

1 2 3 4 5

DATE DESCRIPTION 2013 April 30 State Unemployment Tax Payable Cash Paid state unemployment tax

$467.71

POST. REF.

DEBIT

CREDIT

4 6 7 71 4 6 7 71

1 2 3 4 5

Analyze: If Brian Morris made the same amount for the quarter ended June 30, 2013, $3,120 ($7,000 - $3,880) would be subject to the federal unemployment tax.

PROBLEM 11.5B PAGE

GENERAL JOURNAL

1 2 3 4 5

DATE DESCRIPTION 2014 Jan. 27 Federal Unemployment Tax Payable Cash Pay balance of tax due

POST. REF.

DEBIT

CREDIT

5 5 1 08 5 5 1 08

1 2 3 4 5

Analyze: The balance of the Federal Unemployment Tax Payable account is zero.

Chapter 11  413

PROBLEM 11.5B (continued)

414  Chapter 11

PROBLEM 11.5B (continued)

Chapter 11  415

PROBLEM 11.6B 1. WORK CLASSIFICATION Office work Delivery work Total

ESTIMATED EARNINGS $50,000 $308,000

INSURANCE RATE

ESTIMATED PREMIUMS

$0.50/$100 $6.00/$100

$250.00 18,480.00 $18,730.00

2. PAGE

GENERAL JOURNAL

1 2 3 4 5 6

DATE DESCRIPTION 2013 Jan. 17 Prepaid Workers’ Compensation Insurance Cash Pay estimated workers' compensation for year

POST. REF.

DEBIT

CREDIT

18 7 3 0 00 18 7 3 0 00

1 2 3 4 5 6

3. WORK CLASSIFICATION

ACTUAL EARNINGS

INSURANCE RATE

ACTUAL PREMIUMS

Office work Delivery work Total actual premiums Estimated premiums paid Additional premium due

$52,970 $316,240

$0.50/$100 $6.00/$100

$264.85 18,974.40 19,239.25 18,730.00 $509.25

416  Chapter 11

PROBLEM 11.6B (continued) 4. PAGE

GENERAL JOURNAL DATE DESCRIPTION 1 2013 2 Dec. 31 Workers’ Compensation Insurance Expense 3 Workers' Compensation Insurance Payable 4 Adjust workers’ compensation 5 insurance expense 6 7 31 Workers’ Compensation Insurance Expense 8 Prepaid Worker's Compensation Insurance 9 Adjust prepaid workers’ compensation 10 insurance 11

POST. REF.

DEBIT

CREDIT

1 5 0 9 25 2 5 0 9 25 3 4 5 6 18 7 3 0 00 7 18 7 3 0 00 8 9 10 11

Analyze: The balance of the Workers’ Compensation Insurance Expense account is $19,239.25 ($18,730.00 + $509.25). CRITICAL THINKING PROBLEM 11.1 1. Tony is not an employee. A self-employed person cannot be his or her own employee. 2. Guy is probably not an employee. He has the right to refuse jobs, which is not characteristic of an employee’s rights. 3. Ken is an employee, paid on an hourly basis by Dr. Liu, who provides all facilities, supplies, and equipment. He is not hired by the patients for professional services. 4. Lisa is not an employee. The employer does not provide a work place or tools. No one directly supervises her activities. She has the freedom to decide when the work is to be done and how it is to be done. 5. Ron is definitely a part-time employee. The titles of president, secretary, and treasurer make him officially an employee. Analyze: The employees are hired and work under the control and direction of the employer. The employer CRITICAL THINKING PROBLEM 11.2 1. Payroll information needed: the hourly rate paid the truck drivers; the rates for social security, medicare, and federal and state unemployment taxes; and the employer’s obligations for workers’ compensation insurance and fringe benefits such as health insurance, pension contributions, and group life insurance.

Chapter 11  417

CRITICAL THINKING PROBLEM 11.2 (continued) YEARLY COST—CURRENT SYSTEM

Truck Drivers: Wages (110 × $48,000) Social Security Tax ($5,280,000 × 0.062) Medicare Tax ($5,280,000 × 0.0145) State Unemployment Tax (110 × $7,000 × .05) Federal Unemployment Tax (110 × $7,000 × .008) Workers’ Compensation Insurance ($5,280,000 × $.70 ÷ 100) Health Insurance (110 × $310 × 12) Pensions (110 × $250 × 12) Total Payroll Costs Teenage Carriers: Payment per paper (90,000 × $0.04 × 5 days × 52 weeks) Liability Insurance Total Cost

$5,280,000 327,360 76,560 38,500 6,160 36,960 409,200 330,000 $6,504,740 936,000 110,000 $7,550,740

YEARLY COST—PROPOSED SYSTEM Truck Drivers: Wages (30 × $48,000) Social Security Tax ($1,440,000 × 0.0620) Medicare Tax ($1,440,000 × 0.0145) State Unemployment Tax (30 × $7,000 × 0.05) Federal Unemployment Tax (30 × $7,000 × .008) Workers’ Compensation Insurance ($1,440,000 × $0.70 ÷ 100) Health Insurance (30 × $310 × 12) Pensions (30 × $250 × 12) Total Payroll Costs Independent Contractor Payments (90000 × $0.20 × 5 days × 52 weeks) Total Cost

$1,440,000 89,280 20,880 10,500 1,680 10,080 111,600 90,000 $1,774,020 $4,680,000 $6,454,020

Davis would save $1,096,720 if the proposed system were adopted ($7,550,740 - $6,454,020). NOTE:

Federal income tax withholding is not a factor in this analysis since it is the employees' obligation, not the employer’s.

418  Chapter 11

CRITICAL THINKING PROBLEM 11.2 (continued) 3.

In addition to analyzing payroll costs, Davis should consider costs of operating the fleet of delivery trucks. What is the current cost to operate the trucks? How much would be saved by reducing the fleet? She should also consider the effect on employee morale of terminating 75 truck drivers and the commitments the paper has to union contracts. She should also assess the dependability and stability of the independent contractors; it may be worthwhile to spend more in order to have control of the paper’s distribution system through its own employees and trucks.

Chapter 11  419

SOLUTIONS TO BUSINESS CONNECTIONS Managerial Focus: 1. Only authorized persons able to add new employees to payroll; review of payroll by different employee; distribution of paychecks by yet another person. 2. Premiums for workers’ compensation insurance are based on the amount earned by classes of employees. 3. Penalties and fines for the employer. 4. Experience rating is a potential source of tax savings. Ethical Dilemma: Johan is paying $1,720 more per month for wages. The extra expense represents an additional employee that he did not hire. He should consult his accountant to find the approval for an additional sales associate. To prevent this from happening in the future, he should pass out the paychecks personally to match the paycheck to the person. Financial Statement Analysis: 1. 193,370 (317,000 X 61%) 2. $832.60 ($161 million ÷ 193,370 employees) Teamwork: Hire temporary employees for jobs that occur seasonally. Only pay 98% of deposit required. The IRS states that 98% is considered in compliance. Stop any unnecessary overtime by requiring management approval for all overtime. Find less expensive benefits. Internet Connection: The 940 and 941 form is available to download and use. However, the W-2, W-3, W-4 and W-5 must be original forms.

420  Chapter 11

SOLUTIONS TO PRACTICE TEST Part A True-False 1. TRUE 2. FALSE 3. FALSE 4. TRUE 5. FALSE 6. TRUE 7. FALSE 8. FALSE 9. TRUE 10. FALSE 11. TRUE 12. FALSE 13. TRUE 14. FALSE 15. FALSE 16. FALSE 17. FALSE 18. FALSE Part B Matching 1. j 2. i 3. h 4. a 5. g 6. e 7. f 8. b 9. d 10. c

Chapter 11  421

CHAPTER 12 ACCRUALS, DEFERRALS, AND THE WORKSHEET Chapter Opener: Thinking Critically Students may assess that an unexpected decline in sales would mean surplus inventory which would have to be reduced—most likely by selling the too sophisticated merchandise at lower prices. Expenses for market research to determine a better merchandise strategy would also need to be recorded. Fast Facts Urban Outfitters achieved compounded annual sales growth of approximately 19% from 2005 to • 2010, with sales of approximately $1.9 billion in fiscal 2010. The first Urban Outfitters store opened 1970 near the University of Pennsylvania campus in • Philadelphia. The company circulates nearly 40 million catalogs per year. • The company employs 14,000 people; the number fluctuates based upon seasonal demand. • Managerial Implications: Thinking Critically Financial results and financial condition will be incorrectly stated. Discussion Questions Note to instructor : These questions are designed to check students’ understanding of new terms, concepts, and procedures presented in the chapter. 1. Debiting Allowance for Doubtful Accounts and Crediting Accounts Receivable. 2. To the Income Statement columns. 3. Dr. Uncollectible Accounts Expense, Cr. Allowance for Doubtful Accounts. 4. Transfers cost of asset to expense over life of asset. 5. Long-term assets whose usefulness is consumed over the life of the assets. (Buildings, furniture and fixtures, machinery.) 6. a. Estimated selling price upon disposal of an asset. b. Cost of asset less salvage value. c. Number of years that asset will be used. d. Equal amount of depreciation taken in each year of the asset’s useful life. 7. 8. 9. 10. 11. 12.

Dr. Depreciation Exp.— Office Equipment., Cr. Accum. Depr.—Office Equipment. An expense that does not yet appear in the accounts. (Accrued salaries, accrued payroll taxes, and accrued interest on notes payable.) Dr. Salaries Expense, Cr. Salaries Payable. Item that has been paid for and recorded in the accounts in advance of its use. (Prepaid rent, prepaid insurance, prepaid interest on notes payable.) Dr. Prepaid Insurance, Cr. Cash. Dr. Insurance Expense, Cr. Prepaid Insurance

422  Chapter 12

Discussion Questions (continued) 13. 14. 15. 16. 17. 18. 19. 20. 21.

Charge cost to expense account at the time cost is incurred. At end of period, amount still prepaid is debited to prepaid expense account and credited to the expense account. Income earned but not yet received in cash or recorded as a receivable. (Interest on notes receivable.) Dr. Interest Receivable, Cr. Interest Income. Income for which payment has been received in advance, but which has not been earned. (Rent income received in advance.) Dr. Cash, Cr. Unearned Income. Dr. Unearned Income, Cr. Income. Record amount received in advance as income at the time it is received in cash. At period end, unearned amount debited to Income and credited to Unearned Income. Provides a single location for all information necessary to journalize adjusting entries and to prepare the financial statements. Liability.

Chapter 12  423

EXERCISE 12.1 PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 Dec. 31 Income Summary 3 Merchandise Inventory 4 5 31 Merchandise Inventory 6 Income Summary 7

POST. REF.

DEBIT

CREDIT

121 0 0 0 00 121 0 0 0 00 102 5 1 9 00 102 5 1 9 00

1 2 3 4 5 6 7

EXERCISE 12.2 Beginning Merchandise Inventory is $179,000 and ending Merchandise Inventory is $203,344. EXERCISE 12.3 PAGE

GENERAL JOURNAL DATE DESCRIPTION 1 2013 2 Dec. 31 Uncollectible Accounts Expense 3 Allowance for Doubtful Accounts 4 5 31 Depreciation Expense—Equipment 6 Accumulated Depreciation—Equipment 7 8 31 Wages Expense 9 Wages Payable 10 11 31 Payroll Taxes Expense 12 Social Security Tax Payable 13 Medicare Tax Payable 14 15 31 Payroll Taxes Expense 16 Federal Unemployment Tax Payable 17 State Unemployment Tax Payable 18

424  Chapter 12

POST. REF.

DEBIT

CREDIT

5 6 4 6 00 5 6 4 6 00 3 0 6 8 00 3 0 6 8 00 6 5 4 6 00 6 5 4 6 00 5 0 0 77 4 0 5 85 9 4 92 4 0 5 85 5 2 37 3 5 3 48

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

EXERCISE 12.4 PAGE

GENERAL JOURNAL DATE DESCRIPTION 1 2013 2 Dec. 31 Interest Expense 3 Interest Payable 4 5 31 Supplies Expense 6 Supplies 7 8 31 Insurance Expense 9 Prepaid Insurance 10 11 31 Advertising Expense 12 Prepaid Advertising 13

POST. REF.

DEBIT

CREDIT

2 1 0 00 2 1 0 00 4 4 3 3 00 4 4 3 3 00 5 1 3 5 00 5 1 3 5 00 9 7 2 0 00 9 7 2 0 00

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

EXERCISE 12.5 PAGE

GENERAL JOURNAL DATE DESCRIPTION 1 2013 2 Dec. 1 Cash 3 Prepaid Interest 4 Notes Payable 5 6 31 Interest Expense 7 Prepaid Interest 8

POST. REF.

DEBIT

CREDIT

29 8 6 4 00 1 1 3 6 00 31 0 0 0 00 2 8 4 00 2 8 4 00

1 2 3 4 5 6 7 8

EXERCISE 12.6 PAGE

GENERAL JOURNAL DATE DESCRIPTION 1 2013 2 Dec. 31 Interest Expense 3 Interest Payable 4

POST. REF.

DEBIT

CREDIT

3 9 0 00 3 9 0 00

1 2 3 4

Chapter 12  425

EXERCISE 12.7 PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 Dec. 31 Interest Receivable 3 Interest Income 4 5 31 Unearned Subscription Revenue 6 Subscription Revenue 7 8 31 Unearned Rent 9 Rent Income 10 11 31 Unearned Season Ticket Income 12 Season Ticket Income 13

426  Chapter 12

POST. REF.

DEBIT

CREDIT

6 4 0 00 6 4 0 00 20 0 0 0 00 20 0 0 0 00 16 0 0 0 00 16 0 0 0 00 600 0 0 0 00 600 0 0 0 00

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

PROBLEM 12.1A PAGE

GENERAL JOURNAL DATE DESCRIPTION 1 2013 2 June 30 (Adjustment a) Income Summary 3 Merchandise Inventory 4 5 6 30 (Adjustment b) Merchandise Inventory 7 Income Summary 8 9 10 30 (Adjustment c) Unearned Seminar Fees 11 Seminar Fees Income 12 13 14 30 (Adjustment d) Insurance Expense 15 Prepaid Insurance 16 17 18 30 (Adjustment e) Depreciation Expense - Store Equipment 19 Accumulated Depreciation - Store Equipment 20 21 22 30 (Adjustment f) 23 Wages Expense 24 Wages Payable 25 26 30 (Adjustment g) 27 Payroll Taxes Expense 28 State Unemployment Taxes Payable 29 Federal Unemployment Taxes Payable 30 Medicare Taxes Payable 31 Social Security Taxes Payable 32 33 30 (Adjustment h) 34 Uncollectible Accounts Expense 35 Allowance for Doubtful Accounts 36 37 30 (Adjustment i) 38 Rent Expense 39 Prepaid Rent

POST. REF.

DEBIT

CREDIT

7 5 0 0 00 7 5 0 0 00

8 0 0 0 00 8 0 0 0 00

2 4 0 0 00 2 4 0 0 00

4 0 0 0 00 4 0 0 0 00

2 2 5 00 2 2 5 00

2 5 0 00 2 5 0 00

2 8 63 7 50 2 00 3 63 1 5 50

20 0 0 0 00 20 0 0 0 00

4 4 0 0 00 4 4 0 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39

Chapter 12  427

PROBLEM 12.1A (continued) PAGE

GENERAL JOURNAL

41 42 43 44 45 46 47

DATE DESCRIPTION 30 (Adjustment j) Supplies Expense Supplies 30 (Adjustment k) Interest Expense Interest Payable

POST. REF.

DEBIT 2 5 0 00

3 5 00

CREDIT 41 42 2 5 0 00 43 44 45 46 3 5 00 47

Notes on calculations: a.-b. Amounts given. c. $6,000 cash received/5 seminars = $1,200/seminar. $1,200/seminar × 2 seminars conducted = $2,400 earned. d. $12,000/6 months in policy = $2,000/month. $2,000/month × 2 months expired (May and June) = $4,000 insurance expense. e. ($5,000 cost - $500 salvage value)/60 months = $75/month depreciation. $75/month × 3 months of use (April, May and June) = $225. f. Amounts given. g. Amounts given. h. $2,000,000 × 1% = $20,000 i. $6,600/6 months in policy = $1,100/month; $1,100 × 4 months expired = $4,400. j. $400 balance - $150 supplies on hand = $250 of supplies used. k. $6,000 principal × 7% interest rate × 1/12 time factor = $35 Analyze: The balance of the Prepaid Rent account will be $2,200 ($6,600 - $4,400 expired).

428  Chapter 12

PROBLEM 12.2A PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 July 1 Prepaid Rent 3 Cash 4 5 1 Cash 6 Prepaid Interest 7 Notes Payable 8 9 1 Cash 10 Unearned Accounting Fees 11 12 1 Office Equipment 13 Notes Payable 14 15 1 Prepaid Insurance 16 Cash 17 18 3 Office Furniture 19 Cash 20 Accounts Payable 21 22 5 Supplies 23 Cash 24

POST. REF.

DEBIT

CREDIT

13 2 0 0 00 13 2 0 0 00 23 0 4 0 00 9 6 0 00 24 0 0 0 00 72 0 0 0 00 72 0 0 0 00 17 0 0 0 00 17 0 0 0 00 1 6 2 0 00 1 6 2 0 00 16 6 0 0 00 8 4 0 0 00 8 2 0 0 00 1 8 1 0 00 1 8 1 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Chapter 12  429

PROBLEM 12.2A (continued) PAGE

GENERAL JOURNAL

DATE

DESCRIPTION Adjusting Entries

1 2 2013 3 July 31 Rent Expense 4 Prepaid Rent 5 6 31 Interest Expense 7 Prepaid Interest 8 9 31 Unearned Accounting Fees 10 Accounting Fees 11 12 31 Interest Expense 13 Interest Payable 14 15 31 Depreciation Expense—Office Equipment 16 Accumulated Depreciation—Office Equipment 17 18 31 Insurance Expense 19 Prepaid Insurance 20 21 31 Depreciation Expense—Office Furniture 22 Accumulated Depreciation—Office Furniture 23 24 31 Supplies Expense 25 Supplies 26

Analyze:

POST. REF.

DEBIT

CREDIT

2 2 0 0 00 2 2 0 0 00 2 4 0 00 2 4 0 00 6 0 0 0 00 6 0 0 0 00 1 7 0 00 1 7 0 00 2 2 0 00 2 2 0 00 1 3 5 00 1 3 5 00 2 6 0 00 2 6 0 00 1 0 1 0 00 1 0 1 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

The Unearned Accounting Fees account would be $66,000.

430  Chapter 12

PROBLEM 12.3A Michael Brady, Consultant Worksheet Month Ended July 31, 2013 ACCOUNT NAME 1 Cash 2 Accounts Receivable 3 Supplies 4 Prepaid Rent 5 Prepaid Insurance 6 Prepaid Interest 7 Office Furniture 8 Accumulated Depreciation— 9 Office Furniture 10 Office Equipment 11 Accumulated Depreciation—Equipment 12 Notes Payable 13 Accounts Payable 14 Interest Payable 15 Unearned Consulting Fees 16 Michael Brady, Capital 17 Michael Brady, Drawing 18 Consulting Fees 19 Salaries Expense 20 Utilities Expense 21 Telephone Expense 22 Supplies Expense 23 Rent Expense 24 Insurance Expense 25 Depreciation Expense—Furniture 26 Depreciation Expense—Equipment 27 Interest Expense 28 29 Totals 30

TRIAL BALANCE DEBIT CREDIT 25 0 1 0 00 1 3 4 0 00 8 6 0 00 9 0 0 0 00 1 6 2 0 00 3 6 0 00 12 0 5 0 00

ADJUSTMENTS DEBIT CREDIT

(a) 2 8 0 00 (b) 1 5 0 0 00 (c) 1 3 5 00 (d) 9 0 00

(e)

1 2 5 00

(f)

8 0 00

(g)

5 2 00

(h)

4 0 0 00

6 4 0 0 00

16 7 0 0 00 4 5 0 0 00 4 8 0 0 00 (h) 28 2 2 0 00

4 0 0 00

2 0 0 0 00 8 0 0 0 00 3 2 0 0 00 2 2 0 00 1 6 0 00 (a) 2 8 0 00 (b) 1 5 0 0 00 (c) 1 3 5 00 (e) 1 2 5 00 (f)

8 0 00

(d) (g)

9 0 00 5 2 00 2 6 6 2 00

62 2 2 0 00 62 2 2 0 00

2 6 6 2 00

Chapter 12  431

PROBLEM 12.3A Continued

ADJUSTED TRIAL BALANCE DEBIT CREDIT 25 0 1 0 00 1 3 4 0 00 5 8 0 00 7 5 0 0 00 1 4 8 5 00 2 7 0 00 12 0 5 0 00

INCOME STATEMENT DEBIT CREDIT

BALANCE SHEET DEBIT CREDIT

1 2 5 00 6 4 0 0 00 8 0 00 16 7 0 4 5 0 5 4 4 0 28 2 2

0 00 0 00 2 00 0 00 0 00

1 2 3 4 5 6 7 8 9 10 11

0 00 0 00 0 00 0 00 0 00 5 00 5 00

12 13 14 15 16 17 18 19 20 21 22 23 24 25

8 0 00

9 0 00 5 2 00 62 4 7 7 00

27 28 29 30

2 0 0 0 00 8 4 0 0 00 3 2 2 1 2 1 5 1 1

Analyze:

0 2 6 8 0 3 2

62 4 7 7 00

The expense accounts of the business were adjusted by $2,262 ($2,662 - $400).

432  Chapter 12

PROBLEM 12.4A The Green Thumb Gallery Worksheet Year Ended December 31, 2013 TRIAL BALANCE 1 Cash

ACCOUNT NAME

DEBIT 5 7 0 0 00

2 Accounts Receivable

2 6 0 0 00

3 Allowance for Doubtful Accounts

ADJUSTMENTS

CREDIT

DEBIT

5 2 00

CREDIT

(c)

2 1 0 00

4 Merchandise Inventory

11 3 0 0 00

5 Supplies

1 2 0 0 00

(d)

9 2 5 00

6 Prepaid Advertising

9 6 0 00

(e)

4 8 0 00

7 Store Equipment

8 1 0 0 00 1 5 0 0 00

(f) 1

5 0 0 00

2 8 0 00

(g)

2 8 0 00

4 3 0 00

(i)

1 1 3 46

9 8 00

(i)

2 6 54

14 Federal Unemployment Tax Payable

(j)

1 4 64

15 State Unemployment Tax Payable

(j)

9 8 82

16 Salaries Payable

(h)

1 8 3 0 00

8 Accumulated Depr.—Store Equipment 9 Office Equipment 11 Accounts Payable

2 6 2 5 00

12 Social Security Tax Payable 13 Medicare Tax Payable

17 Beth Argo, Capital

25 4 5 7 00 20 0 0 0 00

19 Sales

90 0 4 8 00

20 Sales Returns & Allowances

1 1 0 0 00

21 Purchases

46 4 0 0 00

22 Purchases Returns & Allowances 23 Rent Expense 24 Telephone Expense

4 3 0 00 6 0 0 0 00 5 9 0 00

25 Salaries Expense

14 1 0 0 00

26 Payroll Taxes Expense

1 2 7 0 00

(h) 1 8 3 0 00 (i)

1 4 0 00

(j)

1 1 3 46

28 Income Summary

(a) 11 3 0 0 00

29 Supplies Expense

(d)

9 2 5 00

30 Advertising Expense

(e)

4 8 0 00

31 Depreciation expense—Store Equipment

(f)

1 5 0 0 00

32 Depreciation expense—Office Equipment

(g)

2 8 0 00

33 Totals Carried Forward

(a) 11 3 0 0 00

1 6 0 0 00

10 Accumulated Depr.—Office Equipment

18 Beth Argo, Drawing

(b) 12 3 2 1 00

120 9 2 0 00 120 9 2 0 00

28 8 8 9 46

(b) 12 3 2 1 00

29 0 9 9 46

Chapter 12  433

PROBLEM 12.4A (continued)

ADJUSTED TRIAL BALANCE DEBIT CREDIT 5 7 0 0 00 2 6 0 0 00 2 6 2 00 12 3 2 1 00 2 7 5 00 4 8 0 00 8 1 0 0 00 3 0 0 0 00 1 6 0 0 00 5 6 0 00 2 6 2 5 00 5 4 3 46 1 2 4 54 1 4 64 9 8 82 1 8 3 0 00 25 4 5 7 00 20 0 0 0 00 90 0 4 8 00 1 1 0 0 00 46 4 0 0 00 4 3 0 00 6 0 0 0 00 5 9 0 00 15 9 3 0 00 1 5 2 3 46 11

1 137

3 9 4 5 2 1

0 2 8 0 8 0

0 00 5 00 0 00 0 00 0 00 4 46

434  Chapter 12

12 3 2 1 00

137 3 1 4 46

INCOME STATEMENT DEBIT CREDIT

BALANCE SHEET DEBIT CREDIT 5 7 0 0 00 2 6 0 0 00 2 6 2 00 12 3 2 1 00 2 7 5 00 4 8 0 00 8 1 0 0 00 3 0 0 0 00 1 6 0 0 00 5 6 0 00 2 6 2 5 00 5 4 3 46 1 2 4 54 1 4 64 9 8 82 1 8 3 0 00 25 4 5 7 00 20 0 0 0 00

90 0 4 8 00 1 1 0 0 00 46 4 0 0 00 4 3 0 00 6 0 0 0 00 5 9 0 00 15 9 3 0 00 1 5 2 3 46 11 3 0 0 00 9 2 5 00 4 8 0 00 1 5 0 0 00 2 8 0 00 86 0 2 8 46

12 3 2 1 00

102 7 9 9 00 51 0 7

6 00 34 5 1 5 46

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34

PROBLEM 12.4A (continued) The Green Thumb Gallery Worksheet (Continued) Year Ended December 31, 2013 ACCOUNT NAME 1 Totals Brought Forward 2 Uncollectible Accounts Expense 3 Totals 4 Net Income 5 6

TRIAL BALANCE DEBIT CREDIT 120 9 2 0 00 120 9 2 0 00 120 9 2 0 00

ADJUSTMENTS DEBIT CREDIT 28 8 8 9 46 29 0 9 9 46 (c) 2 1 0 00 120 9 2 0 00 29 0 9 9 46 29 0 9 9 46

Chapter 12  435

PROBLEM 12.4A (continued)

ADJUSTED TRIAL BALANCE DEBIT CREDIT 137 1 0 4 46 137 3 1 4 46 2 1 0 00 137 3 1 4 46 137 3 1 4 46

INCOME STATEMENT DEBIT CREDIT 86 0 2 8 46 102 7 9 9 00 2 1 0 00 86 2 3 8 46 102 7 9 9 00 16 5 6 0 54 102 7 9 9 00 102 7 9 9 00

BALANCE SHEET DEBIT CREDIT 51 0 7 6 00 34 5 1 5 46 1 2 51 0 7 6 00 34 5 1 5 46 3 16 5 6 0 54 4 51 0 7 6 00 51 0 7 6 00 5 6

Analyze: The total assets (assets, less accumulated depreciation) were decreased $2,374 by adjustments.

436  Chapter 12

PROBLEM 12.5A Healthy Habits Foods Company Worksheet Year Ended December 31, 2013

ACCOUNT NAME 1 Cash 2 Accounts Receivable 3 Allowance for Doubtful Accounts 4 Merchandise Inventory 5 Supplies 6 Prepaid Insurance 7 Office Equipment 8 Accumulated Depr.—Office 9 Warehouse Equipment 10 Accumulated Depr.—Warehouse Equipment 11 Notes Payable—Bank 12 Accounts Payable 13 Interest Payable 14 Social Security Tax Payable 15 Medicare Tax Payable 16 Federal Unemployment Tax Payable 17 State Unemployment Tax Payable 18 Salaries Payable 19 Phillip Tucker, Capital 20 Phillip Tucker, Drawing 21 Sales 22 Sales Returns and Allowances 23 Purchases 24 Purchases Returns and Allowance 25 Income Summary 26 Rent Expenses 27 Telephone Expense 28 Salaries Expense 29 Payroll Taxes Expense 30 31 Supplies Expense 32 Insurance Expense 33 Totals Carried Forward 34

TRIAL BALANCE ADJUSTMENTS DEBIT CREDIT DEBIT CREDIT 30 1 0 0 00 35 2 0 0 00 4 2 0 00 (c) 2 8 0 0 00 86 0 0 0 00 (b) 78 0 0 0 00 (a) 86 0 0 0 00 10 4 0 0 00 (d) 9 2 2 0 00 5 4 0 0 00 (e) 3 6 0 0 00 8 3 0 0 00 2 6 5 0 00 (f) 1 3 2 5 00 28 0 0 0 00 9 6 0 0 00 (g) 4 8 0 0 00 32 0 0 0 00 12 2 0 0 00 (h) (j) (j) (k) (k) (i) 5

1 6 8 0 00 3 8 8 00

6 4 0 00 3 1 0 00 7 2 50 4 0 00 2 7 0 00 0 0 0 00

108 6 8 4 00 56 0 0 0 00 653 7 7 8 00 10 0 0 0 00 350 0 0 0 00 9 2 0 0 00 (a) 86 0 0 0 00 (b) 78 0 0 0 00 36 0 0 0 00 2 2 0 0 00 160 0 0 0 00 13 0 0 0 00

(i) 5 (j) (k) (d) 9 (e) 3

830 6 0 0 00 830 6 0 0 00

0 0 0 00 3 8 2 50 3 1 0 00 2 2 0 00 6 0 0 00

182 5 1 2 50

192 0 7 7 50

Chapter 12  437

PROBLEM 12.5A (continued)

ADJUSTED TRIAL BALANCE DEBIT CREDIT 30 1 0 0 00 35 2 0 0 00 3 2 2 0 00 78 0 0 0 00 1 1 8 0 00 1 8 0 0 00 8 3 0 0 00 3 9 7 5 00 28 0 0 0 00 14 4 0 0 00

INCOME STATEMENT DEBIT CREDIT

BALANCE SHEET DEBIT CREDIT 30 1 0 0 00 35 2 0 0 00 3 2 2 0 00 78 0 0 0 00 1 1 8 0 00 1 8 0 0 00 8 3 0 0 00 3 9 7 5 00 28 0 0 0 00 14 4 0 0 00

32 0 0 0 00 12 2 0 0 00 6 4 0 00 1 9 9 0 00 4 6 0 50 4 0 00 2 7 0 00 5 0 0 0 00 108 6 8 4 00

56 0 0 0 00

56 0 0 0 00 653 7 7 8 00

10 0 0 0 00 350 0 0 0 00 86 0 0 0 00 36 0 0 0 00 2 2 0 0 00 165 0 0 0 00 13 6 9 2 50

9 2 0 0 00 78 0 0 0 00

9 2 2 0 00 3 6 0 0 00 914 2 9 2 50

438  Chapter 12

653 7 7 8 00 10 0 0 0 00 350 0 0 0 00 86 0 0 0 00 36 0 0 0 00 2 2 0 0 00 165 0 0 0 00 13 6 9 2 50

9 2 0 0 00 78 0 0 0 00

9 2 2 0 00 3 6 0 0 00 923 8 5 7 50

675 7 1 2 50

740 9 7 8 00

238 5 8 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32

182 8 7 9 50 33 34

PROBLEM 12.5A (continued)

ACCOUNT NAME 1 Totals Brought Forward 2 Depr. Expense—Office Equipment 3 Depr. Expense—Warehouse Equipment 4 Uncollectible Accounts Expense 5 Interest Expense 6 Totals 7 Net Income 8 9

TRIAL BALANCE DEBIT CREDIT 830 6 0 0 00 830 6 0 0 00

830 6 0 0 00

ADJUSTMENTS DEBIT CREDIT 182 5 1 2 50 192 0 7 7 50 (f) 1 3 2 5 00 (g) 4 8 0 0 00

192 0 7 7 50

Chapter 12  439

PROBLEM 12.5A (continued)

ADJUSTED TRIAL BALANCE DEBIT CREDIT 914 2 9 2 50 923 8 5 7 50 1 3 2 5 00 4 8 0 0 00 2 8 0 0 00 6 4 0 00 923 8 5 7 50 923 8 5 7 50

INCOME STATEMENT DEBIT CREDIT 675 7 1 2 50 740 9 7 8 00 1 3 2 5 00 4 8 0 0 00 2 8 0 0 00 6 4 0 00 685 2 7 7 50 740 9 7 8 00 55 7 0 0 50 740 9 7 8 00 740 9 7 8 00

BALANCE SHEET DEBIT CREDIT 238 5 8 0 00 182 8 7 9 50 1 2 3 4 5 238 5 8 0 00 182 8 7 9 50 6 55 7 0 0 50 7 238 5 8 0 00 238 5 8 0 00 8 9

Analyze: The net income will be $55,700.50.

440  Chapter 12

PROBLEM 12.6A The Wine Shop Worksheet Year Ended December 31, 2013 ACCOUNT NAME 1 Cash 2 Accounts Receivable 3 Prepaid Advertising 4 Supplies 5 Merchandise Inventory 6 Store Equipment 7 Accum. Depr., Store Equip. 8 Office Equipment 9 Accum. Depr., Office Equip. 10 Notes Payable, due 2014 11 Accounts Payable 12 Wages Payable 13 Social Security Tax Payable 14 Medicare Tax Payable 15 Unearned Seminar Fees 16 Interest Payable 17 Vincent Arroyo, Capital 18 Vincent Arroyo, Drawing 19 Income Summary 20 Sales 21 Sales Discounts 22 Seminar Fee Income 23 Purchases 24 Purchases Returns & Allow. 25 Freight In 26 Rent Expense 27 Wages Expense 28 Payroll Taxes Expense 29 Depreciation Exp., Store Equip. 30 Depreciation Exp., Office Equip. 31 Advertising Expense 32 Supplies Expense 33 Interest Expense 34 35 Net income 36 Analyze:

TRIAL BALANCE ADJUSTMENTS DEBIT CREDIT DEBIT CREDIT 28 3 8 6 00 5 0 0 00 4 8 0 00 (c) 1 6 0 00 3 0 0 00 (d) 2 0 0 00 15 0 0 0 00 (a) 12 0 0 0 00 15 0 0 0 00 25 0 0 0 00 00 3 0 0 0 00 (e) 3 1 2 5 00 5 0 0 0 00 1 5 0 0 00 (f) 1 0 0 0 00 20 0 0 0 00 2 7 0 5 00 (h) 5 0 0 00 (i) 3 1 00 7 25 6 0 0 0 00 (g) 2 0 0 0 00 (j) 1 0 0 00 32 7 0 0 00 14 1 1 0 00 (b) 15 0 0 0 00 (a) 12 0 0 0 00 153 9 7 0 00 2 0 0 00 (g) 2 0 0 0 00 91 0 0 0 00 1 0 0 0 00 2 2 5 00 13 2 0 0 00 24 0 0 0 00 (h) 5 0 0 00 3 3 2 4 00 (i) 3 8 25 (e) 3 1 2 5 00 (f) 1 0 0 0 00 (c) 1 6 0 00 (d) 2 0 0 00 1 5 0 00 (j) 1 0 0 00 220 8 7 5 00

220 8 7 5 00

34 1 2 3 25

The firm earned $2,000 in 2013 by conducting seminars.

Chapter 12  441

PROBLEM 12.6A (continued)

ADJUSTED TRIAL BALANCE DEBIT CREDIT 28 3 8 6 00 5 0 0 00 3 2 0 00 1 0 0 00 12 0 0 0 00 25 0 0 0 00 6 1 2 5 00 5 0 0 0 00 2 5 0 0 00 20 0 0 0 00 2 7 0 5 00 5 0 0 00 3 1 00 7 25 4 0 0 0 00 1 0 0 00 32 7 0 0 00 14 1 1 0 00 15 0 0 0 00 12 0 0 0 00 153 9 7 0 00 2 0 0 00 2 0 0 0 00 91 0 0 0 00 1 0 0 0 00 2 2 5 00 13 2 0 0 00 24 5 0 0 00 3 3 6 2 25 3 1 2 5 00 1 0 0 0 00 1 6 0 00 2 0 0 00 2 5 0 00 237 6 3 8 25

237 6 3 8 25

INCOME STATEMENT DEBIT CREDIT

15 0 0 0 00

BALANCE SHEET DEBIT CREDIT 28 3 8 6 00 5 0 0 00 3 2 0 00 1 0 0 00 12 0 0 0 00 25 0 0 0 00 6 1 2 5 00 5 0 0 0 00 2 5 0 0 00 20 0 0 0 00 2 7 0 5 00 5 0 0 00 3 1 00 7 25 4 0 0 0 00 1 0 0 00 14 1 1 0 00 32 7 0 0 00

12 0 0 0 00 153 9 7 0 00

2 0 0 00 2 0 0 0 00 91 0 0 0 00 1 0 0 0 00 2 2 5 00 13 2 0 0 00 24 5 0 0 00 3 3 6 2 25 3 1 2 5 00 1 0 0 0 00 1 6 0 00 2 0 0 00 2 5 0 00 152 2 2 2 25 168 9 7 0 00

85 4 1

6 00

16 7 4 7 75 168 9 7 0 00 168 9 7 0 00

442  Chapter 12

85 4 1

6 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33

68 6 6 8 25

16 7 4 7 75

85 4 1 6 00

PROBLEM 12.1B PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 Dec 31 (Adjustment a) 3 Income Summary 4 Merchandise Inventory 5 6 31 (Adjustment b) 7 Merchandise Inventory 8 Income Summary 9 10 31 (Adjustment c) 11 Unearned Seminar Fees 12 Seminar Fees Income 13 14 31 (Adjustment d) 15 Insurance Expense 16 Prepaid Insurance 17 18 31 (Adjustment e) 19 Depreciation Expense - Store Equipment 20 Accumulated Depreciation - Store Equipment 21 22 31 (Adjustment f) 23 Wages Expense 24 Wages Payable 25 26 31 (Adjustment g) 27 Payroll Taxes Expense 28 State Unemployment Taxes Payable 29 Federal Unemployment Taxes Payable 30 Medicare Taxes Payable 31 Social Security Taxes Payable 32 33 31 (Adjustment h) 34 Uncollectible Accounts Expense 35 Allowance for Doubtful Accounts 36

POST. REF.

DEBIT

CREDIT

9 0 0 0 00 9 0 0 0 00

10 5 0 0 00 10 5 0 0 00

7 5 0 0 00 7 5 0 0 00

6 0 0 0 00 6 0 0 0 00

3 0 0 00 3 0 0 00

5 0 0 00 5 0 0 00

5 7 25 1 5 00 4 00 7 25 3 1 00

45 0 0 0 00 45 0 0 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36

Chapter 12  443

PROBLEM 12.1B (continued) PAGE

GENERAL JOURNAL

37 38 39 40 41 42 43 44 45 46 47

DATE DESCRIPTION 31 (Adjustment i) Rent Expense Prepaid Rent

POST. REF.

DEBIT 6 6 0 0 00

31 (Adjustment j) Supplies Expense Supplies

2 7 5 00

31 (Adjustment k) Interest Expense Interest Payable

4 0 00

CREDIT 37 38 6 6 0 0 00 39 40 41 42 2 7 5 00 43 44 45 4 0 00 46 47

Notes on calculations: a.-b. Amounts given. c. $10,000 cash received /4 seminars = $2,500/seminar. $2,500/seminar × 3 seminars conducted = $7,500 earned. d. $12,000/6 months in policy = $2,000/month. $2,000/month × 3 months expired (October, November and December) = $6,000 insurance expense. e. f. g. h. i. j. k.

($5,000 cost - $500 salvage value) /60 months = $75/month depreciation. $75/month × 4 months of use (September, October, November and December) = $300. Amounts given. Amounts given. $3,000,000 × 1.5% = $45,000 $13,200/6 months prepaid = $2,200/month; $2,200 × 3 months expired = $6,600. $500 balance - $225 supplies on hand = $275 of supplies used. $8,000 principal × 6% interest rate × 1/12 time factor = $40

Analyze: The balance of the Unearned Seminar Fees account will be $2,500 ($10,000 - $7,500 earned).

444  Chapter 12

PROBLEM 12.2B PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 June 1 Prepaid Rent 3 Cash 4 5 1 Cash 6 Prepaid Interest 7 Notes Payable 8 9 1 Cash 10 Unearned Advertising Fees 11 12 1 Office Equipment 13 Notes Payable 14 15 1 Prepaid Insurance 16 Cash 17 18 3 Office Furniture 19 Accounts Payable 20 Cash 21 22 5 Office Supplies 23 Cash 24

POST. REF.

DEBIT

CREDIT

18 0 0 0 00 18 0 0 0 00 17 5 5 0 00 4 5 0 00 18 0 0 0 00 54 6 0 0 00 54 6 0 0 00 15 4 0 0 00 15 4 0 0 00 1 9 4 4 00 1 9 4 4 00 17 4 0 0 00 9 0 0 0 00 8 4 0 0 00 2 8 1 0 00 2 8 1 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Chapter 12  445

PROBLEM 12.2B (continued) PAGE

GENERAL JOURNAL

DATE

DESCRIPTION Adjusting Entries

POST. REF.

1 2 2013 3 June 30 Rent Expense 4 Prepaid Rent 5 6 30 Interest Expense 7 Prepaid Interest 8 9 30 Unearned Advertising Fees 10 Advertising Fees 11 12 30 Interest Expense 13 Interest Payable 14 15 30 Depreciation Expense—Office Equipment Accumulated Depreciation—Office Equipment 16 17 18 30 Insurance Expense 19 Prepaid Insurance 20 21 30 Depreciation Expense—Office Furniture Accumulated Depreciation—Office Furniture 22 23 24 30 Office Supplies Expense 25 Office Supplies 26

DEBIT

CREDIT

3 0 0 0 00 3 0 0 0 00 1 5 0 00 1 5 0 00 4 5 5 0 00 4 5 5 0 00 1 5 4 00 1 5 4 00 2 4 0 00 2 4 0 00 1 6 2 00 1 6 2 00 2 7 0 00 2 7 0 00 1 6 6 0 00 1 6 6 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Analyze: Total Rent expense will be $18,000 at the end of the year.

446  Chapter 12

PROBLEM 12.3B Cross Timbers Company Partial Worksheet Month Ended September 30, 2013 ACCOUNT NAME 1 Cash 2 Supplies 3 Prepaid Rent 4 Prepaid Advertising 5 Prepaid Interest 6 Furniture 7 Accumulated Depreciation—Office Furniture 8 9 Equipment 10 Accumulated Depreciation—Equipment 11 Notes Payable 12 Accounts Payable 13 Interest Payable 14 Unearned Course Fees 15 Scott Nelson, Capital 16 Scott Nelson, Drawing 17 Course Fees 18 Salaries Expense 19 Telephone Expense 20 Entertainment Expense 21 Supplies Expense 22 Rent Expense 23 Advertising Expense 24 Depreciation Expense—Furniture 25 Depreciation Expense—Equipment 26 Interest Expense 27 28 Totals 29

TRIAL BALANCE DEBIT CREDIT 26 4 6 0 00 7 4 0 00 4 2 0 0 00 3 7 5 0 00 4 5 0 00 4 8 4 0 00

ADJUSTMENTS DEBIT CREDIT (a) (b) (c ) (d)

3 5 00 7 0 0 00 6 2 5 00 1 5 0 00

(e)

7 5 00

(f)

1 3 0 00

(g)

3 5 00

9 0 0 0 00

20 2 5 0 00 4 4 0 0 00 22 0 0 0 00 (h) 7 0 0 0 00 6 7 3 0 00 2 0 0 0 00 (h) 7 0 0 0 00 1 6 0 0 00 1 2 0 00 2 2 0 00

53 3 8 0 00

(a) (b) (c) (e)

3 5 00 7 0 0 00 6 2 5 00 7 5 00

(f)

1 3 0 00

(d) (g)

1 5 0 00 3 5 00 8 7 5 0 00

8 7 5 0 00

Chapter 12  447

PROBLEM 12.3B (continued)

ADJUSTED TRIAL BALANCE CREDIT DEBIT 26 4 6 0 00 7 0 5 00 3 5 0 0 00 3 1 2 5 00 3 0 0 00 4 8 4 0 00

INCOME STATEMENT DEBIT CREDIT

BALANCE SHEET DEBIT CREDIT 1 2 3 4 5 6 7

7 5 00

8 9 10

9 0 0 0 00 1 3 0 00 20 2 5 0 00 4 4 0 0 00 3 5 00 15 0 0 0 00 6 7 3 0 00

1 6 0 0 00 1 2 0 00 2 2 0 00 3 5 00 7 0 0 00 6 2 5 00 7 5 00

11 12 13 14 15 16 17 18 19 20 21 22 23 24

1 3 0 00

1 8 5 00

26 27

2 0 0 0 00 7 0 0 0 00

53 6 2 0 00

Analyze:

53 6 2 0 00

28 29

The net dollar effect of the adjustments is an increase of $5,250.00 in income.

448  Chapter 12

PROBLEM 12.4B Fun Depot Worksheet Year Ended December 31, 2013 TRIAL BALANCE ACCOUNT NAME 1 Cash

DEBIT 26 4 0 0 00

2 Accounts Receivable

22 7 0 0 00

3 Allowance for Doubtful Accounts

ADJUSTMENTS

CREDIT

DEBIT

3 2 0 00

CREDIT

(c ) 3

4 Merchandise Inventory

138 0 0 0 00

5 Supplies

11 6 0 0 00

(d) 8

6 4 0 00

6 Prepaid Advertising

5 2 8 0 00

(e) 3

5 2 0 00

7 Store Equipment

32 5 0 0 00 5 7 6 0 00

(f)

7 6 0 00

10 Accumulated Depr.—Office Equip.

1 4 4 0 00

(g) 1

4 4 0 00

11 Accounts Payable

8 6 0 0 00

12 Social Security Tax Payable

5 9 2 0 00

(i)

4 9 6 00

13 Medicare Tax Payable

1 3 6 8 00

(i)

1 1 6 00

14 Federal Unemployment Tax Payable

(j)

6 4 00

15 State Unemployment Tax Payable

(j)

4 3 2 00

16 Salaries Payable

(h) 8

0 0 0 00

8 Accumulated Depr.—Store Equip. 9 Office Equipment

112 2 5 0 00 100 0 0 0 00

19 Sales

1,043 6 6 2 00

20 Sales Returns and Allowances

17 2 0 0 00

21 Purchases

507 6 0 0 00

22 Purchases Returns and Allowances 23 Rent Expense

0 0 0 00 (a)138 0 0 0 00

8 4 0 0 00

17 Janie Fielder, Capital 18 Janie Fielder, Drawing

(b)148

0 8 0 00

5 0 4 0 00 125 0 0 0 00

24 Telephone Expense

4 2 8 0 00

25 Salaries Expense

164 2 0 0 00

26 Payroll Taxes Expense

15 2 0 0 00

(h) 8

0 0 0 00

(i)

6 1 2 00

(j)

4 9 6 00

28 Income Summary

(a)138

0 0 0 00 (b)148 0 0 0 00

29 Supplies Expense

(d) 8

6 4 0 00

(e) 3

5 2 0 00

31 Depreciation Expense—Store Equip.

(f)

7 6 0 00

32 Depreciation Expense—Office i 33 E Uncollectible Accounts Expense

(g) 1

4 4 0 00

0 8 0 00

30 Advertising Expense

34 Totals Carried Forward

6 0 0 0 00

1,184 3 6 0 00

317 5 4 8 00

Chapter 12  449

PROBLEM 12.4B (continued)

ADJUSTED TRIAL BALANCE DEBIT CREDIT 26 4 0 0 00 22 7 0 0 00 3 4 0 0 00

INCOME STATEMENT DEBIT CREDIT

148 0 0 0 00 2 9 6 0 00 1 7 6 0 00 32 5 0 0 00

BALANCE SHEET DEBIT CREDIT 26 4 0 0 00 22 7 0 0 00 3 4 0 0 00 148 0 0 0 00 2 9 6 0 00 1 7 6 0 00 32 5 0 0 00

11 5 2 0 00

8 4 0 0 00

8 4 0 0 00 2 8 8 0 00 8 6 0 0 00 6 4 1 6 00 1 4 8 4 00 6 4 00 4 3 2 00 8 0 0 0 00 112 2 5 0 00

2 8 8 0 00 8 6 0 0 00 6 4 1 6 00 1 4 8 4 00 6 4 00 4 3 2 00 8 0 0 0 00 112 2 5 0 00

100 0 0 0 00

100 0 0 0 00 1043 6 6 2 00

17 2 0 0 00 507 6 0 0 00

1043 6 6 2 00 17 2 0 0 00 507 6 0 0 00

5 0 4 0 00 125 0 0 0 00 4 2 8 0 00 172 2 0 0 00 16 3 0 8 00 138 0 0 0 00 8 6 4 0 00 9 5 2 0 00 5 7 6 0 00 1 4 4 0 00 3 0 8 0 00 1,351 7 4 8 00

450  Chapter 12

5 0 4 0 00 125 0 0 0 00 4 2 8 0 00 172 2 0 0 00 16 3 0 8 00

148 0 0 0 00

1,351 7 4 8 00

138 0 0 0 00 8 6 4 0 00 9 5 2 0 00 5 7 6 0 00 1 4 4 0 00 3 0 8 0 00 1,009 0 2 8 00

148 0 0 0 00

1,196 7 0 2 00

342 7 2 0 00 155 0 4 6 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34

PROBLEM 12.4B (continued) Fun Depot Worksheet (Continued) Year Ended December 31, 2013 ACCOUNT NAME 1 Totals Brought Forward 2 Totals 3 Net Income 4 5

TRIAL BALANCE ADJUSTMENTS DEBIT CREDIT DEBIT CREDIT 1,184 3 6 0 00 1,184 3 6 0 00 317 5 4 8 00 317 5 4 8 00 1,184 3 6 0 00 1,184 3 6 0 00 317 5 4 8 00 317 5 4 8 00

Chapter 12  451

PROBLEM 12.4B (continued)

ADJUSTED TRIAL BALANCE INCOME STATEMENT BALANCE SHEET DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT 1,351 7 4 8 00 1,351 7 4 8 00 1,009 0 2 8 00 1,196 7 0 2 00 342 7 2 0 00 155 0 4 6 00 1 187 6 7 4 00 187 6 7 4 00 2 1,196 7 0 2 00 1,196 7 0 2 00 342 7 2 0 00 342 7 2 0 00 3 4 5

Analyze: The resulting net income without the advertising adjustment would have been $191,194.

452  Chapter 12

PROBLEM 12.5B Whatnots Worksheet Year Ended December 31, 2013 TRIAL BALANCE ADJUSTMENTS DEBIT CREDIT DEBIT CREDIT 3 2 3 5 00 6 9 1 0 00 6 0 0 00 (c) 1 2 8 0 00 16 9 8 5 00 (b) 15 8 4 0 00 (a) 16 9 8 5 00 7 5 0 00 (d) 5 0 5 00 2 4 0 0 00 (e) 1 2 0 0 00 6 0 0 0 00

ACCOUNT NAME 1 Cash 2 Accounts Receivable 3 Allowance for Doubtful Accounts 4 Merchandise Inventory 5 Supplies 6 Prepaid Insurance 7 Store Equipment 8 Accumulated Depr.—Store Equipment 9 Equipment 2 0 0 0 00 10 Store Fixtures 15 7 6 0 00 11 Accumulated Depr.—Store Fixtures 4 1 0 0 00 12 Notes Payable 4 0 0 0 00 13 Accounts Payable 6 0 0 00 14 Interest Payable 15 Social Security Tax Payable 16 Medicare Tax Payable 17 Federal Unemployment Tax Payable 18 State Unemployment Tax Payable 19 Salaries Payable 20 Preston Allen, Capital 39 7 8 0 00 21 Preston Allen, Drawing 8 0 0 0 00 22 Sales 236 5 6 0 00 23 Sales Returns and Allowances 6 0 0 0 00 24 Purchases 160 0 0 0 00 25 Purchases Returns and Allowance 2 0 0 0 00 26 Rent Expenses 18 0 0 0 00 27 Telephone Expense 2 4 0 0 00 28 Salaries Expense 40 0 0 0 00 (i) 1 4 5 0 00 29 Payroll Taxes Expense 3 2 0 0 00 (j) 1 1 0 93 30 (k) 8 7 00 31 Income Summary (a) 16 9 8 5 00 32 Supplies Expense (d) 5 0 5 00 33 Insurance Expense (e) 1 2 0 0 00 34 Totals Carried Forward 289 6 4 0 00 289 6 4 0 00 36 1 7 7 93

(f)

1 0 0 0 00

(g) 2 0 5 0 00

(h) 9 0 00 (j) 8 9 90 (j) 2 1 03 (k) 1 4 50 (k) 7 2 50 (i) 1 4 5 0 00

(b) 15 8 4 0 00

40 5 9 7 93

Chapter 12  453

PROBLEM 12.5B (continued)

ADJUSTED TRIAL BALANCE DEBIT CREDIT 3 2 3 5 00 6 9 1 0 00 1 8 8 0 00 15 8 4 0 00 2 4 5 00 1 2 0 0 00 6 0 0 0 00

INCOME STATEMENT DEBIT CREDIT

BALANCE SHEET DEBIT CREDIT 3 2 3 5 00 6 9 1 0 00 1 8 8 0 00 15 8 4 0 00 2 4 5 00 1 2 0 0 00 6 0 0 0 00

3 0 0 0 00

15 7 6 0 00

15 7 6 0 00 6 1 5 0 00 4 0 0 0 00 6 0 0 00 9 0 00 8 9 90 2 1 03 1 4 50 7 2 50 1 4 5 0 00 39 7 8 0 00

6 1 5 0 00 4 0 0 0 00 6 0 0 00 9 0 00 8 9 90 2 1 03 1 4 50 7 2 50 1 4 5 0 00 39 7 8 0 00

8 0 0 0 00

8 0 0 0 00 236 5 6 0 00

6 0 0 0 00 160 0 0 0 00

236 5 6 0 00 6 0 0 0 00 160 0 0 0 00

2 0 0 0 00 18 0 0 0 00 2 4 0 0 00 41 4 5 0 00 3 3 9 7 93 16 9 8 5 00 5 0 5 00 1 2 0 0 00 307 1 2 7 93

454  Chapter 12

2 0 0 0 00 18 0 0 0 00 2 4 0 0 00 41 4 5 0 00 3 3 9 7 93

15 8 4 0 00

311 5 4 7 93

16 9 8 5 00 5 0 5 00 1 2 0 0 00 249 9 3 7 93

15 8 4 0 00

254 4 0 0 00

57 1 9 0 00

57 1 4 7 93

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34

PROBLEM 12.5B (continued)

ACCOUNT NAME 1 Totals Brought Forward 2 Depr. Expense—Store Equipment 3 Depr. Expense—Store Fixtures 4 Interest Expense 5 Uncollectible Accounts Expense 6 Totals 7 Net Income 8 9

TRIAL BALANCE DEBIT CREDIT 289 6 4 0 00 289 6 4 0 00

ADJUSTMENTS DEBIT CREDIT 36 1 7 7 93 40 5 9 7 93 (f) 1 0 0 0 00 (g) 2 0 5 0 00 (h) 9 0 00 (c) 1 2 8 0 00 289 6 4 0 00 289 6 4 0 00 40 5 9 7 93 40 5 9 7 93

Chapter 12  455

PROBLEM 12.5B (continued)

1 2 3 4 5 6 7 8 9

ADJUSTED TRIAL BALANCE DEBIT CREDIT 307 1 2 7 93 311 5 4 7 93 1 0 0 0 00 2 0 5 0 00 9 0 00 1 2 8 0 00 311 5 4 7 93 311 5 4 7 93

INCOME STATEMENT DEBIT CREDIT 249 9 3 7 93 254 4 0 0 00 1 0 0 0 00 2 0 5 0 00 9 0 00 1 2 8 0 00 254 3 5 7 93 254 4 0 0 00 4 2 07 254 4 0 0 00 254 4 0 0 00

BALANCE SHEET DEBIT CREDIT 57 1 9 0 00 57 1 4 7 93 1 2 3 4 5 57 1 9 0 00 57 1 4 7 93 6 4 2 07 7 57 1 9 0 00 57 1 9 0 00 8 9

Analyze: The net book value of the company’s assets is $38,160. ($49,190 − $11,030).

456  Chapter 12

PROBLEM 12.6B The Game Place Worksheet Year Ended December 31, 2013 ACCOUNT NAME 1 Cash 2 Accounts Receivable 3 Prepaid Advertising 4 Supplies 5 Merchandise Inventory 6 Store Equipment 7 Accum. Depr., Store Equip. 8 Office Equipment 9 Accum. Depr., Office Equip. 10 Notes Payable, due 2014 11 Accounts Payable 12 Wages Payable 13 Social Security Tax Payable 14 Medicare Tax Payable 15 Unearned Seminar Fees 16 Interest Payable 17 Matt Huffman, Capital 18 Matt Huffman, Drawing 19 Income Summary 20 Sales 21 Sales Discounts 22 Seminar Fee Income 23 Purchases 24 Purchases Returns & Allow. 25 Freight In 26 Rent Expense 27 Wages Expense 28 Payroll Taxes Expense 29 Depreciation Exp., Store Equip. 30 Depreciation Exp., Office Equip. 31 Advertising Expense 32 Supplies Expense 33 Interest Expense 34 35 Net income 36

TRIAL BALANCE ADJUSTMENTS DEBIT CREDIT DEBIT CREDIT 32 4 6 5 00 6 6 9 00 4 8 0 00 (c) 3 2 0 00 4 2 5 00 (d) 2 7 5 00 18 5 0 0 00 (a) 20 0 0 0 00 (b) 18 5 0 0 00 30 0 0 0 00 3 0 0 0 00 (e) 4 5 0 0 00 4 8 0 0 00 1 5 0 0 00 (f) 1 5 0 0 00 22 5 0 0 00 3 7 2 5 00 (h) 8 0 0 00 (i) 4 9 60 (i) 1 1 60 7 5 0 0 00 (g) 6 0 0 0 00 (j) 1 5 0 00 43 0 0 0 00 18 0 0 0 00 (b) 18 5 0 0 00 (a) 20 0 0 0 00 162 6 6 0 00 1 8 0 00 (g) 6 0 0 0 00 92 5 0 0 00 7 7 0 00 2 7 5 00 26 4 0 0 00 18 0 0 0 00 (h) 8 0 0 00 1 8 1 1 00 (i) 6 1 20 (e) 4 5 0 0 00 (f) 1 5 0 0 00 (c) 3 2 0 00 (d) 2 7 5 00 1 5 0 00 (j) 1 5 0 00 244 6 5 5 00 244 6 5 5 00 52 1 0 6 20 52 1 0 6 20

Chapter 12  457

PROBLEM 12.6B (continued)

ADJUSTED TRIAL BALANCE DEBIT CREDIT 32 4 6 5 00 6 6 9 00 1 6 0 00 1 5 0 00 20 0 0 0 00 30 0 0 0 00 7 5 0 0 00 4 8 0 0 00 3 0 0 0 00 22 5 0 0 00 3 7 2 5 00 8 0 0 00 4 9 60 1 1 60 1 5 0 0 00 1 5 0 00 43 0 0 0 00 18 0 0 0 00 18 5 0 0 00 20 0 0 0 00 162 6 6 0 00 1 8 0 00 6 0 0 0 00 92 5 0 0 00 7 7 0 00 2 7 5 00 26 4 0 0 00 18 8 0 0 00 1 8 7 2 20 4 5 0 0 00 1 5 0 0 00 3 2 0 00 2 7 5 00 3 0 0 00 271 6 6 6 20

271 6 6 6 20

INCOME STATEMENT DEBIT CREDIT

18 5 0 0 00

BALANCE SHEET DEBIT CREDIT 32 4 6 5 00 6 6 9 00 1 6 0 00 1 5 0 00 20 0 0 0 00 30 0 0 0 00 7 5 0 0 00 4 8 0 0 00 3 0 0 0 00 22 5 0 0 00 3 7 2 5 00 8 0 0 00 4 9 60 1 1 60 1 5 0 0 00 1 5 0 00 43 0 0 0 00 18 0 0 0 00

20 0 0 0 00 162 6 6 0 00

1 8 0 00 6 0 0 0 00 92 5 0 0 00 7 7 0 00 2 7 5 00 26 4 0 0 00 18 8 0 0 00 1 8 7 2 20 4 5 0 0 00 1 5 0 0 00 3 2 0 00 2 7 5 00 3 0 0 00 165 4 2 2 20

189 4 3 0 00

106 2 4 4 00

24 0 0 7 80 189 4 3 0 00 Analyze:

168 9 7 0 00

106 2 4 4 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33

82 2 3 6 20

24 0 0 7 80

106 2 4 4 00

The balance of merchandise inventory increased by $1,500 during 2013 ($20,000 $18,500).

458  Chapter 12

CRITICAL THINKING PROBLEM 12.1 Ben’s Jewelers Worksheet Year Ended December 31, 2013

ACCOUNT NAME 1 Cash 2 Accounts Receivable 3 Allowance for Doubtful Accounts 4 Merchandise Inventory 5 Store Supplies 6 Office Supplies 7 Store Equipment 8 Accumulated Depr.—Store Equip. 9 Office Equipment 10 Accumulated Depr.—Office Equip. 11 Accounts Payable 12 Salaries Payable 13 Social Security Tax Payable 14 Medicare Tax Payable 15 Federal Unemployment Tax Payable 16 State Unemployment Tax Payable 17 Ben Waites, Capital 18 Ben Waites, Drawing 19 Income Summary 20 Sales 21 Sales Returns and Allowances 22 Purchases 23 Purchases Returns and Allowances 24 Purchases Discounts 25 Freight In 26 Salaries Expense—Sales 27 Rent Expense 28 Advertising Expense 29 Store Supplies Expense 30 Depreciation Expense—Store Equip. 31 Salaries Expense—Office 32 Total Carried Forward 33

TRIAL BALANCE ADJUSTMENTS DEBIT CREDIT DEBIT CREDIT 13 0 5 0 00 49 9 0 0 00 2 0 0 0 00 (c) 1 0 0 0 00 105 9 0 0 00 (b) 98 7 0 0 00 (a)105 9 0 0 00 4 2 3 0 00 (d) 3 6 0 5 00 2 9 5 0 00 (e) 2 6 4 5 00 113 5 9 0 00 13 0 1 0 00 (f) 11 3 6 0 00 27 6 4 0 00 4 9 3 0 00 (g) 3 3 0 0 00 4 3 9 0 00 (h) 5 0 0 0 00 (i) 3 2 6 00 (i) 7 6 00 (j) 5 6 00 (j) 2 7 0 00 166 3 1 0 00 30 0 0 0 00 (a)105 9 0 0 00 (b) 98 7 0 0 00 862 2 3 0 00 7 5 8 0 00 504 8 1 0 00 4 2 4 0 00 10 7 7 0 00 7 0 0 0 00 75 9 5 0 00 (h) 4 0 0 0 00 35 5 0 0 00 12 3 0 0 00 (d) 3 6 0 5 00 (f) 11 3 6 0 00 77 4 8 0 00 (h) 1 0 0 0 00 1,067 8 8 0 00 1,067 8 8 0 00

224 5 6 5 00

232 2 3 8 00

Chapter 12  459

CRITICAL THINKING PROBLEM 12.1 (continued)

ADJUSTED TRIAL BALANCE INCOME STATEMENT BALANCE SHEET DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT 13 0 5 0 00 13 0 5 0 00 49 9 0 0 00 49 9 0 0 00 3 0 0 0 00 3 0 0 0 00 98 7 0 0 00 98 7 0 0 00 6 2 5 00 6 2 5 00 3 0 5 00 3 0 5 00 113 5 9 0 00 113 5 9 0 00 24 3 7 0 00 24 3 7 0 00 27 6 4 0 00 27 6 4 0 00 8 2 3 0 00 8 2 3 0 00 4 3 9 0 00 4 3 9 0 00 5 0 0 0 00 5 0 0 0 00 3 2 6 00 3 2 6 00 7 6 00 7 6 00 5 6 00 5 6 00 2 7 0 00 2 7 0 00 166 3 1 0 00 166 3 1 0 00 30 0 0 0 00 30 0 0 0 00 105 9 0 0 00 98 7 0 0 00 105 9 0 0 00 98 7 0 0 00 862 2 3 0 00 862 2 3 0 00 7 5 8 0 00 7 5 8 0 00 504 8 1 0 00 504 8 1 0 00 4 2 4 0 00 4 2 4 0 00 10 7 7 0 00 10 7 7 0 00 7 0 0 0 00 7 0 0 0 00 79 9 5 0 00 79 9 5 0 00 35 5 0 0 00 35 5 0 0 00 12 3 0 0 00 12 3 0 0 00 3 6 0 5 00 3 6 0 5 00 11 3 6 0 00 11 3 6 0 00 78 4 8 0 00 78 4 8 0 00 1,180 2 9 5 00

460  Chapter 12

1,187 9 6 8 00 846 4 8 5 00 975 9 4 0 00 333 8 1 0 00 212 0 2 8 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33

CRITICAL THINKING PROBLEM 12.1 (continued) Ben’s Jewelers Worksheet (Continued) Year Ended December 31, 2013

ACCOUNT NAME 1 Totals Brought Forward 2 Office Supplies Expense 3 Depreciation Expense—Office 4 Uncollectible Accounts Expense 5 Payroll Taxes Expense 6 7 Totals 8 Net Income 9

TRIAL BALANCE DEBIT CREDIT 1,067 8 8 0 00 1,067 8 8 0 00

1,067 8 8 0 00

ADJUSTMENTS DEBIT CREDIT 224 5 6 5 00 232 2 3 8 00 (e) 2 6 4 5 00 (g) 3 3 0 0 00 (c) 1 0 0 0 00 (i) 4 0 2 00 (j) 3 2 6 00 1,067 8 8 0 00 232 2 3 8 00 232 2 3 8 00

Chapter 12  461

CRITICAL THINKING PROBLEM 12.1 (continued)

ADJUSTED TRIAL BALANCE DEBIT CREDIT 1,180 2 9 5 00 1,187 9 6 8 00 2 6 4 5 00 3 3 0 0 00 1 0 0 0 00 7 2 8 00

INCOME STATEMENT DEBIT CREDIT 846 4 8 5 00 975 9 4 0 00 2 6 4 5 00 3 3 0 0 00 1 0 0 0 00 7 2 8 00

1,187 9 6 8 00

854 1 5 8 00 121 7 8 2 00 975 9 4 0 00

462  Chapter 12

1,187 9 6 8 00

975 9 4 0 00 975 9 4 0 00

BALANCE SHEET DEBIT CREDIT 333 8 1 0 00 212 0 2 8 00 1 2 3 4 5 6 333 8 1 0 00 212 0 2 8 00 7 121 7 8 2 00 8 333 8 1 0 00 333 8 1 0 00 9

CRITICAL THINKING PROBLEM 12.1 (continued) PAGE

GENERAL JOURNAL

DATE 1 2 2013 3 Dec. 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35

DESCRIPTION Adjusting Entries

POST. REF.

Instruction 2 31 Income Summary Merchandise Inventory

DEBIT

105 9 0 0 98 7 0 0 00

31 Uncollectible Accounts Expense Allowance for Doubtful Accounts

1 0 0 0 00

31 Store Supplies Expense Store Supplies

3 6 0 5 00

31 Office Supplies Expense Office Supplies

2 6 4 5 00

31 Depreciation Expense—Store Equipment Accumulated Depreciation—Store Equipment

11 3 6 0 00

31 Depreciation Expense—Office Equipment Accumulated Depreciation—Office Equipment

3 3 0 0 00

31 Salaries Expense—Sales Salaries Expense—Office Salaries Payable

4 0 0 0 00 1 0 0 0 00

98 7 0 0

1 0 0 0

3 6 0 5

2 6 4 5

11 3 6 0

3 3 0 0

5 0 0 0

31 Payroll Taxes Expense Social Security Tax Payable Medicare Tax Payable

4 0 2 00

31 Payroll Taxes Expenses Federal Unemployment Tax Payable State Unemployment Tax Payable

3 2 6 00

CREDIT

105 9 0 0 00

31 Merchandise Inventory Income Summary

3 2 6 7 6

5 6 2 7 0

1 2 3 00 4 5 6 00 7 8 9 00 10 11 12 00 13 14 15 00 16 17 18 00 19 20 21 00 22 23 24 25 00 26 27 28 00 29 00 30 31 32 00 33 00 34 35

Chapter 12  463

CRITICAL THINKING PROBLEM 12.1 (continued) PAGE

GENERAL JOURNAL

DATE

DESCRIPTION

1 2 2013 Instruction 3 3 Dec. 31 Sales 4 Purchases Returns and Allowances 5 Purchases Discounts 6 Income Summary 7 8 Dec. 31 Income Summary 9 Sales Returns and Allowances 10 Purchases 11 Freight In 12 Salaries Expense—Sales 13 Rent Expense 14 Advertising Expense 15 Store Supplies Expense 16 Depreciation Expense—Store Equipment 17 Office Salaries Expense 18 Uncollectible Accounts Expense 19 Depreciation Expense—Office Equipment 20 Office Supplies Expense 21 Payroll Taxes Expense 22 23 31 Income Summary 24 Ben Waites, Capital 25 26 31 Ben Waites, Capital 27 Ben Waites, Drawing 28

464  Chapter 12

POST. REF.

DEBIT

CREDIT

1 2 862 2 3 0 00 3 4 2 4 0 00 4 10 7 7 0 00 5 877 2 4 0 00 6 7 748 2 5 8 00 8 7 5 8 0 00 9 504 8 1 0 00 10 7 0 0 0 00 11 79 9 5 0 00 12 35 5 0 0 00 13 12 3 0 0 00 14 3 6 0 5 00 15 11 3 6 0 00 16 78 4 8 0 00 17 1 0 0 0 00 18 3 3 0 0 00 19 2 6 4 5 00 20 7 2 8 00 21 22 121 7 8 2 00 23 121 7 8 2 00 24 25 30 0 0 0 00 26 30 0 0 0 00 27 28

CRITICAL THINKING PROBLEM 12.1 (continued) a. Net Sales

Sales Less Sales Returns and Allowances Net Sales

$862,230 7,580 $854,650

b. Net Delivered Cost of Purchases

Purchases Freight In Delivered Cost of Purchases Less Purchases Returns and Allowances Purchases Discounts Net Delivered Cost of Purchases

$504,810 7,000 $511,810

c. Cost of Goods Sold

$4,240 10,770

15,010 496,800

Merchandise Inventory, January 1, 2013 Net Delivered Cost of Purchases Total Merchandise Available for Sale Less Merchandise Inventory, December 31, 2013 Cost of Goods Sold

$105,900 496,800 602,700 98,700 $504,000

d. Net Income (from worksheet) e. Capital, December 31

Analyze:

$121,782

Ben Waites, Capital, January 1, 2013 Net Income for Year Less Withdrawals for Year Ben Waites, Capital, December 31, 2013

$166,310 $121,782 30,000

91,782 $258,092

The changes shown in Ben Waites, Capital in the statement of owner’s equity will be the net income, $121,782, and the withdrawal of $30,000.

Chapter 12  465

CRITICAL THINKING PROBLEM 12.2 1. Under the accrual basis of accounting, expenses are recorded when incurred and not necessarily when paid. Thus, when a business reports expenses on the income statement that did not require the use of cash during the accounting period, the increase in the cash account will be greater than the net income.

Increase in cash account Net Income from income statement Difference Expense not requiring the use of cash: Increase in Salaries Payable Decrease in Prepaid Insurance Decrease in Supplies Depreciation Expense Difference

466  Chapter 12

$48,028 19,100 $28,928 $12,360 300 2,268 14,000 $28,928

SOLUTIONS TO BUSINESS CONNECTIONS Ethical Dilemma: You should count the row only once. Counting a row twice will misrepresent the amount of inventory and create false financial statements. Financial Statement Analysis: 1. Prepaid expenses and accumulated depreciation. 2. Prepaid expenses: debit the appropriate expense account and credit Prepaid Expenses. Accumulated depreciation: debit Depreciation Expense and credit Accumulated Depreciation. 3. Inventories increased by 1.6 percent. Teamwork: Since service companies will not have inventory, the inventory adjustment would not be needed. Both types of companies would require an insurance and depreciation adjustment. Service companies that deal only with cash customers would not require an uncollectible account adjustment. A service company would need the accrued wages since the employee will be directly producing the service income but paid weekly instead of daily. Internet Connection: The student’s answer will depend on the search engine used. In general, several Excel spreadsheets should be available to download.

Chapter 12  467

SOLUTIONS TO PRACTICE TEST Part A True-False 1. TRUE 2. TRUE 3. TRUE 4. FALSE 5. FALSE 6. FALSE 7. FALSE 8. TRUE 9. TRUE 10. TRUE 11. TRUE 12. FALSE 13. TRUE

14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25.

TRUE FALSE FALSE FALSE TRUE TRUE FALSE TRUE TRUE FALSE TRUE TRUE

Part B Exercises PAGE

GENERAL JOURNAL DATE 1 2 3 4 2013 5 Dec. 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

DESCRIPTION Adjusting Entries

POST. REF.

DEBIT

(Adjustment 1) 31 Supplies Expense Store Supplies

1 2 0 0 00

(Adjustment 2) 31 Interest Expense Interest Payable

2 0 00

(Adjustment 3) 31 Interest Receivable Interest Income

7 0 00

(Adjustment 4) 31 Insurance Expense Prepaid Insurance

4 0 0 00

1 2 0 0 00

2 0 00

7 0 00

(Adjustment 5) 31 Unearned Season Tickets Income Season Tickets Income

468  Chapter 12

CREDIT

4 0 0 00

360 0 0 0 00 360 0 0 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

CHAPTER 13 FINANCIAL STATEMENTS AND CLOSING PROCEDURES Chapter Opener: Thinking Critically Students should realize information such as stock prices, dividend earnings, net income, gross profit, net sales, and changes in stockholders’ equity are all indicators of the financial strength of a company. Fast Facts Whole Foods operates 284 stores with an average store size of 37,000 square feet. • The stores feature over 30,000 natural and organic items. • To underscore the company’s focus on health, it recently created a new Core Company Value – • Promoting the health of our stakeholders through healthy eating education. Whole Foods employs 52,000 people in North America and the United Kingdom. • Managerial Implications: Thinking Critically Managers can use financial statements to learn about a company’s operating efficiency by using ratios and measurements to analyze the financial statement results and compare them to those measurements of prior periods and to similar businesses in the same industry. Discussion Questions Note to instructor : These questions are designed to check students’ understanding of new terms, concepts, and procedures presented in the chapter. 1. Other Revenue and Expense consists of items that are routine and recurring, but not properly included in Operating Expenses. To be an Extraordinary Gain and Loss, the item must be one that seldom occurs and is not a part of the normal business operation. 2.

Operating expenses arise from the normal operating activities of the business. Financing expenses are generally excluded from operating expenses and included in Other Revenues and Expenses.

3. 4.

The Cost of Goods Sold section contains this information. It shows the firm’s financial position on a specific date through a presentation of the assets, liabilities and owner’s equity. Cash, items that will be converted into cash within one year, and items that will be used up within one year are considered to be current assets. These include cash, accounts receivable, merchandise inventory, and prepaid expenses.

Current liabilities are debts that must be paid within one year; long-term liabilities are debts that are due more than a year in the future. 7. It reports the beginning and ending owner’s equity and the changes that occurred in owner’s equity during the year. 8. a. Ending merchandise inventory is shown in both the income statement and the balance sheet. b. The owner’s ending capital is shown in both the balance sheet and the statement of owner’s equity.

Chapter 13  469

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Discussion Questions (continued) 9.

It assures that the general ledger is in balance after the adjusting and closing entries have been posted. 10. The permanent accounts—assets, liabilities, and owner’s equity—appear on the post-closing trial balance. 11. The likely problem is that the posting of either a debit amount or a credit amount of a closing entry was entered as an incorrect figure to an asset or liability account. 12. The types of adjusting entries that are reversed are: (a) all accruals, (b) prepaid items such as prepaid insurance initially charged to the Insurance Expense account and (c) unearned income items initially credited to income accounts. 13. A reversing entry with a debit to Interest Income and a credit to Interest Receivable would be recorded. 14. Entries for (a) accrued payroll taxes and (e) accrued interest income would be reversed. 15. The steps in the accounting cycle are: a. Analyze transactions b. Journalize the data about transactions c. Post the data about transactions to the accounts d. Prepare a worksheet e. Prepare financial statements f. Journalize and post adjusting entries g. Journalize and post closing entries h. Prepare a post closing trial balance i. Interpret the financial information j. A final step for some companies is to journalize and post reversing entries. 16. The additional investment would be shown in the Statement of Owner’s Equity as an addition to Beginning Capital.

470  Chapter 13

EXERCISE 13.1 1. Purchase returns and Allowances 2. Telephone Expense 3. Sales Returns and Allowances 4. Purchases 5. Interest income

b c a b d

6. 7. 8. 9.

Merchandise Inventory Interest Expense Sales Depreciation expense – Store Equipment 10. Rent Expense

b e a c c

EXERCISE 13.2 1. Accounts Receivable 2. Delivery Van 3. Prepaid Insurance 4. Notes Payable, due 2014 5. Store Supplies

a b a c a

6. 7. 8. 9. 10.

Accounts Payable Merchandise Inventory Ray Lynch, Capital Cash Unearned Subscription Income

c a e a c

Chapter 13  471

EXERCISE 13.3 Alec’s Office Supplies Income Statement Year Ended December 31, 2013 Operating Revenue Sales Less Sales Returns and Allowance Net Sales Cost of Goods Sold Merchandise Inventory, January 1, 2013 Purchases Freight In Delivered Cost of Purchases Less Purchases Returns and Allowance Purchases Discounts Net Delivered Cost of Purchases Total Merchandise Available for Sale Less Merchandise Inventory, Dec. 31, 2013 Cost of Goods Sold Gross Profit on Sales Operating Expenses Selling Expenses Salaries Expense—Sales Store Supplies Expense Depreciation Expense—Store Equip. Total Selling Expense General and Administrative Expenses Rent Expense Utilities Expense Salaries Expense—Office Payroll Taxes Expense Depreciation Expense—Office Equip. Uncollectible Accounts Expense Total General and Admin. Expenses Total Operating Expenses Income from Operations Other Income Miscellaneous Income Other Expense Interest Expense Net Nonoperating Expenses Net Income for Year

472  Chapter 13

245 6 0 0 00 4 2 5 0 00 241 3 5 0 00 58 7 7 5 00 102 6 0 0 00 1 8 7 5 00 104 4 7 5 00 3 5 0 0 00 1 7 0 0 00

5 2 0 0 00 99 2 7 5 00 158 0 5 0 00 51 7 2 5 00 106 3 2 5 00 135 0 2 5 00

44 3 0 0 00 2 2 1 0 00 1 4 1 0 00 47 9 2 0 00 12 5 0 0 00 2 9 0 0 00 20 1 0 0 00 5 0 0 0 00 4 7 0 00 6 2 0 00 41 5 9 0 00 89 5 1 0 00 45 5 1 5 00 3 0 0 00 5 4 0 00 2 4 0 00 45 2 7 5 00

EXERCISE 13.4 Alec’s Office Supplies Statement of Owner's Equity Year Ended December 31, 2013 Alec Patel, Capital, January 1, 2013 Net Income for Year Less Withdrawals for Year Increase in Capital Alec Patel, Capital, December 31, 2013

62 7 6 0 00 45 2 7 5 00 40 2 0 0 00 5 0 7 5 00 67 8 3 5 00

EXERCISE 13.5 Alec’s Office Supplies Balance Sheet December 31, 2013 Assets Current Assets Cash Change Fund Accounts Receivable Less Allowance for Doubtful Accounts Merchandise Inventory Prepaid Expenses Store Supplies Prepaid Interest Total Current Assets Plant and Equipment Store Equipment Less Accumulated Depreciation Office Equipment Less Accumulated Depreciation Total Plant and Equipment Total Assets Liabilities and Owner’s Equity Current Liabilities Notes Payable Accounts Payable Interest Payable Sales Tax Payable Total Current Liabilities Owner’s Equity Alec Patel, Capital Total Liabilities and Owner’s Equity

9 7 8 0 00 4 0 0 00 5 0 4 0 00 7 6 0 00

1 0 0 0 00 8 0 00

10 2 0 0 00 1 0 8 0 00 3 2 0 0 00 4 0 0 00

4 2 8 0 00 51 2 5 0 00

1 0 8 0 00 66 7 9 0 00

9 1 2 0 00 2 8 0 0 00 11 9 2 0 00 78 7 1 0 00

5 4 0 0 00 3 6 2 5 00 6 0 00 1 7 9 0 00 10 8 7 5 00 67 8 3 5 00 78 7 1 0 00

Chapter 13  473

EXERCISE 13.6 GENERAL JOURNAL

DATE DESCRIPTION Closing Entries 1 2 2013 3 Dec. 31 Sales 4 Interest Income 5 Purchases Returns and Allowances 6 Purchases Discounts 7 Income Summary 8 9 31 Income Summary 10 Sales Returns and Allowances 11 Sales Discounts 12 Purchases 13 Freight In 14 Rent Expense 15 Utilities Expense 16 Telephone Expense 17 Salaries Expense 18 Payroll Taxes Expense 19 Supplies Expense 20 Depreciation Expense 21 Interest Expense 22 23 31 Income Summary 24 Bobby Thomason, Capital 25 26 31 Bobby Thomason, Capital 27 Bobby Thomason, Drawing 28 29 30 31 32 33 34 35 36 37

474  Chapter 13

PAGE POST. REF.

DEBIT

254 5 0 0 00 1 7 0 00 2 0 0 0 00 1 5 3 0 00

232 2 8 0 00

29 2 2 0 00

26 2 0 0 00

CREDIT 1 2 3 4 5 6 258 2 0 0 00 7 8 9 3 9 0 0 00 10 2 9 0 0 00 11 134 4 0 0 00 12 2 2 0 0 00 13 8 5 0 0 00 14 2 9 3 0 00 15 1 5 4 0 00 16 66 1 0 0 00 17 5 2 7 0 00 18 1 7 0 0 00 19 2 5 0 0 00 20 3 4 0 00 21 22 23 29 2 2 0 00 24 25 26 26 2 0 0 00 27 28 29 30 31 32 33 34 35 36 37

EXERCISE 13.7 PAGE

GENERAL JOURNAL

DATE

DESCRIPTION Reversing Entries

POST. REF.

1 2 2014 3 Jan. 1 Salaries Payable 4 Salaries Expense—Office 5 To reverse adjustment (e) made on Dec. 31, 2013 6 7 1 Social Security Tax Payable 8 Medicare Tax Payable 9 Payroll Taxes Expense 10 To reverse adjustment (f) made on Dec. 31, 2013 11 12 1 Interest Payable 13 Interest Expense 14 To reverse adjustment (g) made on Dec. 31, 2013 15 16 1 Interest Income 17 Interest Receivable 18 To reverse adjustment (h) made on Dec. 31, 2013 19 20 21 22 23 24 25 26 27 28 29 30

DEBIT

CREDIT

2 8 0 0 00

1 7 3 60 4 0 60

2 0 0 00

2 1 5 00

1 2 3 2 8 0 0 00 4 5 6 7 8 2 1 4 20 9 10 11 12 2 0 0 00 13 14 15 16 2 1 5 00 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Chapter 13  475

EXERCISE 13.8 Harmon Farm Supply Post-closing Trial Balance December 31, 2013 ACCOUNT NAME Cash Accounts Receivable Allowance for Doubtful Accounts Merchandise Inventory Supplies Prepaid Insurance Equipment Accumulated Depreciation—Equipment Notes Payable Accounts Payable Social Security Tax Payable Medicare Tax Payable Ken Harmon, Capital Totals

476  Chapter 13

DEBIT 18 6 0 0 00 59 8 0 0 00

CREDIT

1 2 0 00 186 2 0 0 00 7 1 4 0 00 3 0 6 0 00 51 0 0 0 00

325 8 0 0 00

17 8 0 0 00 9 5 0 0 00 8 7 0 0 00 1 3 9 2 00 3 2 4 00 287 9 6 4 00 325 8 0 0 00

EXERCISE 13.9 a. Net Sales

Sales Less Sales Discounts Net Sales

$525,000 2,200 $522,800

Gross profit

Net sales Less cost of goods sold Gross profit

$522,800 392,100 $130,700

The gross profit percentage

Gross profit Net sales

b. Current assets

$130,700 = $522,800

25.0%

Cash Accounts receivable Note receivable, due 2014 Merchandise inventory Prepaid insurance Supplies

$22,500 46,700 8,500 34,700 2,250 1,310 $115,960

Current liabilities

Note payable to bank, due 2014 Accounts payable Interest payable

$25,000 21,134 250 $46,384

Working capital

$115,960 - $46,384 =

$69,576

2.5

c. Current ratio

$115,960 $46,384

d. Inventory turnover

Cost of goods sold Average inventory

Average inventory

$392,100 $46,129

$34,700 + $57,558 = 2

8.5 times

$46,129

Chapter 13  477

7 4 4 0 00 10 1 6 0 00

259 2 0 0 00 20 5 0 0 00 59 3 3 0 00 8 8 0 0 00

189 6 0 0 00 6 1 0 0 00 4 8 0 0 00

17 6 0 0 00

757 0 0 0 00 12 8 0 0 00 769 8 0 0 00

Wood Design Company Income Statement Year Ended December 31, 2013

Operating Revenue Sales Less Sales Returns and Allowances Net Sales Cost of Goods Sold Merchandise Inventory, January 1, 2013 Purchases Freight In Delivered Cost of Purchases Less Purchases Returns and Allowances Purchases Discounts Net Delivered Cost of Purchases Total Merchandise Available for Sale Less Merchandise Inventory, December 31, 2013 Cost of Goods Sold Gross Profit on Sales Operating Expenses Warehouse Expenses Warehouse Wages Expense Warehouse Supplies Expense Depreciation Expense—Warehouse Equipment Total Warehouse Expenses Selling Expenses Salaries Expense—Sales Travel and Entertainment Expense Delivery Wages Expense Depreciation Expense—Delivery Equipment Total Selling Expenses

PROBLEM 13.1A

347 8 3 0 00

200 5 0 0 00

752 2 0 0 00 986 2 0 0 00 224 0 0 0 00

234 0 0 0 00

762 2 0 0 00 886 4 8 4 00

1,665 8 8 4 00 17 2 0 0 00 1,648 6 8 4 00

Wood Design Company Income Statement (continued) Year Ended December 31, 2013

General and Administrative Expenses Salaries Expense—Office Office Supplies Expense Insurance Expense Utilities Expense Telephone Expense Payroll Taxes Expense Property Taxes Expense Uncollectible Accounts Expense Depreciation Expense—Building Depreciation Expense—Office Equipment Total General and Administrative Exp. Total Operating Expenses Income from Operations Other Income Interest Income Other Expenses Interest Expense Net Nonoperating Expenses Net Income for Year

PROBLEM 13.1A (continued)

69 6 0 0 00 3 0 0 0 00 5 2 0 0 00 8 2 9 0 00 5 5 2 0 00 54 0 0 0 00 4 6 0 0 00 4 8 0 0 00 8 0 0 0 00 3 0 0 0 00

7 2 0 0 00

1 4 8 0 00

166 0 1 0 00

5 7 2 0 00 166 4 2 4 00

714 3 4 0 00 172 1 4 4 00

PROBLEM 13.1A (continued) Wood Design Company Statement of Owner's Equity Year Ended December 31, 2013 Chuck Kirby, Capital, January 1, 2013 Net Income for Year Less Withdrawals for Year Increase in Capital Chuck Kirby, Capital, December 31, 2013

480  Chapter 13

397 6 4 0 00 166 4 2 4 00 126 0 0 0 00 40 4 2 4 00 438 0 6 4 00

PROBLEM 13.1A (continued) Wood Design Company Balance Sheet December 31, 2013 Assets Current Assets Cash Petty Cash Fund Notes Receivable Accounts Receivable Less Allowance for Doubtful Accounts Merchandise Inventory Prepaid Expenses Warehouse Supplies Office Supplies Prepaid Insurance Total Current Assets Plant and Equipment Land Building Less Accumulated Depreciation Warehouse Equipment Less Accumulated Depreciation Delivery Equipment Less Accumulated Depreciation Office Equipment Less Accumulated Depreciation Total Plant and Equipment Total Assets

23 1 0 0 00 4 0 0 00 10 8 0 0 00 86 1 6 4 00 5 0 0 0 00

2 7 6 0 00 1 3 2 0 00 7 2 0 0 00

81 1 6 4 00 224 0 0 0 00

11 2 8 0 00 350 7 4 4 00

36 0 0 0 00 168 0 0 0 00 48 0 0 0 00 32 0 0 0 00 14 4 0 0 00 46 0 0 0 00 17 6 0 0 00 20 0 0 0 00 9 0 0 0 00

Liability and Owner’s Equity Current Liabilities Notes Payable Accounts Payable Interest Payable Total Current Liabilities

120 0 0 0 00 17 6 0 0 00 28 4 0 0 00 11 0 0 0 00 213 0 0 0 00 563 7 4 4 00

19 2 0 0 00 38 0 0 0 00 4 8 0 00 57 6 8 0 00

Chapter 13  481

PROBLEM 13.1A (continued) Wood Design Company Balance Sheet (continued) December 31, 2013 Long-Term Liabilities Mortgage Payable Loans Payable Total Long-Term Liabilities Total Liabilities Owner’s Equity Chuck Kirby, Capital Total Liabilities and Owner’s Equity

56 0 0 0 00 12 0 0 0 00 68 0 0 0 00 125 6 8 0 00 438 0 6 4 00 563 7 4 4 00

Analyze: The company’s current ratio is 6.08 to 1 ($350,744 ÷ $57,680).

482  Chapter 13

12 6 5 0 00 8 2 4 0 00

150 7 0 0 00 23 0 0 0 00 36 4 2 5 00

107 6 0 0 00 4 8 0 0 00 2 4 0 0 00

20 8 9 0 00

453 0 0 0 00 8 8 0 0 00 461 8 0 0 00

Good to Go Auto Products Income Statement Year Ended December 31, 2013

Operating Revenue Sales Less Sales Returns and Allowances Net Sales Cost of Goods Sold Merchandise Inventory, January 1, 2013 Purchases Freight In Delivered Cost of Purchases Less Purchases Returns and Allowances Purchases Discounts Net Delivered Cost of Purchases Total Merchandise Available for Sale Less Merchandise Inventory, Dec. 31, 2013 Cost of Goods Sold Gross Profit on Sales Operating Expenses Warehouse Expenses Warehouse Wages Expense Warehouse Supplies Expense Depreciation Exp.—Warehouse Equip. Total Warehouse Expenses Selling Expenses Salaries Expense—Sales Travel Expense Delivery Expense Total Selling Expenses

PROBLEM 13.2A

210 1 2 5 00

114 8 0 0 00

440 9 1 0 00 571 3 1 0 00 127 5 0 0 00

130 4 0 0 00

443 8 1 0 00 639 0 9 0 00

1,090 3 0 0 00 7 4 0 0 00 1,082 9 0 0 00

84 0 0 0 00 1 1 2 0 00 8 8 7 5 00 7 0 0 0 00 3 1 8 0 00 30 6 0 0 00 15 4 0 0 00 2 7 0 0 00 2 5 8 0 00 4 6 0 0 00 1 5 2 0 00

Good to Go Auto Products Income Statement (continued) Year Ended December 31, 2013

General and Administrative Expenses Salaries Expense—Office Office Supplies Expense Insurance Expense Utilities Expense Telephone Expense Payroll Taxes Expense Property Taxes Expense Building Repair Expense Uncollectible Accounts Expense Depreciation Expense—Building Depreciation Expense—Office Equip. Total General and Administrative Exp. Total Operating Expenses Income from Operations Other Income Interest Income Other Expenses Interest Expense Net Nonoperating Expenses Net Income for Year

PROBLEM 13.2A (continued)

3 0 0 0 00

4 8 0 00

161 5 7 5 00

2 5 2 0 00 150 0 7 0 00

486 5 0 0 00 152 5 9 0 00

PROBLEM 13.2A (continued) Good to Go Auto Products Statement of Owner's Equity Year Ended December 31, 2013 Colin O’Brien, Capital, January 1, 2013 Net Income for Year Less Withdrawals for Year Increase in Capital Colin O’Brien, Capital, December 31, 2013

317 0 2 0 00 150 0 7 0 00 69 6 5 0 00 80 4 2 0 00 397 4 4 0 00

Chapter 13  485

PROBLEM 13.2A (continued) Good to Go Auto Products Balance Sheet December 31, 2013 Assets Current Assets Cash Petty Cash Fund Notes Receivable Accounts Receivable Less Allowance for Doubtful Accounts Merchandise Inventory Interest Receivable Prepaid Expenses Warehouse Supplies Office Supplies Prepaid Insurance Total Current Assets Plant and Equipment Land Building Less Accumulated Depreciation Warehouse Equipment Less Accumulated Depreciation Office Equipment Less Accumulated Depreciation Total Plant and Equipment Total Assets Liability and Owner’s Equity Current Liabilities Notes Payable Accounts Payable Interest Payable Total Current Liabilities

486  Chapter 13

98 0 0 0 00 5 0 0 00 10 0 0 0 00 139 2 0 0 00 2 8 0 0 00 136 4 0 0 00 127 5 0 0 00 1 0 0 00 2 3 0 0 00 6 0 0 00 3 6 4 0 00

6 5 4 0 00 379 0 4 0 00

15 0 0 0 00 102 0 0 0 00 16 2 0 0 00 18 8 0 0 00 9 0 0 0 00 8 4 0 0 00 3 4 0 0 00

85 8 0 0 00 9 8 0 0 00 5 0 0 0 00 115 6 0 0 00 494 6 4 0 00

14 0 0 0 00 55 9 0 0 00 3 0 0 00 70 2 0 0 00

PROBLEM 13.2A (continued) Good to Go Auto Products Balance Sheet (continued) December 31, 2013 Long-Term Liabilities Mortgage Payable Loans Payable Total Long-Term Liabilities Total Liabilities Owner’s Equity Colin O'Brien, Capital Total Liabilities and Owner’s Equity

15 0 0 0 00 12 0 0 0 00 27 0 0 0 00 97 2 0 0 00

397 4 4 0 00 494 6 4 0 00

Analyze: The percentage of total operating expenses attributable to warehouse expense is 23.6% ($114,800 ÷ $486,500).

Chapter 13  487

PROBLEM 13.3A The Wine Shop Income Statement Year Ended December 31, 2013 Operating Revenue Sales Less Sales Discount Net Sales Cost of Goods Sold Merchandise Inventory, January 1, 2013 Purchases Freight In Delivered Cost of Purchases Less Purchases Returns and Allowances Net Delivered Cost of Purchases Goods Available for Sale Less Merchandise Inventory, December 31, 2013 Cost of Goods Sold Gross Profit on Sales Operating Expenses Rent Expense Wages Expense Payroll Taxes Expense Depreciation Expense, Store Equipment Depreciation Expense, Office Equipment Advertising Expense Supplies Expense Total Operating Expenses Income From Operations Other Income Seminar Fee Income Other Expenses Interest Expense Net Nonoperating Income Net Income for Year

488  Chapter 13

153,970.00 200.00 153,770.00 15,000.00 91,000.00 225.00 91,225.00 1,000.00 90,225.00 105,225.00 12,000.00 93,225.00 60,545.00 13,200.00 24,500.00 3,362.25 3,125.00 1,000.00 160.00 200.00 45,547.25 14,997.75 2,000.00 250.00 1,750.00 16,747.75

PROBLEM 13.3A (continued) The Wine Shop Statement of Owner's Equity Year Ended December 31, 2013 Vincent Arroyo, Capital, January 1, 2013 Net Income for the Year Less Withdrawals for the Year Increase in Capital Vincent Arroyo, Capital, December 31, 2013

32,700.00 16,747.75 14,110.00 2,637.75 35,337.75

The Wine Shop Balance Sheet December 31, 2013 Assets Current Assets Cash Accounts Receivable Prepaid Advertising Supplies Merchandise Inventory Total Current Assets Plant and Equipment: Store Equipment 25,000.00 Less Accumulated Depreciation 6,125.00 Office Equipment 5,000.00 Less Accumulated Depreciation 2,500.00 Total Plant and Equipment Total Assets Liabilities and Owner's Equity Current Liabilities: Notes Payable, due 2014 Accounts Payable Wages Payable Social Security Tax Payable Medicare Tax Payable Unearned Seminar Fees Interest Payable Total Current Liabilities Owner's Equity Vincent Arroyo, Capital Total Liabilities and Owner's Equity

28,386.00 500.00 320.00 100.00 12,000.00 41,306.00

18,875.00 2,500.00 21,375.00 62,681.00

20,000.00 2,705.00 500.00 31.00 7.25 4,000.00 100.00 27,343.25 35,337.75 62,681.00

Chapter 13  489

PROBLEM 13.3A (continued) Analyze:

The inventory turnover for The Wine Shop is 6.91, calculated as follows: 6.91 Cost of Goods Sold 93,225 = Average Inventory 13,500 Average Inventory =

12,000 + 15,000 2

13,500

PROBLEM 13.4A PAGE

GENERAL JOURNAL

DATE DESCRIPTION Adjusting Entries 1 2 2013 (Adjustment a) 3 Dec. 31 Income Summary 4 Merchandise Inventory 5 To transfer beginning inventory 6 7 (Adjustment b) 8 31 Merchandise Inventory 9 Income Summary 10 To record ending inventory 11 12 (Adjustment c) 13 31 Uncollectible Accounts Expense 14 Allowance for Doubtful Accounts 15 To record estimated loss for 2013, based 16 on 0.5% of net credit sales $560,000 17 18 (Adjustment d) 19 31 Supplies Expense 20 Supplies 21 To record supplies used during 2013 22 23 (Adjustment e) 24 31 Insurance Expense 25 Prepaid Insurance 26 To record expired insurance 27 28 (Adjustment f) 29 31 Depreciation Expense—Office Equipment 30 Accumulated Depreciation—Office Equipment 31 To record depreciation for 2013 (schedule on file)

490  Chapter 13

POST. REF.

DEBIT

CREDIT

86 0 0 0 00 86 0 0 0 00

78 0 0 0 00 78 0 0 0 00

2 8 0 0 00 2 8 0 0 00

9 2 2 0 00 9 2 2 0 00

3 6 0 0 00 3 6 0 0 00

1 3 2 5 00 1 3 2 5 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

PROBLEM 13.4A (continued) PAGE

GENERAL JOURNAL

DATE

DESCRIPTION Adjusting Entries

POST. REF.

DEBIT

CREDIT

1 2 2013 (Adjustment g) 3 Dec. 31 Depreciation Expense—Warehouse Equipment 4 Accumulated Depreciation—Warehouse Equipment 5 To record depreciation for 2013 (schedule on file) 6 7 (Adjustment h) 8 31 Interest Expense 9 Interest Payable 10 To record accrued interest on 4-month, 12% trade 11 note payable dated November 1, 2013 12 $32,000 × 0.12 × 2/12 = $640 13 14 (Adjustment i) 15 31 Salaries Expense 16 Salaries Payable 17 To record accrued salaries 18 19 (Adjustment j) 20 31 Payroll Taxes Expense 21 Social Security Tax Payable 22 Medicare Tax Payable 23 To record accrued payroll taxes on accrued 24 salaries for December: social security tax = 25 6.2% × $5000; Medicare tax = 1.45% × $5,000 26 27 (Adjustment k) 28 31 Payroll Taxes Expense 29 Federal Unemployment Tax Payable 30 State Unemployment Tax Payable 31 To record payroll taxes (state = 0.054 × $5,000, 32 federal = 0.008 × $5,000) 33 34 35

1 2 4 8 0 0 00 3 4 8 0 0 00 4 5 6 7 6 4 0 00 8 6 4 0 00 9 10 11 12 13 14 5 0 0 0 00 15 5 0 0 0 00 16 17 18 19 3 8 2 50 20 3 1 0 00 21 7 2 50 22 23 24 25 26 27 3 1 0 00 28 4 0 00 29 2 7 0 00 30 31 32 33 34 35

Chapter 13  491

PROBLEM 13.4A (continued) PAGE

GENERAL JOURNAL

DATE

DESCRIPTION Closing Entries

1 2 2013 3 Dec. 31 Sales 4 Purchases Returns and Allowances 5 Income Summary 6 7 31 Income Summary 8 Sales Returns and Allowances 9 Purchases 10 Rent Expenses 11 Telephone Expense 12 Salaries Expense 13 Payroll Taxes Expense 14 Supplies Expense 15 Insurance Expense 16 Depreciation Expense—Office Equipment 17 Depreciation Expense—Warehouse Equipment 18 Uncollectible Accounts Expense 19 Interest Expense 20 21 31 Income Summary 22 Phillip Tucker, Capital 23 24 31 Phillip Tucker, Capital 25 Phillip Tucker, Drawing 26 27 28 29 30 31 32 33 34 35 36 37

492  Chapter 13

POST. REF.

DEBIT

CREDIT

653 7 7 8 00 9 2 0 0 00 662 9 7 8 00 599 2 7 7 50 10 0 0 0 00 350 0 0 0 00 36 0 0 0 00 2 2 0 0 00 165 0 0 0 00 13 6 9 2 50 9 2 2 0 00 3 6 0 0 00 1 3 2 5 00 4 8 0 0 00 2 8 0 0 00 6 4 0 00 55 7 0 0 50 55 7 0 0 50 56 0 0 0 00 56 0 0 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37

PROBLEM 13.4A (continued) PAGE

GENERAL JOURNAL

DATE

DESCRIPTION Reversing Entries

POST. REF.

1 2 2014 3 Jan. 1 Interest Payable 4 Interest Expense 5 To reverse adjusting entry (h) made Dec. 31, 2013 6 7 1 Salaries Payable 8 Salaries Expense 9 To reverse adjusting entry (i) made Dec. 31, 2013 10 11 1 Social Security Tax Payable 12 Medicare Tax Payable 13 Payroll Taxes Expense 14 To reverse adjusting entry (j) made Dec. 31, 2013 15 16 1 Federal Unemployment Tax Payable 17 State Unemployment Tax Payable 18 Payroll Taxes Expense 19 To reverse adjusting entry (k) made Dec. 31, 2013 20 21 22 23

DEBIT

CREDIT

6 4 0 00 6 4 0 00

5 0 0 0 00 5 0 0 0 00

3 1 0 00 7 2 50 3 8 2 50

4 0 00 2 7 0 00 3 1 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

Analyze: The following entry would be required: PAGE

GENERAL JOURNAL

1 2 3 4 5 6

DATE DESCRIPTION 2014 Jan. 3 Salaries Payable Cash To record the payment of salaries

POST. REF.

DEBIT

CREDIT

5 0 0 0 00 5 0 0 0 00

1 2 3 4 5 6

Chapter 13  493

PROBLEM 13.5A PAGE

GENERAL JOURNAL

DATE

DESCRIPTION Adjusting Entries

1 2 2013 (Adjustment a) 3 Dec. 31 Rent Expense 4 Prepaid Rent 5 To record expired rent on 6-month lease of 6 $17,700 paid October 1, 2013 7 8 (Adjustment b) 9 31 Supplies Expense 10 Supplies 11 To record supplies used in 2013 12 13 (Adjustment c) 14 31 Depreciation Expense—Equipment 15 Accumulated Depreciation—Equipment 16 To record depreciation for 2013 17 18 (Adjustment d) 19 31 Salaries Expense 20 Salaries Payable 21 To record accrued salaries 22 23 31 (Adjustment e) 24 Payroll Taxes Expense 25 Social Security Tax Payable 26 Medicare Tax Payable 27 To record accrued payroll taxes on accrued 28 salaries 29 30 (Adjustment f) 31 31 Interest Receivable 32 Interest Income 33 To record accrued interest on 5-month, 34 8%, $4,500 note receivable dated 35 September 1, 2013 36

494  Chapter 13

POST. REF.

DEBIT

8 8 5 0 00

9 2 8 0 00

8 2 0 0 00

4 4 0 0 00

3 3 6 60

1 2 0 00

CREDIT 1 2 3 8 8 5 0 00 4 5 6 7 8 9 9 2 8 0 00 10 11 12 13 14 8 2 0 0 00 15 16 17 18 19 4 4 0 0 00 20 21 22 23 24 2 7 2 80 25 6 3 80 26 27 28 29 30 31 1 2 0 00 32 33 34 35 36

PROBLEM 13.5A (continued) PAGE

GENERAL JOURNAL

DATE

DESCRIPTION Reversing Entries

1 2 2014 3 Jan. 1 Salaries Payable 4 Salaries Expense 5 To reverse adjusting entry (d) made Dec. 31, 2013 6 7 1 Social Security Tax Payable 8 Medicare Tax Payable 9 Payroll Taxes Expense 10 To reverse adjusting entry (e) made Dec. 31, 2013 11 12 1 Interest Income 13 Interest Receivable 14 To reverse adjusting entry (f) made Dec. 31, 2013 15 16

POST. REF.

DEBIT

CREDIT

1 2 4 4 0 0 00 3 4 4 0 0 00 4 5 6 2 7 2 80 7 6 3 80 8 3 3 6 60 9 10 11 1 2 0 00 12 1 2 0 00 13 14 15 16

Analyze: The balance of the Prepaid Rent Account on January 1, 2014, is $8,850.

Chapter 13  495

2 5 2 0 00 2 3 5 0 00

2 4 4 0 00

67 2 0 0 00 6 3 0 0 00 26 9 0 0 00

1 4 0 0 00

38 9 0 0 00 1 7 9 0 00

4 8 7 0 00

179 6 0 0 00 2 2 0 0 00 181 8 0 0 00

Lite Speed Electronics Income Statement Year Ended December 31, 2013

Operating Revenue Sales Less Sales Returns and Allowances Net Sales Cost of Goods Sold Merchandise Inventory, January 1, 2013 Purchases Freight In Delivered Cost of Purchases Less Purchases Returns and Allowances Purchases Discounts Net Delivered Cost of Purchases Total Merchandise Available for Sale Less Merchandise Inventory, Dec. 31, 2013 Cost of Goods Sold Gross Profit on Sales Operating Expenses Warehouse Expenses Warehouse Wages Expense Warehouse Supplies Expense Depreciation Expense—Warehouse Equipment Total Warehouse Expenses Selling Expenses Salaries Expense—Sales Travel and Entertainment Expense Delivery Wages Expense Depreciation Expense—Delivery Equipment Total Selling Expenses

PROBLEM 13.1B

102 8 4 0 00

42 0 9 0 00

176 9 3 0 00 210 0 5 5 00 35 4 0 0 00

33 1 2 5 00

174 6 5 5 00 251 9 9 5 00

429 8 0 0 00 3 1 5 0 00 426 6 5 0 00

15 9 0 0 00 1 1 5 0 00 1 5 0 0 00 2 4 0 0 00 1 3 8 0 00 15 2 5 0 00 1 7 5 0 00 1 0 5 0 00 3 0 0 0 00 1 0 2 0 00

Lite Speed Electronics Income Statement (continued) Year Ended December 31, 2013

General and Administrative Expenses Salaries Expense—Office Office Supplies Expense Insurance Expense Utilities Expense Telephone Expense Payroll Taxes Expense Property Taxes Expense Uncollectible Accounts Expense Depreciation Expense—Building Depreciation Expense—Office Equipment Total General and Administrative Expenses Total Operating Expenses Income from Operations Other Income Interest Income Other Expenses Interest Expense Net Nonoperating Expenses Net Income for Year

PROBLEM 13.1B (continued)

1 6 0 0 00

4 6 2 00

44 4 0 0 00

1 1 3 8 00 61 5 2 7 00

189 3 3 0 00 62 6 6 5 00

PROBLEM 13.1B (continued) Lite Speed Electronics Statement of Owner's Equity Year Ended December 31, 2013 Toshi Takahashi, Capital, January 1, 2013 Net Income for Year Less Withdrawals for Year Increase in Capital Toshi Takahashi, Capital, December 31, 2013

498  Chapter 13

60 9 4 0 00 61 5 2 7 00 24 0 0 0 00 37 5 2 7 00 98 4 6 7 00

PROBLEM 13.1B (continued) Lite Speed Electronics Balance Sheet December 31, 2013 Assets Current Assets Cash Petty Cash Fund Notes Receivable Accounts Receivable Less Allowance for Doubtful Accounts Merchandise Inventory Prepaid Expenses Warehouse Supplies Office Supplies Prepaid Insurance Total Current Assets Plant and Equipment Land Building Less Accumulated Depreciation Warehouse Equipment Less Accumulated Depreciation Delivery Equipment Less Accumulated Depreciation Office Equipment Less Accumulated Depreciation Total Plant and Equipment Total Assets

10 2 0 0 00 1 0 0 00 3 2 0 0 00 21 2 5 0 00 2 2 5 0 00

7 7 5 00 7 8 0 00 2 2 0 0 00

19 0 0 0 00 35 4 0 0 00

3 7 5 5 00 71 6 5 5 00

7 6 4 2 00 48 5 0 0 00 13 0 0 0 00 8 0 0 0 00 2 3 0 0 00 16 4 0 0 00 3 6 0 0 00 6 0 0 0 00 2 5 0 0 00

Liability and Owner’s Equity Current Liabilities Notes Payable Accounts Payable Interest Payable Total Current Liabilities

35 5 0 0 00 5 7 0 0 00 12 8 0 0 00 3 5 0 0 00 65 1 4 2 00 136 7 9 7 00

5 0 0 0 00 13 1 4 0 00 2 4 0 00 18 3 8 0 00

Chapter 13  499

PROBLEM 13.1B (continued) Lite Speed Electronics Balance Sheet (continued) December 31, 2013 Long-Term Liabilities Mortgage Payable Loans Payable Total Long-Term Liabilities Total Liabilities

15 9 5 0 00 4 0 0 0 00 19 9 5 0 00 38 3 3 0 00

Owner’s Equity Toshi Takahashi, Capital Total Liabilities and Owner’s Equity

Analyze:

98 4 6 7 00 136 7 9 7 00

The gross profit percentage for the period is 59.06% ($251,995/$426,650).

500  Chapter 13

6 4 2 0 00 5 7 6 0 00

78 9 0 0 00 21 0 0 0 00 35 4 0 0 00

2 4 0 0 00

64 3 0 0 00 4 3 0 0 00

12 1 8 0 00

230 0 5 0 00 9 6 0 0 00 239 6 5 0 00

Hog Wild Income Statement Year Ended December 31, 2013

Operating Revenue Sales Less Sales Returns and Allowances Net Sales Cost of Goods Sold Merchandise Inventory, January 1, 2013 Purchases Freight In Delivered Cost of Purchases Less Purchases Returns and Allowances Purchases Discounts Net Delivered Cost of Purchases Total Merchandise Available for Sale Less Merchandise Inventory, Dec. 31, 2013 Cost of Goods Sold Gross Profit on Sales Operating Expenses Warehouse Expenses Warehouse Wages Expense Warehouse Supplies Expense Depreciation Expense—Warehouse Equipment Total Warehouse Expenses Selling Expenses Salaries Expense—Sales Travel Expense Delivery Expense Total Selling Expenses

PROBLEM 13.2B

135 3 0 0 00

71 0 0 0 00

227 4 7 0 00 316 4 5 0 00 87 9 1 5 00

88 9 8 0 00

228 5 3 5 00 370 4 8 2 00

608 4 1 7 00 9 4 0 0 00 599 0 1 7 00

57 5 0 0 00 1 3 6 0 00 9 5 0 0 00 6 9 1 2 00 4 3 7 0 00 19 2 0 0 00 11 7 0 0 00 3 1 0 0 00 2 9 0 0 00 3 2 0 0 00 1 6 8 0 00

Hog Wild Income Statement (continued) Year Ended December 31, 2013

General and Administrative Expenses Salaries Expense—Office Office Supplies Expense Insurance Expense Utilities Expense Telephone Expense Payroll Taxes Expense Property Taxes Expense Building Repair Expense Uncollectible Accounts Expense Depreciation Expense—Building Depreciation Expense—Office Equipment Total General and Administrative Expenses Total Operating Expenses Income from Operations Other Income Interest Income Other Expenses Interest Expense Net Nonoperating Expenses Net Income for Year

PROBLEM 13.2B (continued)

3 6 0 0 00

7 2 0 00

121 4 2 2 00

2 8 8 0 00 39 8 8 0 00

327 7 2 2 00 42 7 6 0 00

PROBLEM 13.2B (continued) Hog Wild Statement of Owner's Equity Year Ended December 31, 2013 Nick Henry, Capital, January 1, 2013 Net Income for Year Less Withdrawals for Year Decrease in Capital Nick Henry, Capital, December 31, 2013

198 7 1 0 00 39 8 8 0 00 56 0 0 0 00 16 1 2 0 00 182 5 9 0 00

Chapter 13  503

PROBLEM 13.2B (continued) Hog Wild Balance Sheet December 31, 2013 Assets Current Assets Cash Petty Cash Fund Notes Receivable Accounts Receivable Less Allowance for Doubtful Accounts Merchandise Inventory Interest Receivable Prepaid Expenses Warehouse Supplies Office Supplies Prepaid Insurance Total Current Assets Plant and Equipment Land Building Less Accumulated Depreciation Warehouse Equipment Less Accumulated Depreciation Office Equipment Less Accumulated Depreciation Total Plant and Equipment Total Assets Liability and Owner’s Equity Current Liabilities Notes Payable Accounts Payable Interest Payable Total Current Liabilities

504  Chapter 13

14 3 5 0 00 2 0 0 00 6 0 0 0 00 54 6 0 0 00 5 0 0 0 00

3 7 0 0 00 1 8 0 0 00 6 9 0 0 00

49 6 0 0 00 87 9 1 5 00 2 0 0 00

12 4 0 0 00 170 6 6 5 00

20 4 0 0 00 53 1 0 0 00 8 4 0 0 00 24 0 0 0 00 4 0 0 0 00 12 8 0 0 00 1 8 0 0 00

44 7 0 0 00 20 0 0 0 00 11 0 0 0 00 96 1 0 0 00 266 7 6 5 00

8 0 0 0 00 32 5 0 0 00 1 8 0 0 00 42 3 0 0 00

PROBLEM 13.2B (continued) Hog Wild Balance Sheet (continued) December 31, 2013 Long-Term Liabilities Mortgage Payable Notes Payable-Long Term Total Long-Term Liabilities Total Liabilities Owner’s Equity Nick Henry, Capital Total Liabilities and Owner’s Equity

35 8 7 5 00 6 0 0 0 00 41 8 7 5 00 84 1 7 5 00

182 5 9 0 00 266 7 6 5 00

Analyze: The inventory turnover is 2.58 times ($228,535 COGS ÷ $88,448 Avg. Inventory). Average inventory is ($88,980 + $87,915) ÷ 2 = $88,448.

Chapter 13  505

PROBLEM 13.3B The Game Place Income Statement Year Ended December 31, 2013 Operating Revenue Sales Less Sales Discount Net Sales Cost of Goods Sold Merchandise Inventory, January 1, 2013 Purchases Freight In Delivered Cost of Purchases Less Purchases Returns and Allowances Net Delivered Cost of Purchases Total Merchandise Available for Sale Less Merchandise Inventory, December 31, 2013 Cost of Goods Sold Gross Profit on Sales Operating Expenses Rent Expense Wages Expense Payroll Taxes Expense Depreciation Expense, Store Equipment Depreciation Expense, Office Equipment Advertising Expense Supplies Expense Total Operating Expenses Net Income From Operations Other Income Seminar Fee Income Other Expenses Interest Expense Net Nonoperating Income Net Income for Year

506  Chapter 13

162,660.00 180.00 162,480.00 18,500.00 92,500.00 275.00 92,775.00 770.00 92,005.00 110,505.00 20,000.00 90,505.00 71,975.00 26,400.00 18,800.00 1,872.20 4,500.00 1,500.00 320.00 275.00 53,667.20 18,307.80 6,000.00 300.00 5,700.00 24,007.80

PROBLEM 13.3B (continued) The Game Place Statement of Owner's Equity Year Ended December 31, 2013 Matt Huffman, Capital, January 1, 2013 Net Income for the Year Less Withdrawals for the Year Increase in Capital Matt Huffman, Capital, December 31, 2013

43,000.00 24,007.80 18,000.00 6,007.80 49,007.80

The Game Place Balance Sheet December 31, 2013 Assets Current Assets Cash Accounts Receivable Prepaid Advertising Supplies Merchandise Inventory Total Current Assets Plant and Equipment Store Equipment 30,000.00 Less Accumulated Depreciation 7,500.00 Office Equipment 4,800.00 Less Accumulated Depreciation 3,000.00 Total Plant and Equipment Total Assets Liabilities and Owner's Equity Current Liabilities Notes Payable, due 2014 Accounts Payable Wages Payable Social Security Tax Payable Medicare Tax Payable Unearned Seminar Fees Interest Payable Total Current Liabilities Owner's Equity Matt Huffman, Capital Total Liabilities and Owner's Equity

32,465.00 669.00 160.00 150.00 20,000.00 53,444.00

22,500.00 1,800.00 24,300.00 77,744.00

22,500.00 3,725.00 800.00 49.60 11.60 1,500.00 150.00 28,736.20 49,007.80 77,744.00

Chapter 13  507

PROBLEM 13.3B (continued) Analyze: The amount of working capital is 24,707.80, calculated as follows: Current assets 53,444.00 Less current liabilities 28,736.20 Working capital 24,707.80 PROBLEM 13.4B PAGE

GENERAL JOURNAL

DATE DESCRIPTION Adjusting Entries 1 2 2013 (Adjustment a) 3 Dec. 31 Income Summary 4 Merchandise Inventory 5 To transfer beginning inventory 6 7 (Adjustment b) 8 31 Merchandise Inventory 9 Income Summary 10 To record ending inventory 11 12 (Adjustment c) 13 31 Uncollectible Accounts Expense 14 Allowance for Doubtful Accounts 15 To record estimated loss for 2013, based 16 on 0.8% of net credit sales $160,000 17 18 (Adjustment d) 19 31 Supplies Expense 20 Supplies 21 To record supplies used during 2013 22 23 (Adjustment e) 24 31 Insurance Expense 25 Prepaid Insurance 26 To record expired insurance on one-year policy 27 28 (Adjustment f) 29 31 Depreciation Expense—Store Equipment 30 Accumulated Depreciation—Store Equipment 31 To record depreciation for 2013 (schedule on file) 32

508  Chapter 13

POST. REF.

DEBIT

CREDIT

1 2 16 9 8 5 00 3 16 9 8 5 00 4 5 6 7 15 8 4 0 00 8 15 8 4 0 00 9 10 11 12 1 2 8 0 00 13 1 2 8 0 00 14 15 16 17 18 5 0 5 00 19 5 0 5 00 20 21 22 23 1 2 0 0 00 24 1 2 0 0 00 25 26 27 28 1 0 0 0 00 29 1 0 0 0 00 30 31 32

PROBLEM 13.4B (continued) PAGE

GENERAL JOURNAL

DATE

DESCRIPTION Adjusting Entries

1 2 2013 (Adjustment g) 3 Dec. 31 Depreciation Expense—Store Fixtures 4 Accumulated Depreciation—Store Fixtures 5 To record depreciation for 2013 (schedule on file) 6 7 (Adjustment h) 8 31 Interest Expense 9 Interest Payable 10 To record accrued interest on six-month, $4,000, 11 9% trade note payable, dated October 1, 2013 12 $4,000 × 0.09 × 3/12 = $90 13 14 (Adjustment i) 15 31 Salaries Expense 16 Salaries Payable 17 To record accrued salaries 18 19 (Adjustment j) 20 31 Payroll Taxes Expense 21 Social Security Tax Payable 22 Medicare Tax Payable 23 To record accrued payroll taxes on accrued 24 salaries (Social Security = 0.062 × $1,450; 25 Medicare = 0.0145 × $1450) 26 27 (Adjustment k) 28 31 Payroll Taxes Expense 29 Federal Unemployment Tax Payable 30 State Unemployment Tax Payable 31 To record unemployment taxes on accrued 32 salaries (federal = .01 × $1,450; 33 state = .05 × $1,450) 34 35 36 37

POST. REF.

DEBIT

CREDIT

1 2 2 0 5 0 00 3 2 0 5 0 00 4 5 6 7 9 0 00 8 9 0 00 9 10 11 12 13 14 1 4 5 0 00 15 1 4 5 0 00 16 17 18 19 1 1 0 93 20 8 9 90 21 2 1 03 22 23 24 25 26 27 8 7 00 28 1 4 50 29 7 2 50 30 31 32 33 34 35 36 37

Chapter 13  509

PROBLEM 13.4B (continued) PAGE

GENERAL JOURNAL

DATE

DESCRIPTION Closing Entries

1 2 2013 3 Dec. 31 Sales 4 Purchases Returns and Allowances 5 Income Summary 6 7 31 Income Summary 8 Sales Returns and Allowances 9 Purchases 10 Rent Expenses 11 Telephone Expense 12 Salaries Expense 13 Payroll Taxes Expense 14 Supplies Expense 15 Insurance Expense 16 Depreciation Expense—Office Equipment 17 Depreciation Expense—Store Equipment 18 Uncollectible Accounts Expense 19 Interest Expense 20 21 31 Income Summary 22 Preston Allen, Capital 23 24 31 Preston Allen, Capital 25 Preston Allen, Drawing 26 27 28 29

510  Chapter 13

POST. REF.

DEBIT

CREDIT

236 5 6 0 00 2 0 0 0 00 238 5 6 0 00 237 3 7 2 93 6 0 0 0 00 160 0 0 0 00 18 0 0 0 00 2 4 0 0 00 41 4 5 0 00 3 3 9 7 93 5 0 5 00 1 2 0 0 00 1 0 0 0 00 2 0 5 0 00 1 2 8 0 00 9 0 00 4 2 07 4 2 07 8 0 0 0 00 8 0 0 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

PROBLEM 13.4B (continued) PAGE

GENERAL JOURNAL

DATE

DESCRIPTION Reversing Entries

POST. REF.

DEBIT

CREDIT

9 0 00

1 4 5 0 00

8 9 90 2 1 03

1 4 50 7 2 50

1 2 3 9 0 00 4 5 6 7 1 4 5 0 00 8 9 10 11 12 1 1 0 93 13 14 15 16 17 8 7 00 18 19 20 21 22 23

Analyze: The following entry would be required: PAGE

GENERAL JOURNAL

1 2 3 4 5 6

DATE DESCRIPTION 2014 Jan. 4 Salaries Payable Salaries Expense Cash To record the payment of salaries (ignoring payroll taxes)

POST. REF.

DEBIT

CREDIT

1 4 5 0 00 1 1 5 0 00 2 6 0 0 00

1 2 3 4 5 6

Chapter 13  511

PROBLEM 13.5B PAGE

GENERAL JOURNAL

DATE

DESCRIPTION Adjusting Entries

1 2 2013 (Adjustment a) 3 Dec. 31 Advertising Expense 4 Prepaid Advertising 5 To record expired advertising on $17,700, 6 one year contract paid August 1, 2013 7 8 (Adjustment b) 9 31 Supplies Expense 10 Supplies 11 To record supplies used in 2013 12 13 (Adjustment c) 14 31 Depreciation Expense—Store Equipment 15 Accumulated Depreciation—Equipment 16 To record depreciation for 2013 17 18 (Adjustment d) 19 31 Salaries Expense 20 Salaries Payable 21 To record accrued salaries 22 23 31 (Adjustment e) 24 Payroll Taxes Expense 25 Social Security Tax Payable 26 Medicare Tax Payable 27 To record accrued payroll taxes on accrued 28 salaries 29 30 (Adjustment f) 31 31 Interest Receivable 32 Interest Income 33 To record accrued interest on 5-month, 34 8%, $4,500 note receivable dated 35 December 1, 2013 36

512  Chapter 13

POST. REF.

DEBIT

CREDIT

7 3 7 5 00 7 3 7 5 00

8 2 8 0 00 8 2 8 0 00

9 2 0 0 00 9 2 0 0 00

4 4 0 0 00 4 4 0 0 00

3 3 6 60 2 7 2 80 6 3 80

3 0 00 3 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36

PROBLEM 13.5B (continued) PAGE

GENERAL JOURNAL

DATE DESCRIPTION Reversing Entries 1 2 2014 3 Jan. 1 Salaries Payable 4 Salaries Expense 5 To reverse adjusting entry (d) made Dec. 31, 2013 6 7 1 Social Security Tax Payable 8 Medicare Tax Payable 9 Payroll Taxes Expense 10 To reverse adjusting entry (e) made Dec. 31, 2013 11 12 1 Interest Income 13 Interest Receivable 14 To reverse adjusting entry (f) made Dec. 31, 2013 15 16

POST. REF.

DEBIT

4 4 0 0 00

2 7 2 80 6 3 80

3 0 00

CREDIT 1 2 3 4 4 0 0 00 4 5 6 7 8 3 3 6 60 9 10 11 12 3 0 00 13 14 15 16

Analyze: The balance of the Prepaid Advertising Account on December 31 is $10,325.

Chapter 13  513

CRITICAL THINKING PROBLEM 13.1 Programs Plus Worksheet Year Ending December 31, 2013 ACCOUNT NAME 1 Cash 2 Accounts Receivable 3 Allowance for Doubtful Accounts 4 Merchandise Inventory 5 Supplies 6 Prepaid Insurance 7 Equipment 8 Accumulated Depreciation—Equip. 9 Notes Payable 10 Accounts Payable 11 Social Security Tax Payable 12 Medicare Tax Payable 13 Salaries Payable 14 Interest Payable 15 Yasser Tousson, Capital 16 Yasser Tousson, Drawing 17 Income Summary 18 Sales 19 Sales Returns and Allowances 20 Purchases 21 Freight In 22 Purchases Returns and Allowances 23 Purchases Discounts 24 Rent Expense 25 Telephone Expense 26 Salaries Expense 27 Payroll Taxes Expense 28 Interest Expense 29 Supplies Expense 30 Insurance Expense 31 Depreciation Expense—Equipment 32 Uncollectible Accounts Expense 33 Totals 34 Net Income 35 36

514  Chapter 13

TRIAL BALANCE ADJUSTMENTS DEBIT CREDIT DEBIT CREDIT 15 2 8 0 00 26 6 0 0 00 9 5 00 (c) 1 2 2 5 00 62 3 7 5 00 (b) 67 8 5 0 00 (a) 62 3 7 5 00 6 7 4 0 00 (d) 5 7 2 0 00 2 3 8 0 00 (e) 1 1 9 0 00 34 0 0 0 00 10 1 0 0 00 (f) 5 6 0 0 00 7 2 6 4 00 6 5 0 0 00 5 6 0 00 (i) 1 3 0 20 1 3 0 00 (i) 3 0 45 (h) 2 1 0 0 00 (g) 3 2 5 00 93 6 2 0 00 50 0 0 0 00 (a) 62 3 7 5 00 (b) 67 8 5 0 00 514 9 8 0 00 9 6 0 0 00 319 4 3 0 00 3 6 0 0 00 7 1 4 5 00 5 7 6 0 00 14 5 0 0 00 2 1 6 4 00 92 0 0 0 00 (h) 2 1 0 0 00 7 3 0 0 00 (i) 1 6 0 65 1 8 5 00 (g) 3 2 5 00 (d) 5 7 2 0 00 (e) 1 1 9 0 00 (f) 5 6 0 0 00 (c) 1 2 2 5 00 646 1 5 4 00 646 1 5 4 00 146 5 4 5 65 146 5 4 5 65

CRITICAL THINKING PROBLEM 13.1 (continued)

ADJUSTED TRIAL BALANCE DEBIT CREDIT 15 2 8 0 00 26 6 0 0 00 1 3 2 0 00 67 8 5 0 00 1 0 2 0 00 1 1 9 0 00 34 0 0 0 00 15 7 0 0 00 7 2 6 4 00 6 5 0 0 00 6 9 0 20 1 6 0 45 2 1 0 0 00 3 2 5 00 93 6 2 0 00 50 0 0 0 00 62 3 7 5 00 67 8 5 0 00 514 9 8 0 00 9 6 0 0 00 319 4 3 0 00 3 6 0 0 00 7 1 4 5 00 5 7 6 0 00 14 5 0 0 00 2 1 6 4 00 94 1 0 0 00 7 4 6 0 65 5 1 0 00 5 7 2 0 00 1 1 9 0 00 5 6 0 0 00 1 2 2 5 00 723 4 1 4 65 723 4 1 4 65

INCOME STATEMENT DEBIT CREDIT

62 3 7 5 00

67 8 5 0 00 514 9 8 0 00

9 6 0 0 00 319 4 3 0 00 3 6 0 0 00 7 1 4 5 00 5 7 6 0 00 14 5 0 0 00 2 1 6 4 00 94 1 0 0 00 7 4 6 0 65 5 1 0 00 5 7 2 0 00 1 1 9 0 00 5 6 0 0 00 1 2 2 5 00 527 4 7 4 65 68 2 6 0 35 595 7 3 5 00

595 7 3 5 00 595 7 3 5 00

BALANCE SHEET DEBIT CREDIT 15 2 8 0 00 1 26 6 0 0 00 2 1 3 2 0 00 3 67 8 5 0 00 4 1 0 2 0 00 5 1 1 9 0 00 6 34 0 0 0 00 7 15 7 0 0 00 8 7 2 6 4 00 9 6 5 0 0 00 10 6 9 0 20 11 1 6 0 45 12 2 1 0 0 00 13 3 2 5 00 14 93 6 2 0 00 15 50 0 0 0 00 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 195 9 4 0 00 127 6 7 9 65 33 68 2 6 0 35 34 195 9 4 0 00 195 9 4 0 00 35

Chapter 13  515

Operating Revenue Sales Less Sales Returns and Allowances Net Sales Cost of Goods Sold Merchandise Inventory, January 1, 2013 Purchases Freight In Delivered Cost of Purchases Less Purchases Returns and Allowances Purchases Discounts Net Delivered Cost of Purchases Total Merchandise Available for Sale Less Merchandise Inventory, Dec. 31, 2013 Cost of Goods Sold Gross Profit on Sales Operating Expenses Rent Expense Telephone Expense Salaries Expense Payroll Taxes Expense Supplies Expense Insurance Expense Depreciation Expense—Equipment Uncollectible Accounts Expense Total Operating Expenses Income from Operations Other Expenses Interest Expense Net Income for Year 7 1 4 5 00 5 7 6 0 00

14 5 0 216 94 1 0 746 572 119 560 122

0 00 4 00 0 00 0 65 0 00 0 00 0 00 5 00

12 9 0 5 00

319 4 3 0 00 3 6 0 0 00 323 0 3 0 00

Programs Plus Income Statement Year Ended December 31, 2013

CRITICAL THINKING PROBLEM 13.1 (continued)

310 1 2 5 00 372 5 0 0 00 67 8 5 0 00

62 3 7 5 00

5 1 0 00 68 2 6 0 35

131 9 5 9 65 68 7 7 0 35

304 6 5 0 00 200 7 3 0 00

514 9 8 0 00 9 6 0 0 00 505 3 8 0 00

CRITICAL THINKING PROBLEM 13.1 (continued) Programs Plus Statement of Owner's Equity Year Ended December 31, 2013 Yasser Tousson, January 1, 2013 Net Income for Year Less Withdrawals for Year Increase in Capital Yasser Tousson, Capital, December 31, 2013

93 6 2 0 00 68 2 6 0 35 50 0 0 0 00 18 2 6 0 35 111 8 8 0 35

Programs Plus Balance Sheet December 31, 2013 Assets Current Assets Cash Accounts Receivable Less Allowance for Doubtful Accounts Merchandise Inventory Prepaid Expenses Supplies Prepaid Insurance Total Current Assets Plant and Equipment Equipment Less Accumulated Depreciation Total Plant and Equipment Total Assets Liability and Owner’s Equity Current Liabilities Notes Payable Accounts Payable Interest Payable Social Security Tax Payable Medicare Tax Payable Salaries Payable Total Current Liabilities Owner’s Equity Yasser Tousson, Capital Total Liabilities and Owner’s Equity

15 2 8 0 00 26 6 0 0 00 1 3 2 0 00

1 0 2 0 00 1 1 9 0 00

34 0 0 0 00 15 7 0 0 00

25 2 8 0 00 67 8 5 0 00

2 2 1 0 00 110 6 2 0 00

18 3 0 0 00 18 3 0 0 00 128 9 2 0 00

7 2 6 4 00 6 5 0 0 00 3 2 5 00 6 9 0 20 1 6 0 45 2 1 0 0 00 17 0 3 9 65 111 8 8 0 35 128 9 2 0 00

Chapter 13  517

CRITICAL THINKING PROBLEM 13.1 (continued) PAGE

GENERAL JOURNAL

DATE

DESCRIPTION Adjusting Entries

1 2 2013 (Adjustment a) 3 Dec. 31 Income Summary 4 Merchandise Inventory 5 To transfer beginning inventory 6 7 (Adjustment b) 8 31 Merchandise Inventory 9 Income Summary 10 To record ending inventory 11 12 (Adjustment c) 13 31 Uncollectible Accounts Expense 14 Allowance for Doubtful Accounts 15 To record estimated loss for 2013, based on 0.5% 16 of net credit sales of $245,000 17 18 (Adjustment d) 19 31 Supplies Expense 20 Supplies 21 To record supplies used during 2013 22 23 (Adjustment e) 24 31 Insurance Expense 25 Prepaid Insurance 26 To record expired insurance 27 28 (Adjustment f) 29 31 Depreciation Expense—Equipment 30 Accumulated Depreciation—Equipment 31 To record depreciation for 2013 (schedule on file) 32

518  Chapter 13

POST. REF.

DEBIT

CREDIT

1 2 62 3 7 5 00 3 62 3 7 5 00 4 5 6 7 67 8 5 0 00 8 67 8 5 0 00 9 10 11 12 1 2 2 5 00 13 1 2 2 5 00 14 15 16 17 18 5 7 2 0 00 19 5 7 2 0 00 20 21 22 23 1 1 9 0 00 24 1 1 9 0 00 25 26 27 28 5 6 0 0 00 29 5 6 0 0 00 30 31 32

CRITICAL THINKING PROBLEM 13.1 (continued) PAGE

GENERAL JOURNAL

DATE

DESCRIPTION Adjusting Entries

POST. REF.

1 2 2013 (Adjustment g) 3 Dec. 31 Interest Expense 4 Interest Payable 5 To record accrued interest on notes payable 6 7 (Adjustment h) 8 31 Salaries Expense 9 Salaries Payable 10 To record accrued salaries 11 12 (Adjustment i) 13 31 Payroll Taxes Expense 14 Social Security Tax Payable 15 Medicare Tax Payable 16 To record accrued payroll taxes on accrued 17 salaries for December: 18 Social Security tax = 6.2% × $2,100; 19 Medicare = 1.45% × $2,100 20 21 22 23

DEBIT

CREDIT

3 2 5 00 3 2 5 00

2 1 0 0 00 2 1 0 0 00

1 6 0 65 1 3 0 20 3 0 45

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

Chapter 13  519

CRITICAL THINKING PROBLEM 13.1 (continued) PAGE

GENERAL JOURNAL

DATE

DESCRIPTION Closing Entries

1 2 2013 3 Dec. 31 Sales 4 Purchase Returns and Allowances 5 Purchase Discounts 6 Income Summary 7 8 31 Income Summary 9 Sales Returns and Allowances 10 Purchases 11 Freight In 12 Rent Expenses 13 Telephone Expense 14 Salaries Expense 15 Payroll Taxes Expense 16 Supplies Expense 17 Insurance Expense 18 Depreciation Expense—Equipment 19 Uncollectible Accounts Expense 20 Interest Expense 21 22 31 Income Summary 23 Yasser Tousson, Capital 24 25 31 Yasser Tousson, Capital 26 Yasser Tousson, Drawing 27 28 29

520  Chapter 13

POST. REF.

DEBIT

CREDIT

514 9 8 0 00 7 1 4 5 00 5 7 6 0 00 527 8 8 5 00 465 0 9 9 65 9 6 0 0 00 319 4 3 0 00 3 6 0 0 00 14 5 0 0 00 2 1 6 4 00 94 1 0 0 00 7 4 6 0 65 5 7 2 0 00 1 1 9 0 00 5 6 0 0 00 1 2 2 5 00 5 1 0 00 68 2 6 0 35 68 2 6 0 35 50 0 0 0 00 50 0 0 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

CRITICAL THINKING PROBLEM 13.1 (continued) PAGE

GENERAL JOURNAL

DATE

DESCRIPTION Reversing Entries

POST. REF.

1 2 2014 3 Jan. 1 Interest Payable 4 Interest Expense 5 To reverse adjusting entry (g) made Dec. 31, 2013 6 7 1 Salaries Payable 8 Salaries Expense 9 To reverse adjusting entry (h) made Dec. 31, 2013 10 11 1 Social Security Tax Payable 12 Medicare Tax Payable 13 Payroll Taxes Expense 14 To reverse adjusting entry (i) made Dec. 31, 2013 15 16 17 18 19 20 21 22 23 24 25

DEBIT

3 2 5 00

2 1 0 0 00

1 3 0 20 3 0 45

CREDIT 1 2 3 3 2 5 00 4 5 6 7 2 1 0 0 00 8 9 10 11 12 1 6 0 65 13 14 15 16 17 18 19 20 21 22 23 24 25

Analyze: The owner’s capital account increased by 19.5% ($111,880.35 - $93,620.00) ÷ $93,620 = 19.5%.

Chapter 13  521

CRITICAL THINKING PROBLEM 13.2 Kim-Yi Jewelry Balance Sheet December 31, 2012 Assets Current Assets Cash Accounts Receivable Inventory Prepaid Expenses Total Current Assets Plant and Equipment Store Fixtures and Equipment Total Assets Liability and Owner’s Equity Current Liabilities Accounts Payable Salaries Payable Total Current Liabilities Long-Term Liabilities Notes Payable Total Liabilities Owner’s Equity Kim-Yi Wei, Capital Total Liabilities and Owner’s Equity

522  Chapter 13

150 0 0 0 00 45 0 0 0 00 105 0 0 0 00 6 0 0 0 00 306 0 0 0 00 180 0 0 0 00 486 0 0 0 00

132 0 0 0 00 18 0 0 0 00 150 0 0 0 00 90 0 0 0 00 240 0 0 0 00

246 0 0 0 00 486 0 0 0 00

CRITICAL THINKING PROBLEM 13.2 (continued) Kim-Yi Jewelry Balance Sheet December 31, 2013 Assets Current Assets Cash Accounts Receivable Inventory Prepaid Expenses Total Current Assets Plant and Equipment Store Fixtures and Equipment Total Assets Liability and Owner’s Equity Current Liabilities Accounts Payable Salaries Payable Total Current Liabilities Long-Term Liabilities Notes Payable Total Liabilities Owner’s Equity Kim-Yi Wei, Capital Total Liabilities and Owner’s Equity

35 0 0 0 00 96 0 0 0 00 236 0 0 0 00 9 0 0 0 00 376 0 0 0 00 390 0 0 0 00 766 0 0 0 00

176 0 0 0 00 19 5 0 0 00 195 5 0 0 00 246 5 0 0 00 442 0 0 0 00

324 0 0 0 00 766 0 0 0 00

NOTE TO INSTRUCTOR: While detailed financial statement analysis is not presented in this chapter, we have included this problem to show students how classified statements provide more useful financial information than non-classified statements. 2. From 2012 to 2013, Kim-Yi Jewelry’s cash decreased by $115,000. At the same time, current liabilities increased from $150,000 to $195,500, or by $45,500. In spite of these changes, the ratio of current assets to current liabilities is still close to 2:1, a widely-used rule of thumb for this ratio as satisfactory. One strong factor is the growth in owner’s equity, resulting from profits. Kim-Yi Jewelry should be able to meet its obligations. However one development to be examined further is the large growth in inventory. 3. A classified balance sheet permits the reader to make more meaningful comparisons of balance sheet accounts, and thus, to make better decisions regarding the financial strength and the financial future of the company. Copyright © 2012 The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 13  523

SOLUTIONS TO BUSINESS CONNECTIONS Managerial Focus: 1. Timely receipt of financial data facilitates effective management and planning. 2. Increase in accounts receivable resulting from slow collections from customers or an unwarranted growth in inventories; payment of long-term debt or purchase of property. 3. May reflect that excess inventory has become obsolete or soiled. Growth in inventory ties up funds. 4. Reveal trends or changes in specific items that need to be investigated. 5. Yes. This indicates a strong possibility that there will be inadequate funds to cover the liabilities as they come due. 6. Yes, compare increase in selling expenses to the increase in sales. Investigate levels of sales returns and allowances. Review each selling expense account for accuracy. 7. Reveals variances out-of-line with industry averages; areas where costs should be controlled. Ethical Dilemma: You should follow the generally accepted accounting principles (GAAP) and do the proper adjusting entry. You might suggest the owner seek different forms of financing that would not require maintenance of a 1.5 current ratio. Additionally, you can offer to meet with the banker and try to obtain a waiver of the current ratio current ratio requirement for the current period. Financial Statement Analysis: 1. 2009: 1.2 ($970.5 ÷ $818.2) 2008: 0.9 ($968.3 ÷ $1,034.1) 2. The current ratio improved from 0.9 in 2008 to 1.2 in 2009. 3. 41.6% gross profit percentage ($1,327 ÷ $3,192) Teamwork: Answers will vary depending on the year. Internet Connection: Answers will vary depending on the corporation.

524  Chapter 13

SOLUTIONS TO PRACTICE TEST Part A True-False 1. FALSE 2. TRUE 3. FALSE 4. FALSE 5. TRUE 6. TRUE 7. FALSE 8. FALSE 9. TRUE 10. FALSE 11. FALSE 12. TRUE 13. FALSE

14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25.

FALSE FALSE TRUE TRUE TRUE TRUE TRUE FALSE FALSE TRUE TRUE FALSE

Chapter 13  525

MINI-PRACTICE SET 2 MERCHANDISING BUSINESS ACCOUNTING CYCLE PAGE

SALES JOURNAL

DATE

1 2013 2 Oct. 3 3 9 4 15 5 24 6 29 7 31 8 9 10 11 12 13 14

SALES POST. SLIP NO. CUSTOMER’S NAME REF.

241 242 243 244 245

Dimitri Sayegh Emma Maldonado James Helmer Megan Greening Emily Tran Totals

✔ ✔ ✔ ✔ ✔

ACCOUNTS RECEIVABLE DEBIT

SALES TAX PAYABLE CREDIT

SALES CREDIT

2 6 0 4 00 2 1 5 2 50 2 0 3 7 00 8 6 1 00 3 0 6 6 00 10 7 2 0 50 ( 1 11)

1 2 4 00 1 0 2 50 9 7 00 4 1 00 1 4 6 00 5 1 0 50 ( 2 3 1)

2 4 2 0 1 9 8 2 9 10 2 ( 4

PURCHASED FROM

2013 Oct. 11 A Fashion Statement 25 Classy Threads 30 Today’s Woman 31

526  Chapter 13

INVOICE INVOICE DATE NUMBER

9422 3418 5821

8 0 00 5 0 00 4 0 00 2 0 00 2 0 00 1 0 00 0 1)

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

PURCHASES JOURNAL

DATE

TERMS

10/8/13 2/10,n/30 10/23/13 2/10,n/30 10/26/13 1/10,n/30

POST. REF.

✔ ✔ ✔

PURCHASES DR./ACCOUNTS PAYABLE CREDIT

4 8 2 0 00 3 3 8 0 00 2 9 2 0 00 11 1 2 0 00 (5 0 1/ 2 03)

DATE DESCRIPTION 2013 Oct. 2 Megan Greening 5 Emily Tran 6 Cash sales 8 James Helmer 13 Cash sales 16 Dimitri Sayegh 20 Cash sales 27 Cash sales 31 Cash sales 31 Totals 8 3 2 00 5 1 0 00

✔ ✔

3 5 6 2 00 ( 1 11)

5 2 0 00 1 7 0 0 00

6 4 0 00 6 6 2 00 8 5 00 2 9 0 7 00 (231)

6 1 5 00

9 0 5 00

ACCOUNTS SALES TAX RECEIVABLE PAYABLE CREDIT CREDIT

12 8 0 0 00 13 2 4 0 00 1 7 0 0 00 58 1 4 0 00 (401)

12 3 0 0 00

18 1 0 0 00

SALES CREDIT

CASH RECEIPTS JOURNAL

✔ ✔

POST. REF.

MINI-PRACTICE SET 2 (continued)

ACCOUNT NAME

POST. REF.

OTHER ACCOUNTS CREDIT

5 2 0 00 1 7 0 0 00 19 0 0 5 00 8 3 2 00 12 9 1 5 00 5 1 0 00 13 4 4 0 00 13 9 0 2 00 1 7 8 5 00 64 6 0 9 00 (101)

CASH DEBIT

PAGE

CK. NO.

DESCRIPTION

10 609 The City Daily 12 610 Ace Freight Co. 16 611 Acme Jobbers 16 612 Fashion Statement 18 613 Teresa Lojay 22 614 City Utilities 26 615 Regional Telephone 31 16-61 (Employees) 31 620 Handy Janitors 31

2013 Oct. 1 601 City Properties 1 602 Cable Station KOTV 2 603 State Tax Com. 2 604 Fashion Statement 4 605 BMX Supply Co. 4 606 Today’s Woman 5 607 Classy Threads 8 608 U.S. Treasury

DATE

MINI-PRACTICE SET 2 (continued)

23 1 2 0 00 (203)

4 8 2 0 00

8 7 7 0 00 1 7 0 0 00

✔ ✔

✔

7 8 3 0 00

✔

ACCOUNT S POST. PAYABLE DEBIT REF.

Teresa Lojay, Drawing Utilities Expense Telephone Expense Salaries Payable Janitorial Services Expense

Social Security Tax Payable Medicare Tax Payable Employee Income Tax Payable Advertising Expense Freight In Purchases

Supplies

Rent Expense Prepaid Advertising Sales Tax Payable

ACCOUNT NAME

302 644 638 229 623

221 222 223 611 502 501

131

629 135 231

POST. REF.

OTHER ACCOUNTS DEBIT

CASH PAYMENTS JOURNAL

6 5 0 0 00 8 8 1 00 5 2 0 00 8 9 1 6 00 2 7 5 00 53 4 2 1 00 ( ✕)

7 0 2 00 1 6 2 00 1 0 2 0 00 2 2 2 5 00 3 0 0 00 5 2 5 0 00

1 0 5 0 00

4 2 0 0 00 3 6 0 0 00 17 8 2 0 00

AMOUNT

CASH CREDIT

4 2 0 0 00 3 6 0 0 00 17 8 2 0 00 1 5 6 60 7 6 7 3 40 1 0 5 0 00 1 7 5 40 8 5 9 4 60 3 4 00 1 6 6 6 00 7 0 2 00 1 6 2 00 1 0 2 0 00 2 2 2 5 00 3 0 0 00 5 2 5 0 00 9 6 40 4 7 2 3 60 6 5 0 0 00 8 8 1 00 5 2 0 00 8 9 1 6 00 2 7 5 00 4 6 2 40 76 0 7 8 60 (50 4) (101)

PURCHAS ES DISCOUNT CREDIT

PAGE

MINI-PRACTICE SET 2 (continued) PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 Oct. 5 Sales Returns and Allowances 3 Sales Tax Payable 4 Accounts Receivable—Dimitri Sayegh 5 Issued Credit Memo 18 for damaged 6 merchandise originally sold on Sales 7 Slip 241, October 3 8 9 29 Accounts Payable—Classy Threads 10 Purchases Returns and Allowances 11 Received Credit Memo 175 for defective 12 goods returned; original purchase made 13 on Invoice 3418, October 25 14 15 29 Salaries Expense 16 Salaries Payable 17 Social Security Tax Payable 18 Medicare Tax Payable 19 Employee Income Tax Payable 20 To record October payroll 21 22 29 Payroll Taxes Expense 23 Social Security Tax Payable 24 Medicare Tax Payable 25 Federal Unemployment Tax Payable 26 State Unemployment Tax Payable 27 To record October payroll taxes 28 29 30 31 32 33 34 35 36 37 38

POST. REF.

DEBIT

402 231 111

6 0 0 00 3 0 00

203 503

4 3 0 00

632 229 221 222 223

10 8 0 0 00

626 221 222 225 227

1 5 6 6 00

CREDIT

6 3 0 00

4 3 0 00

8 9 1 6 00 7 0 2 00 1 6 2 00 1 0 2 0 00

7 0 2 00 1 6 2 00 1 1 8 00 5 8 4 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38

Chapter 13  529

MINI-PRACTICE SET 2 (continued) PAGE

GENERAL JOURNAL

DATE

DESCRIPTION Adjusting Entries

1 2 2013 (Adjustment a) 3 Oct. 31 Uncollectible Accounts Expense 4 Allowance for Doubtful Accounts 5 To record estimated loss from uncollectible 6 accounts, based on 1% of net credit sales 7 8 (Adjustment b) 9 31 Supplies Expense 10 Supplies 11 To record supplies used 12 13 (Adjustment c) 14 31 Insurance Expense 15 Prepaid Insurance 16 To record expired insurance 17 18 (Adjustment d) 19 31 Advertising Expense 20 Prepaid Advertising 21 To record expired advertising 22 23 (Adjustment e) 24 31 Depreciation Expense—Equipment 25 Accumulated Depreciation—Equipment 26 To record depreciation for month 27 28 (Adjustment f) 29 31 Income Summary 30 Merchandise Inventory 31 To transfer beginning inventory 32 33 (Adjustment g) 34 31 Merchandise Inventory 35 Income Summary 36 To record ending inventory 37

530  Chapter 13

POST. REF.

DEBIT

620 112

9 6 10

635 131

2 3 1 0 00

617 133

7 0 0 00

611 135

9 0 0 00

614 142

1 1 7 5 00

399 121

88 9 9 6 00

121 399

80 4 0 0 00

CREDIT

9 6 10

2 3 1 0 00

7 0 0 00

9 0 0 00

1 1 7 5 00

88 9 9 6 00

80 4 0 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37

MINI-PRACTICE SET 2 (continued) PAGE

GENERAL JOURNAL

DATE

DESCRIPTION Closing Entries

1 2 2013 3 Oct. 31 Sales 4 Purchases Returns and Allowances 5 Purchases Discounts 6 Income Summary 7 8 31 Income Summary 9 Sales Returns and Allowances 10 Purchases 11 Freight In 12 Advertising Expense 13 Depreciation Expense—Equipment 14 Insurance Expense 15 Uncollectible Accounts Expense 16 Janitorial Services Expense 17 Payroll Taxes Expense 18 Rent Expense 19 Salaries Expense 20 Supplies Expense 21 Telephone Expense 22 Utilities Expense 23 24 31 Income Summary 25 Teresa Lojay, Capital 26 27 31 Teresa Lojay, Capital 28 Teresa Lojay, Drawing 29 30 31 32 33 34 35 36 37

POST. REF.

401 503 504 399 399 402 501 502 611 614 617 620 623 626 629 632 635 638 644

399 301 301 302

DEBIT

CREDIT

1 2 68 3 5 0 00 3 4 3 0 00 4 4 6 2 40 5 69 2 4 2 40 6 7 42 9 1 8 10 8 6 0 0 00 9 16 3 7 0 00 10 3 0 0 00 11 3 1 2 5 00 12 1 1 7 5 00 13 7 0 0 00 14 9 6 10 15 2 7 5 00 16 1 5 6 6 00 17 4 2 0 0 00 18 10 8 0 0 00 19 2 3 1 0 00 20 5 2 0 00 21 8 8 1 00 22 23 17 7 2 8 30 24 17 7 2 8 30 25 26 6 5 0 0 00 27 6 5 0 0 00 28 29 30 31 32 33 34 35 36 37

Chapter 13  531

MINI-PRACTICE SET 2 (continued) GENERAL LEDGER ACCOUNT

DATE DESCRIPTION 2013 Oct. 1 Balance 31 31

ACCOUNT

✔ CR10 CP10

DEBIT

CREDIT

64 6 0 9 00 76 0 7 8 60

POST. REF. ✔ J16 S10 CR10

DEBIT

CREDIT

6 3 0 00 10 7 2 0 50 3 5 6 2 00

POST. REF.

DEBIT

✔ J17

532  Chapter 13

POST. REF. ✔ J17 J17

6 2 1 0 00 5 5 8 0 00 16 3 0 0 50 12 7 3 8 50

CREDIT

88 9 9 6 00 80 4 0 0 00

112

BALANCE DEBIT CREDIT 4 2 0 00 5 1 6 10

ACCOUNT NO.

DEBIT

111

BALANCE DEBIT CREDIT

9 6 10

Merchandise Inventory

DATE DESCRIPTION 2013 Oct. 1 Balance 31 Adjusting 31 Adjusting

59 8 0 0 00 124 4 0 9 00 48 3 3 0 40

ACCOUNT NO.

CREDIT

101

BALANCE DEBIT CREDIT

ACCOUNT NO.

Allowance for Doubtful Accounts

DATE DESCRIPTION 2013 Oct. 1 Balance 31 Adjusting

ACCOUNT

POST. REF.

Accounts Receivable

DATE DESCRIPTION 2013 Oct. 1 Balance 5 Credit Memo 18 31 31

ACCOUNT

ACCOUNT NO.

Cash

121

BALANCE DEBIT CREDIT 88 9 9 6 00 ─ 0─ 80 4 0 0 00

MINI-PRACTICE SET 2 (continued) GENERAL LEDGER ACCOUNT

DATE DESCRIPTION 2013 Oct. 1 Balance 4 31 Adjusting

ACCOUNT

✔ CP10 J17

DEBIT

BALANCE DEBIT CREDIT

2 3 1 0 00

4 1 0 0 00 5 1 5 0 00 2 8 4 0 00

1 0 5 0 00

ACCOUNT NO. POST. REF.

DEBIT

✔ J17

CREDIT

7 0 0 00

CP10 J17

DEBIT

CREDIT

3 6 0 0 00 9 0 0 00

DATE DESCRIPTION 2013 Oct. 1 Balance

8 4 0 0 00 7 7 0 0 00

POST. REF.

DEBIT

CREDIT

✔

135

BALANCE DEBIT CREDIT 3 6 0 0 00 2 7 0 0 00

ACCOUNT NO.

Equipment

133

BALANCE DEBIT CREDIT

ACCOUNT NO. POST. REF.

131

CREDIT

Prepaid Advertising

DATE DESCRIPTION 2013 Oct. 1 31 Adjusting

ACCOUNT

POST. REF.

Prepaid Insurance

DATE DESCRIPTION 2013 Oct. 1 Balance 31 Adjusting

ACCOUNT

ACCOUNT NO.

Supplies

141

BALANCE DEBIT CREDIT 83 0 0 0 00

Chapter 13  533

MINI-PRACTICE SET 2 (continued) GENERAL LEDGER ACCOUNT

DATE DESCRIPTION 2013 Oct. 1 Balance 31 Adjusting

ACCOUNT

DEBIT

✔ J17

CREDIT

1 1 7 5 00

POST. REF. ✔ J16 P10 CP10

DEBIT

CREDIT

4 3 0 00 11 1 2 0 00 23 1 2 0 00

POST. REF. ✔ CP10 J16 J16

CREDIT

7 0 2 00 7 0 2 00 7 0 2 00

534  Chapter 13

POST. REF. ✔ CP10 J16 J16

DEBIT

CREDIT

1 6 2 00 1 6 2 00 1 6 2 00

203

BALANCE DEBIT CREDIT 18 3 0 0 00 17 8 7 0 00 28 9 9 0 00 5 8 7 0 00 221

BALANCE DEBIT CREDIT 7 0 2 00 ─ 0─ 7 0 2 00 1 4 0 4 00

ACCOUNT NO.

Medicare Tax Payable

DATE DESCRIPTION 2013 Oct. 1 Balance 8 29 29

7 0 5 0 00 8 2 2 5 00

ACCOUNT NO.

DEBIT

142

BALANCE DEBIT CREDIT

ACCOUNT NO.

Social Security Tax Payable

DATE DESCRIPTION 2013 Oct. 1 Balance 8 29 29

ACCOUNT

POST. REF.

Accounts Payable

DATE DESCRIPTION 2013 Oct. 1 Balance 29 31 31 ACCOUNT

ACCOUNT NO.

Accumulated Depreciation—Equipment

222

BALANCE DEBIT CREDIT 1 6 2 00 ─ 0─ 1 6 2 00 3 2 4 00

MINI-PRACTICE SET 2 (continued) GENERAL LEDGER ACCOUNT

DATE DESCRIPTION 2013 Oct. 1 Balance 8 29

ACCOUNT DATE 2013 Oct.

DESCRIPTION

DATE 2013 Oct. 29 31

✔ CP10 J16

DEBIT

CREDIT

1 0 2 0 00 1 0 2 0 00

POST. REF.

DEBIT

✔ J16

CREDIT

1 1 8 00

POST. REF.

DEBIT

✔ J16

5 8 4 00

POST. REF. J16 CP10

DEBIT

CREDIT 8 9 1 6 00

8 9 1 6 00

225

BALANCE DEBIT CREDIT 5 1 2 00 6 3 0 00

227

BALANCE DEBIT CREDIT 1 2 6 8 00 1 8 5 2 00

ACCOUNT NO.

Salaries Payable

DESCRIPTION

1 0 2 0 00 ─0─ 1 0 2 0 00

ACCOUNT NO.

CREDIT

223

BALANCE CREDIT DEBIT

ACCOUNT NO.

State Unemployment Tax Payable

DATE DESCRIPTION 2013 Oct. 1 Balance 29

ACCOUNT

POST. REF.

Federal Unemployment Tax Payable

1 Balance 29

ACCOUNT

ACCOUNT NO.

Employee Income Tax Payable

229

BALANCE DEBIT CREDIT 8 9 1 6 00 ─0─

Chapter 13  535

MINI-PRACTICE SET 2 (continued) GENERAL LEDGER ACCOUNT

DATE DESCRIPTION 2013 Oct. 1 Balance 2 5 31 31 ACCOUNT

DEBIT

✔ CP10 17 8 2 0 00 J16 3 0 00 S10 CR10

CREDIT

3 0 00 5 1 0 50 2 9 0 7 00

✔ J18 J18

DEBIT

CREDIT

536  Chapter 13

4 8 0 50 3 3 8 7 50

POST. REF. CP10 J18

203 2 5 2 00 220 9 8 0 30 214 4 8 0 30

6 5 0 0 00

ACCOUNT NO.

DEBIT

BALANCE DEBIT CREDIT

6 5 0 0 00

6 5 0 0 00 ─ 0─

6 5 0 0 00

J17 J17 J18 J18 J18

DEBIT

CREDIT

88 9 9 6 00 80 4 0 0 00 69 2 4 2 40 42 9 1 8 10 17 7 2 8 30

302

CREDIT

ACCOUNT NO. POST. REF.

301

BALANCE DEBIT CREDIT

17 7 2 8 30

Income Summary

DATE DESCRIPTION 2013 Oct. 31 Adjusting 31 Adjusting 31 Closing 31 Closing 31 Closing

BALANCE DEBIT CREDIT

ACCOUNT NO.

POST. REF.

231

17 8 2 0 00 ─ 0─

Teresa Lojay, Drawing

DATE DESCRIPTION 2013 Oct. 18 31 Closing ACCOUNT

POST. REF.

Teresa Lojay, Capital

DATE DESCRIPTION 2013 Oct. 1 Balance 31 Closing 31 Closing ACCOUNT

ACCOUNT NO.

Sales Tax Payable

399

BALANCE DEBIT CREDIT 88 9 9 6 00 8 5 9 6 00 60 6 4 6 40 17 7 2 8 30 ─ 0─

MINI-PRACTICE SET 2 (continued) GENERAL LEDGER ACCOUNT

DATE DESCRIPTION 2013 Oct. 31 31 31 Closing

ACCOUNT

DATE 2013 Oct. 5 31

ACCOUNT

POST. REF.

DEBIT

S10 CR10 J18 68 3 5 0 00

CREDIT

DESCRIPTION

POST. REF. J16 J18

CREDIT

6 0 0 00 6 0 0 00

POST. REF.

DEBIT

CP10 5 2 5 0 00 P10 11 1 2 0 00 J18

CREDIT

6 0 0 00 ─ 0─

BALANCE DEBIT CREDIT

16 3 7 0 00

─ 0─

ACCOUNT NO.

CP10 J18

DEBIT

501

5 2 5 0 00 16 3 7 0 00

Freight In POST. REF.

402

BALANCE DEBIT CREDIT

ACCOUNT NO.

Purchases

DATE DESCRIPTION 2013 Oct. 12 31 Closing

10 2 1 0 00 68 3 5 0 00 ─ 0─

ACCOUNT NO.

DEBIT

401

BALANCE DEBIT CREDIT

10 2 1 0 00 58 1 4 0 00

Sales Returns and Allowances

DATE DESCRIPTION 2013 Oct. 16 31 31 Closing

ACCOUNT

ACCOUNT NO.

Sales

CREDIT

3 0 0 00

502

BALANCE DEBIT CREDIT 3 0 0 00

3 0 0 00

─ 0─

Chapter 13  537

MINI-PRACTICE SET 2 (continued) GENERAL LEDGER ACCOUNT

DATE DESCRIPTION 2013 Oct. 29 31 Closing

ACCOUNT

J16 J18

DEBIT

CREDIT

ACCOUNT NO.

DEBIT

CP10 J18

4 6 2 40

CREDIT

538  Chapter 13

4 6 2 40 ─ 0─

ACCOUNT NO.

POST. REF. CP10 J17 J18

DEBIT

POST. REF. J17 J18

611

CREDIT

BALANCE DEBIT CREDIT

3 1 2 5 00

2 2 2 5 00 3 1 2 5 00 ─ 0─

2 2 2 5 00 9 0 0 00

DEBIT

504

BALANCE DEBIT CREDIT

4 6 2 40

ACCOUNT NO.

Depreciation Expense—Equipment

DATE DESCRIPTION 2013 Oct. 31 Adjusting 31 Closing

4 3 0 00 ─ 0─

4 3 0 00

POST. REF.

503

BALANCE DEBIT CREDIT

4 3 0 00

Advertising Expense

DATE DESCRIPTION 2013 Oct. 10 31 Adjusting 31 Closing

ACCOUNT

POST. REF.

Purchases Discounts

DATE DESCRIPTION 2013 Oct. 31 31 Closing

ACCOUNT

ACCOUNT NO.

Purchases Returns and Allowances

CREDIT

1 1 7 5 00

614

BALANCE DEBIT CREDIT 1 1 7 5 00

1 1 7 5 00

─ 0─

MINI-PRACTICE SET 2 (continued) GENERAL LEDGER ACCOUNT

Insurance Expense

ACCOUNT NO.

POST. DESCRIPTION REF.

BALANCE DEBIT CREDIT

DATE 2013 Oct. 31 Adjusting 31 Closing

ACCOUNT

7 0 0 00

7 0 0 00 7 0 0 00

POST. REF. J17 J18

POST. REF. CP10 J18

─ 0─

ACCOUNT NO.

DEBIT

CREDIT

9 6 10 9 6 10

DEBIT

CREDIT

2 7 5 00 2 7 5 00

620

BALANCE DEBIT CREDIT 9 6 10 ─ 0─

ACCOUNT NO.

Janitorial Services Expense

DATE DESCRIPTION 2013 Oct. 31 31 Closing

ACCOUNT

CREDIT

Uncollectible Accounts Expense

DATE DESCRIPTION 2013 Oct. 31 Adjusting 31 Closing

ACCOUNT

J17 J18

DEBIT

617

623

BALANCE DEBIT CREDIT 2 7 5 00 ─ 0─

Payroll Taxes Expense

ACCOUNT NO.

POST. DESCRIPTION REF.

CREDIT

BALANCE DEBIT CREDIT

1 5 6 6 00

1 5 6 6 00 ─ 0─

DATE 2013 Oct. 29 31 Closing

J16 J18

DEBIT 1 5 6 6 00

626

Chapter 13  539

MINI-PRACTICE SET 2 (continued) GENERAL LEDGER ACCOUNT

DATE DESCRIPTION 2013 Oct. 1 31 Closing ACCOUNT

BALANCE DEBIT CREDIT

4 2 0 0 00

4 2 0 0 00 ─ 0─

4 2 0 0 00

ACCOUNT NO. POST. REF. J16 J18

DEBIT

CREDIT

10 8 0 0 00 10 8 0 0 00

J17 J18

DEBIT

CREDIT

2 3 1 0 00

2 3 1 0 00 ─ 0─

2 3 1 0 00

CP10 J18

DEBIT

CREDIT

5 2 0 00 5 2 0 00

540  Chapter 13

CP10 J18

DEBIT

CREDIT

8 8 1 00 8 8 1 00

638

BALANCE DEBIT CREDIT 5 2 0 00 ─ 0─ ACCOUNT NO.

POST. REF.

635

BALANCE DEBIT CREDIT

Utilities Expense

DATE DESCRIPTION 2013 Oct. 22 31 Closing

10 8 0 0 00 ─ 0─

ACCOUNT NO. POST. REF.

632

BALANCE DEBIT CREDIT

ACCOUNT NO. POST. REF.

629

CREDIT

Telephone Expense

DATE DESCRIPTION 2013 Oct. 26 31 Closing ACCOUNT

CP10 J18

DEBIT

Supplies Expense

DATE DESCRIPTION 2013 Oct. 31 Adjusting 31 Closing ACCOUNT

POST. REF.

Salaries Expense

DATE DESCRIPTION 2013 Oct. 29 31 Closing ACCOUNT

ACCOUNT NO.

Rent Expense

644

BALANCE DEBIT CREDIT 8 8 1 00 ─ 0─

MINI-PRACTICE SET 2 (continued) ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER NAME

DATE DESCRIPTION 2013 Oct. 1 Balance

NAME

DEBIT

BALANCE

TERMS POST. REF. ✔ CR10 S10

DEBIT

BALANCE

5 2 0 00

5 2 0 00 ─ 0─ 8 6 1 00

8 6 1 00

✔ CR10 S10

DEBIT

BALANCE

8 3 2 00

8 3 2 00 ─ 0─ 2 0 3 7 00

2 0 3 7 00

✔ S10

DEBIT

2 1 5 2 50

n/30

CREDIT

TERMS POST. REF.

n/30

CREDIT

TERMS POST. REF.

n/30

7 9 5 00

Emma Maldonado

DESCRIPTION DATE 2013 Oct. 1 Balance 9 Sales Slip 242

CREDIT

✔

James Helmer

DESCRIPTION DATE 2013 Oct. 1 Balance 8 15 Sales Slip 243

NAME

POST. REF.

Megan Greening

DATE DESCRIPTION 2013 Oct. 1 Balance 2 24 Sales Slip 244

NAME

TERMS

Jennifer Brown

CREDIT

n/30

BALANCE 2 3 2 00 2 3 8 4 50

Chapter 13  541

MINI-PRACTICE SET 2 (continued) ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER NAME

TERMS

Jim Price

DATE DESCRIPTION 2013 Oct. 1 Balance

NAME

CREDIT

BALANCE 1 6 2 1 00

✔

TERMS POST. REF. ✔ S10 J16 CR10

DEBIT

BALANCE

6 3 0 00 5 1 0 00

5 1 0 00 3 1 1 4 00 2 4 8 4 00 1 9 7 4 00

TERMS POST. REF. ✔ CR10 S10

DEBIT

3 0 6 6 00

n/30

CREDIT

2 6 0 4 00

Emily Tran

DATE DESCRIPTION 2013 Oct. 1 Balance 5 29 Sales Slip 245

542  Chapter 13

DEBIT

Dimitri Sayegh

DESCRIPTION DATE 2013 Oct. 1 Balance 3 Sales Slip 241 5 Credit Memo 18 16

NAME

POST. REF.

n/30

CREDIT

BALANCE

1 7 0 0 00

1 7 0 0 00 ─ 0─ 3 0 6 6 00

MINI-PRACTICE SET 2 (continued) ACCOUNTS PAYABLE SUBSIDIARY LEDGER NAME

DATE DESCRIPTION 2013 Oct. 1 Balance 2 11 Invoice 9422 16

NAME

POST. REF. ✔ CP10 P10 CP10

DEBIT

CREDIT

7 8 3 0 00 4 8 2 0 00 4 8 2 0 00

POST. REF. ✔ CP10 P10 J16

DEBIT

CREDIT

1 7 0 0 00 3 3 8 0 00 4 3 0 00

Today’s Woman

DATE DESCRIPTION 2013 Oct. 1 Balance 4 30 Invoice 5821

7 8 3 0 00 ─ 0─ 4 8 2 0 00 ─ 0─

✔ CP10 P10

DEBIT

2/10,n/30

BALANCE 1 7 0 0 00 ─ 0─ 3 3 8 0 00 2 9 5 0 00

TERMS POST. REF.

2/10,n/30

BALANCE

TERMS

Classy Threads

DATE DESCRIPTION 2013 Oct. 1 Balance 5 25 Invoice 3418 29 Credit Memo 175

NAME

TERMS

A Fashion Statement

1/10,n/30

CREDIT

BALANCE

2 9 2 0 00

8 7 7 0 00 ─ 0─ 2 9 2 0 00

8 7 7 0 00

Chapter 13  543

MINI-PRACTICE SET 2 (continued) The Fashion Rack Schedule of Accounts Payable October 31, 2013 A Fashion Statement Classy Threads Today’s Woman Total

0 00 2 9 5 0 00 2 9 2 0 00 5 8 7 0 00

The Fashion Rack Schedule of Accounts Receivable October 31, 2013 Jennifer Brown Megan Greening James Helmer Emma Maldonado Jim Price Dimitri Sayegh Emily Tran Total

544  Chapter 13

7 9 5 00 8 6 1 00 2 0 3 7 00 2 3 8 4 50 1 6 2 1 00 1 9 7 4 00 3 0 6 6 00 12 7 3 8 50

MINI-PRACTICE SET 2 (continued) The Fashion Rack Worksheet For Month Ended October 31, 2013 ACCOUNT NAME 1 Cash 2 Accounts Receivable 3 Allowance for Doubtful Accounts 4 Merchandise Inventory 5 Supplies 6 Prepaid Insurance 7 Prepaid Advertising 8 Equipment 9 Accumulated Depreciation—Equipment 10 Accounts Payable 11 Social Security Tax Payable 12 Medicare Tax Payable 13 Employee Income Tax Payable 14 Federal Unemployment Tax Payable 15 State Unemployment Tax Payable 16 Salaries Payable 17 Sales Tax Payable 18 Teresa Lojay, Capital 19 Teresa Lojay, Drawing 20 Income Summary 21 Sales 22 Sales Returns and Allowances 23 Purchases 24 Freight In 25 Purchases Returns and Allowances 26 Purchases Discounts 27 Advertising Expense 28 Depreciation Expense—Equipment 29 Insurance Expense 30 Uncollectible Accounts Expense 31 Janitorial Services Expense 32 Payroll Taxes Expense 33 Rent Expense 34 Salaries Expense 35 Supplies Expense 36 Telephone Expense 37 Utilities Expense 38 Totals 39 Net Income 40

TRIAL BALANCE DEBIT CREDIT 48 3 3 0 40 12 7 3 8 50 4 2 0 00 88 9 9 6 00 5 1 5 0 00 8 4 0 0 00 3 6 0 0 00 83 0 0 0 00 7 0 5 0 00 5 8 7 0 00 1 4 0 4 00 3 2 4 00 1 0 2 0 00 6 3 0 00 1 8 5 2 00 0 00 3 3 8 7 50 203 2 5 2 00 6 5 0 0 00

ADJUSTMENTS DEBIT CREDIT

80 4 0 0 00

9 6 10 88 9 9 6 00 2 3 1 0 00 7 0 0 00 9 0 0 00 1 1 7 5 00

88 9 9 6 00

80 4 0 0 00

68 3 5 0 00 6 0 0 00 16 3 7 0 00 3 0 0 00 4 3 0 00 4 6 2 40 2 2 2 5 00 9 0 0 00 0 00 1 1 7 5 00 0 00 7 0 0 00 0 00 9 6 10 2 7 5 00 1 5 6 6 00 4 2 0 0 00 10 8 0 0 00 0 00 2 3 1 0 00 5 2 0 00 8 8 1 00 294 4 5 1 90 294 4 5 1 90 174 5 7 7 10 174 5 7 7 10

Chapter 13  545

MINI-PRACTICE SET 2 (continued)

ADJUSTED TRIAL BALANCE DEBIT CREDIT 48 3 3 0 40 12 7 3 8 50 5 1 6 10 80 4 0 0 00 2 8 4 0 00 7 7 0 0 00 2 7 0 0 00 83 0 0 0 00 8 2 2 5 00 5 8 7 0 00 1 4 0 4 00 3 2 4 00 1 0 2 0 00 6 3 0 00 1 8 5 2 00 0 00 3 3 8 7 50 203 2 5 2 00 6 5 0 0 00 88 9 9 6 00 80 4 0 0 00 68 3 5 0 00 6 0 0 00 16 3 7 0 00 3 0 0 00 4 3 0 00 4 6 2 40 3 1 2 5 00 1 1 7 5 00 7 0 0 00 9 6 10 2 7 5 00 1 5 6 6 00 4 2 0 0 00 10 8 0 0 00 2 3 1 0 00 5 2 0 00 8 8 1 00 376 1 2 3 00 376 1 2 3 00

546  Chapter 13

INCOME STATEMENT DEBIT CREDIT

88 9 9 6 00

BALANCE SHEET DEBIT CREDIT 48 3 3 0 40 12 7 3 8 50 5 1 6 10 80 4 0 0 00 2 8 4 0 00 7 7 0 0 00 2 7 0 0 00 83 0 0 0 00 8 2 2 5 00 5 8 7 0 00 1 4 0 4 00 3 2 4 00 1 0 2 0 00 6 3 0 00 1 8 5 2 00 0 00 3 3 8 7 50 203 2 5 2 00 6 5 0 0 00

80 4 0 0 00 68 3 5 0 00

6 0 0 00 16 3 7 0 00 3 0 0 00 4 3 0 00 4 6 2 40 3 1 2 5 00 1 1 7 5 00 7 0 0 00 9 6 10 2 7 5 00 1 5 6 6 00 4 2 0 0 00 10 8 0 0 00 2 3 1 0 00 5 2 0 00 8 8 1 00 131 9 1 4 10 17 7 2 8 30 149 6 4 2 40

149 6 4 2 40 0 00 149 6 4 2 40

244 2 0 8 90 0 00 244 2 0 8 90

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 226 4 8 0 60 38 17 7 2 8 30 39 244 2 0 8 90 40

4 3 0 00 4 6 2 40 8 9 2 40

16 3 7 0 00 3 0 0 00 16 6 7 0 00

The Fashion Rack Income Statement For Month Ended October 31, 2013

Operating Revenue Sales Less Sales Returns and Allowances Net Sales Cost of Goods Sold Merchandise Inventory, October 1, 2013 Purchases Freight In Delivered Cost of Purchases Less Purchases Returns and Allowances Purchases Discounts Net Delivered Cost of Purchases Total Merchandise Available for Sale Less Merchandise Inventory, October 31, 2013 Cost of Goods Sold Gross Profit on Sales Operating Expenses Advertising Expense Depreciation Expense—Equipment Insurance Expense Uncollectible Accounts Expense Janitorial Services Expense Payroll Tax Expense Rent Expense Salaries Expense Supplies Expense Telephone Expense Utilities Expense Total Operating Expenses Income from Operations/Net Income for the Month

MINI-PRACTICE SET 2 (continued)

3 1 2 5 00 1 1 7 5 00 7 0 0 00 9 6 10 2 7 5 00 1 5 6 6 00 4 2 0 0 00 10 8 0 0 00 2 3 1 0 00 5 2 0 00 8 8 1 00

15 7 7 7 60 104 7 7 3 60 80 4 0 0 00

88 9 9 6 00

25 6 4 8 10 17 7 2 8 30

24 3 7 3 60 43 3 7 6 40

68 3 5 0 00 6 0 0 00 67 7 5 0 00

MINI-PRACTICE SET 2 (continued) The Fashion Rack Statement of Owner's Equity For Month Ended October 31, 2013 Teresa Lojay, Capital, October 1, 2013 Net Income for Month Less Withdrawals for Month Increase in Capital Teresa Lojay, Capital, October 31, 2013

203 2 5 2 00 17 7 2 8 30 6 5 0 0 00 11 2 2 8 30 214 4 8 0 30 The Fashion Rack Balance Sheet October 31, 2013

Assets Current Assets Cash Accounts Receivable Less Allowance for Doubtful Accounts Merchandise Inventory Supplies Prepaid Expenses Prepaid Insurance Prepaid Advertising Total Current Assets Plant and Equipment Equipment Less Accumulated Depreciation Total Plant and Equipment Total Assets Liability and Owner’s Equity Current Liabilities Accounts Payable Social Security Tax Payable Medicare Tax Payable Employee Income Tax Payable Federal Unemployment Tax Payable State Unemployment Tax Payable Sales Tax Payable Total Liabilities Owner’s Equity Teresa Lojay, Capital Total Liabilities and Owner’s Equity

548  Chapter 13

48 3 3 0 40 12 7 3 8 50 5 1 6 10

7 7 0 0 00 2 7 0 0 00

12 2 2 2 40 80 4 0 0 00 2 8 4 0 00

10 4 0 0 00 154 1 9 2 80

83 0 0 0 00 8 2 2 5 00 74 7 7 5 00 228 9 6 7 80

5 8 7 0 00 1 4 0 4 00 3 2 4 00 1 0 2 0 00 6 3 0 00 1 8 5 2 00 3 3 8 7 50 14 4 8 7 50 214 4 8 0 30 228 9 6 7 80

MINI-PRACTICE SET 2 (continued) The Fashion Rack Post-closing Trial Balance October 31, 2013 ACCOUNT NAME Cash Accounts Receivable Allowance for Doubtful Accounts Merchandise Inventory Supplies Prepaid Insurance Prepaid Advertising Equipment Accumulated Depreciation—Equipment Accounts Payable Social Security Tax Payable Medicare Tax Payable Employee Income Tax Payable Federal Unemployment Tax Payable State Unemployment Tax Payable Sales Tax Payable Teresa Lojay, Capital Totals

DEBIT 48 3 3 0 40 12 7 3 8 50

CREDIT

5 1 6 10 80 4 0 0 00 2 8 4 0 00 7 7 0 0 00 2 7 0 0 00 83 0 0 0 00

237 7 0 8 90

8 2 2 5 00 5 8 7 0 00 1 4 0 4 00 3 2 4 00 1 0 2 0 00 6 3 0 00 1 8 5 2 00 3 3 8 7 50 214 4 8 0 30 237 7 0 8 90

Chapter 13  549

CHAPTER 14 ACCOUNTING PRINCIPLES AND REPORTING STANDARDS Chapter Opener: Thinking Critically The amount of revenue reported will change depending upon the method in which it is reported. Financial statement users compare results to prior years. This comparison will be distorted and users misled if the change in method is not disclosed. Fast Facts • •

Americans drink an average of 2.6 cups of coffee per day. Green Mountain Coffee Roasters (GMCR) maintains two business units: the Specialty Coffee Business Unit (Green Mountain Coffee® and Tully’s Coffee® brands) and the Keurig Business Unit which produces single-serve coffee makers.

• • •

The Company employs over 1,400 employees. The Company delivered double-digit net sales growth for 27 consecutive quarters. An investment of $100 in GMCR stock in September of 2004 was worth over $1,400 in 2010.

Managerial Implications: Thinking Critically • Net income—low income could be due to accelerated depreciation on new assets. • Assets—low asset value could be due to low historical cost, while the asset’s current market value may be much higher. Discussion Questions 1. The Securities and Exchange Commission and Financial Accounting Standards Board. 2. So that financial statements will have consistent meanings and be comparable. 3. Any U.S. company with foreign-based operations will have to prepare statements under IFRS. 4. Neutrality means that the statements are prepared without bias and without attempting to portray a predetermined picture. The needs of all users are considered equally. 5. Comparability means that statements of one entity may be compared meaningfully with those of another entity. 6. The accrual basis is designed to give effect to the matching principle. 7. If the entity were not a going concern, showing an asset’s cost would be useless. If the entity is about to liquidate, the only useful information would be the value of the assets. In that case, the cost of items are immaterial, GAAP may be less important, and other factors such as the cost of applying GAAP may take precedence. 8. In accounting for items that are not material, there may be justification for simply ignoring GAAP. This is especially true when there are high costs associated with complying rigidly with GAAP. 9. If an item is immaterial, there is less justification for incurring substantial costs to comply with GAAP regarding the item. The cost of compliance may outweigh the benefits. If an item is highly material, then cost becomes less important.

550  Chapter 14

Discussion Questions (continued) 10.

The periodicity assumption is that income can and will be measured for accounting periods such as a year or a quarter.

11.

This procedure violates the neutrality, matching, revenue recognition, reliability, and comparability concepts.

12.

The concepts of conservatism and usefulness warrant the practice. In this case, the cost principle becomes far less important.

13.

Full disclosure is the concept that all facts that would, if disclosed, affect the statement user’s interpretation of the statements should be disclosed. Full disclosure is a key principle in the eyes of the SEC.

14.

In order for statements to be useful, reliable, and comparable, they must be based on a single consistent set of concepts.

15.

For revenues to be recognized, they must have been earned and they must have been realized.

Chapter 14  551

EXERCISE 14.1 1.

He should report no income from the land. Under the realization principle, no revenue should be recognized until it has been realized—until there has been an inflow of cash or other new assets. In addition, the historical cost principle calls for recording assets at cost of $800,000, rather than at some other value.

HER should report no income from the project in 2013. The matching principle requires that revenues should not be recognized until earned and realized. Since no work was performed during the year, no income was earned.

$200. The accounting principle of matching costs with revenues requires that only that part of the insurance premium that applies to the current year should be recorded as an expense against revenues in that year. ($4,800/24 months = $200/month)

EXERCISE 14.2 1.

The separate entity assumption applies here. Under this assumption, Wong’s business and personal finances are separate economic entities, and separate financial records must be maintained for each.

The matching principle applies here. In matching cost with revenue, only the supplies used during the period should be charged to expense in the period since only those supplies were used in helping the company realize the revenue for that period. The costs of supplies not used should be carried forward as assets. (However, under some circumstances the materiality and cost-benefit constraints might argue that charging the supplies to expense when purchased would be permissible.)

To be theoretically correct, Sumner Co. should depreciate the tools over their useful lives. As a practical matter, however, the materiality constraint and the cost-benefit constraint allow such items to be recorded as expense in the year of purchase. The $8,000 cost is not a material amount when compared to income of about $4.5 million. In addition, if Sumner follows the consistency principle and expenses the small tools each year, the net difference between expensing the costs and capitalizing, then depreciating, them is reduced further.

552  Chapter 14

EXERCISE 14.3 1.

This is correct accounting. The historical code principle requires that assets should be recorded at cost. In addition, the recognition principle requires that there be a conversion of assets into cash or other assets before income can be recognized.

This is correct accounting. The historical cost principle, the matching principle and the going-concern assumption are all important. Assets should be recorded at cost. The machine will contribute to the production of revenue over its 8-year useful life and costs should be depreciated over that period. Under the going-concern assumption, it can be assumed that the asset will contribute to the enterprise over the full 8 years unless there is clear indication that expectations have changed.

This is correct accounting. The matching principle calls for matching revenue and related expenses in the same year. Since some part of sales of the current period are not expected to be collected, the resulting loss should be recorded in the current year in order to match expenses with revenues in the same accounting period. Also, conservatism requires that accounts receivable should not be overstated.

EXERCISE 14.4 1.

Objectivity is the key factor. Under GAAP, expenses are recognized as soon as they occur if there is a doubt as to which period should be charged with the expense. In this case, it would be difficult, if not impossible, to determine the current amount for the current period and the amount that should be deferred to future periods. Measuring future benefits from current advertising is very subjective.

Materiality and consistency are important considerations. The amount of $3,500 is not material when compared to net income of about $2.0 million. If the company follows this practice from year to year, the consistency principle is being followed. In theory this is not a proper practice because it does not give a proper matching of costs and revenues. However, under the materiality constraint, the policy is acceptable if followed consistently.

Objectivity is the key factor. GAAP holds that expenditures should be expensed if they cannot be shown objectively to benefit future operations. It would be very difficult to determine objectively the portion of cost of present marketing expenses that will benefit future operations. For this reason, GAAP requires that all marketing costs, except those in very limited specified circumstances shall be charged to expense when incurred.

EXERCISE 14.5 This is appropriate accounting. Matching costs with revenue is a key accounting principle. Any future expense expected to be incurred because of warranties on equipment sold in the current year would be charged against revenues in the current year.

Chapter 14  553

EXERCISE 14.6 The statements apparently contain information that is not verifiable, that is not reliable, that is not neutral, and is not timely. Thus, they are not presented in accordance with generally accepted accounting principles. Probably some of the information for the tax return is irrelevant.

PROBLEM 14.1A 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

True True False False False True False False True True

554  Chapter 14

PROBLEM 14.2A

Handled Properly? No

Basic Concept Separate entity

Proper Presentation The personal money-market account of the owner should not be included in the assets of the business because it is assumed that a business is an entity separate and apart from its owner.

Yes

Matching, conservatism

It is unlikely that Johnson will pay, or be able to pay, her debt. It should be charged off and matched against current income.

Yes

Cost basis, matching

Assets are recorded at cost and the cost is charged to expense through depreciation over the assets’ useful lives.

Yes

Cost basis, realization

Assets should be recorded at cost. The increase in value has not been realized.

Yes

Matching

Prepaid insurance of $2,000 should be shown on the balance sheet. $2,000 of the cost should be charged to expense each year.

Matching

No depreciation was recorded. The cost of an asset should be charged to depreciation over the asset’s useful life. It was, however, appropriate that the asset’s increase in value was not recorded.

Analyze: The net income would be overstated.

Chapter 14  555

PROBLEM 14.3A Cortez Video Center Income Statement Year Ended December 31, 2013 Sales (Note 1) Cost of Goods Sold Merchandise Inventory, January 1 Purchases (Note 2) Total Merchandise Available for Sale Less Merchandise Inventory, December 31 Cost of Goods Sold Gross Profit on Sales Operating Expenses Salaries Expense Office Expenses Depreciation Expense (Note 3) Payroll Taxes Expense Advertising and Other Selling Expenses Repairs Expense (Note 4) Insurance Expense Interest Expense (Note 5) Utility and Telephone Expense Legal and Audit Expense Uncollectible Accounts Expense Miscellaneous Expense Total Operating Expenses Net Income for Year

556  Chapter 14

695 3 0 0 00 44 8 0 0 00 441 2 2 5 00 486 0 2 5 00 48 5 0 0 00 437 5 2 5 00 257 7 7 5 00 80 31 11 9 22 5 4 7 18 3 1 28

5 0 3 0 9 9 4 6 5 5 3 5

0 0 8 0 0 0 0 0 0 0 0 0

0 00 0 00 8 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 224 4 8 8 00 33 2 8 7 00

PROBLEM 14.3A (continued) COMPUTATIONS Note 1 : Computation of Sales: Cash Receipts for Year Accounts Receivable, December 31

$689,000 33,000

Subtotal Less Accounts Receivable, January 1 Sales

$722,000 26,700 $695,300

Note 2 : Computation of Purchases: Payments to Suppliers Accounts Payable, December 31

$435,000 45,425

Subtotal Less Accounts Payable, January 1 Purchases

$480,425 39,200 $441,225

Note 3 : Computation of Depreciation Expense: Equipment ($64,500 ÷ 12 years) Building ($150,330 ÷ 25 years) Depreciation Expense

$5,375 6,013 $11,388

Note 4 : Computation of Repairs Expense: Total Charged to Repairs Expense Less Cost of Paving Parking Lot Repairs Expense

$12,000 6,100 $5,900

Note 5 : Computation of Interest Expense: Total Charged to Interest Expense Less Interest on Owner’s Investment Interest Expense

$12,000 4,400 $7,600

Analyze: The gross profit percentage is 37.07%.

Chapter 14  557

PROBLEM 14.4A The Art Haven Balance Sheet December 31, 2013 Assets Current Assets Cash (Note 2) Accounts Receivable Supplies Inventory (Note 1)

10 2 0 0 00 16 0 0 0 00 2 0 6 0 00 31 9 0 0 00

Total Current Assets Plant and Equipment Equipment Depreciation—Equipment (Note 4) Truck (Note 3) Depreciation—Truck (Note 4) Total Plant and Equipment Total Assets Liabilities and Owner’s Equity Current Liabilities Accounts Payable Notes Payable—Truck (Note 3)

60 1 6 0 00 30 0 0 0 00 6 0 0 0 00

24 0 0 0 00

34 0 0 0 00 4 0 0 0 00

30 0 0 0 00 54 0 0 0 00 114 1 6 0 00

16 4 5 0 00 9 6 0 0 00

Total Current Liabilities Long-Term Liabilities Notes Payable—Truck (Note 3)

26 0 5 0 00

Total Liabilities

40 4 5 0 00

Owner’s Equity (Note 5) Arthur Martin, Capital Total Liabilities and Owner’s Equity

73 7 1 0 00 114 1 6 0 00

558  Chapter 14

14 4 0 0 00

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PROBLEM 14.4A (continued) 1. 2.

The inventory should be shown at cost under the cost principle and not at the selling price. Under the separate entity assumption, the cash of the owner should not be shown with the cash of the business. ($13,400 − $3,200 = $10,200)

Although the truck is not paid for, it is an asset of the business and should be shown on the balance sheet net of any allowable depreciation. The liability on the truck should be shown in the liability section of the balance sheet, with the current and long-term portions appropriately classified.

The equipment and truck should be shown at their original costs, less accumulated depreciation.

The owner’s personal residence, the family auto, notes payable on the family car, and the mortgage on the house should not be shown on the balance sheet of the business under the separate entity concept. The amount for Arthur Martin, Capital was calculated by subtracting total liabilities from total assets ($114,160 − $40,450 = $73,710).

Analyze: An entry should be made debiting Uncollectible Accounts Expense and crediting Allowance for Doubtful Accounts The Balance Sheet would show the Allowance for Doubtful Accounts as a contra asset account.

PROBLEM 14.5A 1.

Violation of the matching concept. Assets are overstated and income for some years has been overstated. The company should adopt the allowance method.

The approach used by the accountant is correct because of the matching principle. However, the owner has valid arguments. Two percent of net income would likely be viewed as material. Even if all the tools are capitalized, their costs are charged to expense over a two-year period. As a result, the effect on income would likely be minimal if they were charged to expense when purchased. The cost-benefit constraint probably argues for expensing the tools when they are purchased.

Violation of the revenue recognition principle. Revenues should be reported only when they have been earned. Deposits do not represent earned revenues. Returned deposits should be treated as reductions of unearned income.

This is a correct practice. Under the historical cost principles and the matching concept, all the costs incurred to obtain an asset, including freight, should be treated as part of the asset’s cost.

The revenue recognition principle is violated because the amount of assets received from the sale is not included in revenue. In addition, the full disclosure concept is violated because expense incurred for sales commissions in not disclosed. The sales commissions represent a material portion of revenues and profits.

Analyze: Sales are understated by $3,000,000.

Chapter 14  559

PROBLEM 14.1B 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

False False True True True False False True True False

PROBLEM 14.2B Proper Presentation The personal auto of the owner should not be included on the balance sheet of the business, since it is assumed that a business is an entity separate from its owners.

Handled Properly? No

Basic Concept Separate Entity

Cost basis, objectivity

Under the cost basis principle the land should be valued at its original cost; furthermore, the objectivity assumption requires verifiable evidence rather than opinion.

Cost basis, matching

The equipment should have been shown on the balance sheet at its cost less its accumulated depreciation. Its cost should be depreciated over its estimated useful life.

Matching

The uncollectible accounts should be estimated and charged against revenue of that year. A loss of 1.5% of sales of $22 million is a large expense and would be material in computing net income.

Cost basis, recognition

The unit should be included in inventory at the cost of making it. Recording the unit at selling price would result in recognizing profit before it is realized.

Consistency

The lack of consistency in valuing inventory could result in financial reports that are not comparable with earlier reports. A change can be made if the new method gives fairer presentation of earnings. However, the company must follow the rules for reporting the effects of the change to the statement users, and cannot change each year.

Analyze: $39,000 is the depreciation for 2013 (3 months @ $13,000 per month).

560  Chapter 14

PROBLEM 14.3B Vanessa’s Beauty Supplies Income Statement Year Ended December 31, 2013 Sales (Note 1) Cost of Goods Sold Merchandise Inventory, January 1 Purchases (Note 2) Total Merchandise Available for Sale Less Merchandise Inventory, December 31 Cost of Goods Sold Gross Profit on Sales Operating Expenses Salaries Expense (Note 3) Insurance Expense Payroll Taxes Expense Depreciation Expense (Note 4) Repairs Expense (Note 5) Uncollectible Accounts Expense Supplies and Other Office Expense Advertising and Other Selling Expenses Utilities Expense Total Operating Expenses

402 2 5 0 00 36 0 0 0 00 314 2 5 0 00 350 2 5 0 00 45 0 0 0 00 305 2 5 0 00 97 0 0 0 00 46 2 5 4 4 1 7 12 5

Net Income from Operations Other Expense: Interest Expense (Note 6) Net Income

0 8 0 8 5 8 0 0 6

0 0 6 0 0 0 0 0 0

0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 89 5 6 0 00 7 4 4 0 00 3 3 0 0 00 4 1 4 0 00

Chapter 14  561

PROBLEM 14.3B (continued) COMPUTATIONS Note 1 : Computation of Sales: Cash Receipts for Year Accounts Receivable, December 31 Subtotal Less Accounts Receivable, January 1 Sales Note 2 : Computation of Purchases: Payments to Creditors Accounts Payable, December 31 Subtotal Less Accounts Payable, January 1 Purchases

$ $ $

Note 3: Computation of Salaries Expense Amount Shown as Salaries Expense Less Withdrawal of Owner Salaries Expense

300,000 32,250 332,250 18,000 314,250

62,000 16,000 46,000

Note 4 : Computation of Depreciation Expense: Store equipment ($52,000 − $4,000)/10 years $

4,800

Note 5 : Computation of Repairs Expense: Total Charged to Repairs Expense Repairs Incorrectly Charged to Equipment Repairs Expense

3,500 1,000 4,500

Note 6 : Computation of Interest Expense: Total Charged to Interest Expense Less Interest on Owner’s Investment Interest Expense

407,000 25,250 432,250 30,000 402,250

$ $

6,500 3,200 3,300

Analyze: The permanent accounts affected would be: Accounts Receivable, Allowance for Doubtful Accounts, Owner’s Capital, Store Equipment, Accumulated Depreciation—Store Equipment.

562  Chapter 14

PROBLEM 14.4B City Kitchen—Country Cooks Balance Sheet December 31, 2013 Assets Current Assets Cash (Note b) Accounts Receivable Inventory (Note a) Total Current Assets Plant and Equipment Store Fixtures Less Accumulated Depreciation (Note c) Store Equipment Less Accumulated Depreciation (Note c) Total Plant and Equipment Total Assets

11 0 0 0 00 7 2 0 0 00 35 0 0 0 00 53 2 0 0 00 28 0 0 0 00 5 6 0 0 00 22 4 0 0 00 19 2 0 0 00 3 8 0 0 00 15 4 0 0 00 37 8 0 0 00 91 0 0 0 00

Liabilities and Owner's Equity Liabilities Accounts Payable

26 0 0 0 00

Owner’s Equity Ann Barnett, Capital (Note e) Total Liabilities and Owner’s Equity

65 0 0 0 00 91 0 0 0 00

Chapter 14  563

PROBLEM 14.4B (continued)

NOTES The inventory should be shown at cost under the cost principle and not replacement cost. (As you will see in Chapter 17, however, if replacement cost is less than actual cost, it may be appropriate to record the asset at the replacement cost.) Only business funds should be recorded and reflected on the balance sheet.

c.& d. Both the asset account and depreciation should be based on historical cost rather than on current value. The accounting being followed does not match costs and benefits. e.

No. Personal assets or liabilities should not be reflected on the balance sheet. The amount for Ann Barnett, Capital was calculated as total assets of $91,000 less liabilities of $26,000. Analyze: The total current assets for City Kitchen—Country Cooks are $53,200.

PROBLEM 14.5B 1.

No accounting entries are required that affect the amounts in the financial statements because no loss or liability has been created. However, existence of the suit would be very important to the statement users, so the full disclosure principle dictates that disclosure of the suit should be made in notes to the statements.

This procedure violates the cost principle and the realization concept. The parts should be recorded at their actual cost and income recognized only when the products are sold.

This is the correct presentation. Financial reports are based on historical cost. The land was purchased for $420,000 and sold for $500,000. Therefore, a profit of $80,000 was made. The accounting framework includes the assumption of a stable monetary unit that disregards the price levels.

This is a violation of the historical cost principle. There has been no identifiable cost related specifically to the goodwill, so it should not be recorded.

This is a violation of the revenue recognition principle. Revenue should be recognized in the year it is earned. The deposits will be earned when services are performed in January and February of 2014. Analyze: Yes. Based on the facts given, it would likely be appropriate to record the goodwill. The amount paid for the other assets was their book values. The goodwill would be shown on the balance sheet as an “Intangible Asset.”

564  Chapter 14

CRITICAL THINKING PROBLEM 14.1 In this situation, it is very difficult to determine if there will be future benefit, and it is almost impossible to measure those benefits. The matching principle requires that the contributions should be charged to expense in the year made. This is not the same as a payment of $500,000 for an item of equipment or a specific service or benefit, even though management may feel relatively sure that construction of the new road will increase value of the property. In addition, the company cannot be compelled to make the suggested contribution. If, on the other hand, the local taxing authority imposes a tax to pay for the road, some would argue that the special tax should be added to the cost of the land because of the almost certainty that the land value will increase.

CRITICAL THINKING PROBLEM 14.2 1.

This is appropriate under the matching concept. If no oil or gas is found, there are no future benefits. If oil or gas is found, there are future benefits against which to match the costs.

This does not conform with GAAP. Under the realization principle, revenue should not be recognized until it has been realized and earned. In this case, the rentals have not been earned because the related services have not been rendered.

There is no violation of generally accepted accounting principles in this case. Although the advertising may benefit future accounting periods, there is no way to match the expense and the resulting revenue since no connection can be made between the advertising costs and future revenues. The concepts of verifiability and reliability would not be met because of the inability to measure future benefits.

Assuming the equipment still retains its usefulness to the business, charging the equipment’s cost to expense violates the cost principle and the matching concept. Generally, assets should be recorded at cost and depreciated over their useful lives. Through the process of measuring and recording depreciation during the assets’ useful lives, there is an appropriate matching of costs and revenues.

This is inappropriate preparation of statements violating the principle of consistency. In order to provide comparability between the statement, the period covered should be consistent for each statement.

The present approach used for the baskets conforms to GAAP. However, the concept of materiality supports the accountant’s suggestion. The total cost is relatively immaterial, while the time and effort recording the assets and depreciating them provides very little benefit. Analyze: Due to inflated rental revenues in the period, income is overstated. In the following period, the services necessary to earn previously reported revenue will be incurred and lower profits reported.

Chapter 14  565

SOLUTIONS TO BUSINESS CONNECTIONS Managerial Focus: 1. Personal judgment can be minimized but not completely eliminated. To aid in objectivity, consult outside experts or use published guidelines. 2.

In some periods, the rate of inflation may make original cost meaningless. Land values may be far in excess of historical costs or far less.

If the entire entity is about to be sold, as in bankruptcy, or is being liquidated. (The assets will not be used up in the normal course of business.)

To report income or loss, accountants must match revenues earned with costs incurred to earn those revenues.

Ethical Dilemma: Although not unethical, it is not in compliance with the generally accepted accounting conventions. The higher depreciation expense will reduce the net income. The correct action is to depreciate each asset by the life of the asset not of the business. Financial Statement Analysis: 1. The statements are comparable in that you can compare these results with other companies in the same industry. The account titles and presentation are very similar to other retail building supply companies. The data is clearly understood. Merchandise Inventory is clearly identified, as are other major areas of expenses. The assets and liabilities are also clearly labeled for comparison and analysis. 2.

The Merchandise Inventory amounts are clearly displayed on the balance sheet. The note says that inventories are valued at lower of cost or market as determined by the retail method. Period physical counting of inventories is made and compared to book values.

Teamwork: As an example, Materiality: Violation would be to put the purchase of a $2,000 executive chair in miscellaneous expense since all chairs are included in the miscellaneous account. Compliance would be reporting the financial statements in thousands of dollars instead of hundreds of dollars. Internet Connection: Each state licenses CPAs to practice in its state. In general, a test must be passed and certain experience must occur. For a CMA, a test and years of experience are required. To teach at a university requires a PhD or a Doctorate of Business Administration.

566  Chapter 14

SOLUTIONS TO PRACTICE TEST Part A True-False 1. FALSE 2. FALSE 3. TRUE 4. FALSE 5. TRUE 6. TRUE 7. FALSE

8. 9. 10. 11. 12. 13. 14.

FALSE TRUE TRUE FALSE TRUE FALSE TRUE

15. 16. 17. 18. 19. 20.

FALSE FALSE TRUE FALSE FALSE FALSE

Part B Completion 1. consistency 2. accrual 3. earned and realized 4. full disclosure 5. conservatism 6. cost-benefit 7. going concern 8. comparability 9. periodicity of income 10. Public Company Accounting Oversight Board (PCAOB) 11. American Institute of CPAs (Accounting Principles Board) 12. materiality 13. separate 14. International Accounting Standards Board 15. Securities and Exchange Commission 16. stable monetary unit Part C Exercise 1. No. The owner of a sole proprietorship is generally legally liable for the debts and other obligations of the business as well as for personal debts. 2. 3.

ABC must use U.S. GAAP since it has not international reporting requirements. If continuity were not assumed, the accounting records would have to be kept on the assumption that the business is about to liquidate—presumably reflecting estimated value.

For revenue to be recognized, it must have been (1) realized (cash or other assets must have been received ’or debts liquidated) and (2) earned, which means that goods or services have been delivered and the costs related to the revenue have been incurred.

The conceptual framework is designed to provide a sound basis for developing accounting standards and rules. It permits development of a coherent set of standards based on the same assumptions, basic principles, and constraints.

Chapter 14  567

CHAPTER 15 ACCOUNTS RECEIVABLE AND UNCOLLECTIBLE ACCOUNTS Chapter Opener: Thinking Critically Uncollectible accounts can be estimated in a number of ways. Students might consider historical data on uncollected accounts as one way of estimating the amount of uncollectible accounts a company can expect. Fast Facts • Federal Express Corporation was founded 1971 in Little Rock, Ark. • The most popular perk for employees is called “jump seating.” This allows employees to hitch an unlimited number of free rides anywhere FedEx flies. • In 1973 on the first night of continuous operation, 389 Federal Express employees and 14 aircraft delivered 186 packages overnight to 25 U.S. cities. • Currently, FedEx employs more than 275,000 employees and contractors worldwide and operates 684 aircraft and delivers an average daily volume of 8 million shipments for express, ground, freight and expedited delivery services. Managerial Implications: Thinking Critically The aging of accounts receivable would provide information about the length of time required to collect accounts. The balance sheet and income statement provide total sales, accounts receivable, and uncollectible accounts expense. Discussion Questions 1. The allowance method more closely matches revenues (sales) with expenses (uncollectible accounts) in the year the revenue is earned. 2. (a) percent net credit sales, (b) adjust allowance to percentage of total accounts receivable, and (c) age accounts based on different percentages for different ages of accounts. 3. On sales. Sales represents the revenues for the current period. The accounts receivable account reflects sales made in the current period and past periods. 4. Compute the loss from bad debts by multiplying the net credit sales by the predetermined loss percentage. Charge this amount to the expense account and credit Allowance for Doubtful Accounts for the same amount. If the balance in the allowance account is unusually low, it may be desirable to consider making a special provision for additional uncollectible accounts. 5. Determining balances for each customer and analyzing the balance between debt not yet due and debt past due for each period of time. 6. Allowance for Doubtful Accounts. 7. Debit Allowance for Doubtful Accounts and credit Accounts Receivable and the customer’s account in the subsidiary ledger. 8. The matching principle and the conservatism constraint.

568  Chapter 15

Discussion Questions (continued) 9. Debit Accounts Receivable and the customer’s subsidiary account and credit Allowance for Doubtful Accounts. Then debit Cash and credit Accounts Receivable and the customer’s subsidiary account. 10. Credit the Allowance account for only enough to bring the balance to the estimated doubtful accounts based on the aging analysis. 11. It is a contra account and is subtracted from Accounts Receivable. 12. Uncollectible Accounts Expenses is shown as either a selling expense (if the sales department is responsible for granting credit), or as a general expense (if the sales department does not grant credit). 13. An individual account is charged to expense and credited to Accounts Receivable when it is determined that account is uncollectible. 14. Accounts Receivable is overstated and expense is understated for the current year and perhaps for the prior year(s). The matching principle is violated. 15. Businesses with few accounts receivable (so that the amount involved is immaterial) or with very few uncollectible accounts. The materiality constraint allows violations of GAAP when results obtained ar not materially different. 16. Uncollectible Accounts Expense is charged and Accounts Receivable credited at the time an individual debtor’s account is determined to be uncollectible. 17. Accounts Receivable is debited and an income account, Uncollectible Accounts Recovered is credited. 18. Authorizing all credit sales, sending invoices and monthly statements, aging accounts receivable, separating duties of those involved in granting credit, handling cash, and keeping records related to accounts receivable. 19. Authorizing credit sales, recording receivables transactions, preparing bills and statements for customers, mailing bills or statements, processing payments from customers, giving approvals for write-offs.

Chapter 15  569

EXERCISE 15.1 Total credit sales Less sales returns and allowances—credit sales Net credit sales Estimated loss rate Estimated loss

$16,403,600 61,600 $16,342,000 0.003 $49,026 PAGE

GENERAL JOURNAL

1 2 3 4 5 6

DATE DESCRIPTION 2013 Dec. 31 Uncollectible Accounts Expense Allowance for Doubtful Accounts To record estimated uncollectible accounts for fiscal year, based on 0.3% of net credit sales of $16,342,000

POST. REF.

DEBIT

CREDIT

49 0 2 6 00 49 0 2 6 00

1 2 3 4 5 6

EXERCISE 15.2 Accounts Receivable Estimated uncollectible rate × Estimated uncollectible accounts Less credit balance of Allowance for Doubtful Accounts Adjustment amount

570  Chapter 15

$1,863,000 0.033 61,479 (3,621) $57,858

EXERCISE 15.2 (continued) PAGE

GENERAL JOURNAL POST. REF.

DATE DESCRIPTION 1 2013 2 Dec. 31 Uncollectible Accounts Expense 3 Allowance for Doubtful Accounts 4 To record adjustment of allowance account based 5 on 3.3% of Accounts Receivable of $1,863,000 6

DEBIT

CREDIT 1 2 57 8 5 8 00 3 4 5 6

57 8 5 8 00

EXERCISE 15.3 Accounts Receivable Estimated uncollectible account rate Estimated uncollectible accounts Add debit balance in Allowance for Doubtful Accounts Adjustment amount

$920,000 0.035 32,200 2,000 34,200 PAGE

GENERAL JOURNAL DATE DESCRIPTION 1 2013 2 Dec. 31 Uncollectible Accounts Expense 3 Allowance for Doubtful Accounts 4 To record adjustment of allowance account 5 to desired balance of $32,200 6

POST. REF.

DEBIT

CREDIT

34 2 0 0 00

1 2 34 2 0 0 00 3 4 5 6

EXERCISE 15.4 PAGE

GENERAL JOURNAL DATE DESCRIPTION 1 2013 2 Apr. 30 Allowance for Doubtful Accounts 3 Accounts Receivable/Michele Waters 4 To write off account determined to be 5 uncollectible

POST. REF.

DEBIT

CREDIT

2 7 0 0 00

1 2 2 7 0 0 00 3 4 5

Chapter 15  571

EXERCISE 15.5 PAGE

GENERAL JOURNAL DATE DESCRIPTION 1 2013 2 Dec. 8 Accounts Receivable/Michele Waters 3 Allowance for Doubtful Accounts 4 To reverse entry dated April 30, 2013 writing 5 off this account, which was collected in full today 6 7 8 Cash 8 Accounts Receivable/Michele Waters 9 To record receipt of cash on account previously 10 written off on April 30, 2013

POST. REF.

DEBIT

CREDIT

1 2 7 0 0 00 2 2 7 0 0 00 3 4 5 6 2 7 0 0 00 7 2 7 0 0 00 8 9 10

EXERCISE 15.6 PAGE

GENERAL JOURNAL DATE DESCRIPTION 1 2014 2 Feb. 28 Accounts Receivable/Michele Waters 3 Allowance for Doubtful Accounts 4 To reverse entry dated April 30, 2013 writing 5 off this account, which was collected in full today 6 7 28 Cash 8 Accounts Receivable/Michele Waters 9 To record receipt of cash on account written off 10 on April 30, 2013

POST. REF.

DEBIT

CREDIT

1 2 7 0 0 00 2 2 7 0 0 00 3 4 5 6 2 7 0 0 00 7 2 7 0 0 00 8 9 10

EXERCISE 15.7 PAGE

GENERAL JOURNAL DATE DESCRIPTION 1 2013 2 Sept. 10 Uncollectible Accounts Expense 3 Accounts Receivable/Chris Freyer 4 To write off uncollectible account 5

572  Chapter 15

POST. REF.

DEBIT

CREDIT

8 4 0 00 8 4 0 00

1 2 3 4 5

EXERCISE 15.8 PAGE

GENERAL JOURNAL DESCRIPTION DATE 1 2013 2 Dec. 8 Accounts Receivable/Chris Freyer 3 Uncollectible Accounts Expense 4 To partially reverse September 10, 2013, 5 entry writing off this account 6

POST. REF.

DEBIT

CREDIT

4 2 0 00

1 2 4 2 0 00 3 4 5 6

EXERCISE 15.9 PAGE

GENERAL JOURNAL 1 2 3 4 5 6

DESCRIPTION DATE 2014 Jan. 28 Accounts Receivable/Chris Freyer Uncollectible Accounts Recovered To partially reinstate amount of account collected today, charged off Sept. 10, 2013

POST. REF.

DEBIT

CREDIT

4 2 0 00

1 2 4 2 0 00 3 4 5 6

PROBLEM 15.1A 1. Wholesale ($2,040,000 × .005) Retail ($548,600 × .012) Total

$10,200.00 6,583.20 $16,783.20

Chapter 15  573

PROBLEM 15.1A (continued) PAGE

GENERAL JOURNAL DESCRIPTION DATE 1 2013 (2) 2 Dec. 31 Uncollectible Accounts Expense 3 Allowance for Doubtful Accounts 4 To record estimated losses from uncollectible 5 accounts for the year, based on 0.5% of net 6 whsle. credit sales and 1.2% of retail net 7 credit sales 8 2014 (4) 9 Jan. 20 Allowance for Doubtful Accounts 10 Accounts Receivable/Delphi Clothiers 11 To write off account determined to be 12 uncollectible 13 (5) 14 Nov. 26 Accounts Receivable/Delphi Clothiers 15 Allowance for Doubtful Accounts 16 To reverse entry dated January 20, writing 17 off this account, which was collected in full 18 today 19

POST. REF.

DEBIT 16 7 8 3 20

8 3 0 00

CREDIT 1 2 16 7 8 3 20 3 4 5 6 7 8 9 8 3 0 00 10 11 12 13 14 8 3 0 00 15 16 17 18 19

Ultra Leather Products Balance Sheet December 31, 2013 Accounts Receivable Less Allowance for Doubtful Accounts ($16,783.20− 326.80)

392 0 0 0 00 16 4 5 6 40 375 5 4 3 60

Analyze: Net Accounts Receivable for the year ended December 31, 2013 should be $375,543.60.

574  Chapter 15

PROBLEM 15.2A ESTIMATE OF UNCOLLECTIBLE ACCOUNTS 1. Over 60 days past due ($1,532 × .25) 31–60 days past due ($1,968 × .09) 1–30 days past due ($5,240 × .03) Current ($37,848 × .01) Total estimated uncollectible accounts

$383.00 177.12 157.20 378.48 $1,095.80

ADJUSTMENT FOR ESTIMATED UNCOLLECTIBLE ACCOUNTS 2. Estimated uncollectible accounts Less credit balance in Allowance for Doubtful Accounts Amount of adjustment for estimated uncollectible accounts

$1,095.80 208.20 $887.60 PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

DATE DESCRIPTION 2013 (3) Dec. 31 Uncollectible Accounts Expense Allowance for Doubtful Accounts To record adjustment of allowance account to needed balance of $1,095.80 based on aging of accounts receivable 2014 (4) May 10 Allowance for Doubtful Accounts Accounts Receivable/John Ash To write off account determined to be uncollectible (5) June 12 Accounts Receivable/Zeke Martin Allowance for Doubtful Accounts To reverse entry dated November 8, 2013, writing off this account, which was collected in full today (6) Dec. 31 Uncollectible Accounts Expense Allowance for Doubtful Accounts To record adjustment of allowance account to needed balance of $1,164.70 based on 2.5% of accounts receivable [(0.025 × $46,588) − $208.20 = $956.50]

POST. REF.

DEBIT

CREDIT

8 8 7 60

4 1 6 00

2 0 0 00

9 5 6 50

1 2 8 8 7 60 3 4 5 6 7 8 4 1 6 00 9 10 11 12 13 2 0 0 00 14 15 16 17 18 19 9 5 6 50 20 21 22 23 24

Analyze: Net income would be reduced by $68.90 ($956.50− $887.60).

Chapter 15  575

PROBLEM 15.3A 1.

a. Credit sales Less sales returns and allowances on credit sales Net credit sales Amount to be charged to the Uncollectible Accounts Expense (0.0025 × $8,300,000)

b. Accounts Receivable Accounts Receivable estimated uncollectible (0.033 × $850,000) Less credit balance in Allowance for Doubtful Accounts Amount to be charged to the Uncollectible Accounts Expense

$8,500,000 200,000 $8,300,000 $20,750

$850,000 28,050 (3,000) $25,050

a. Computations and answers are the same as for 1a. b. Accounts Receivable estimated uncollectible Add debit balance in Allowance for Doubtful Accounts Amount to be charged to the Uncollectible Accounts Expense

$28,050 2,500 $30,550

Analyze: Using the sales basis would give highest income this year.

576  Chapter 15

PROBLEM 15.4A PAGE

GENERAL JOURNAL DATE DESCRIPTION 1 2013 2 Feb. 7 Uncollectible Accounts Expense 3 Accounts Receivable/Anne Baker 4 To write off account determined to be uncollectible 5 6 May 16 Uncollectible Accounts Expense 7 Accounts Receivable/Martha Falls 8 To write off account determined to be uncollectible 9 10 July 2 Accounts Receivable/Anne Baker 11 Uncollectible Accounts Expense 12 To reverse part of entry dated February 7 writing 13 off this account, which was collected today 14 15 July 29 Accounts Receivable/Anne Baker 16 Uncollectible Accounts Expense 17 To reverse balance of entry dated February 7 18 writing off this account, which was collected 19 in full today 20 21 Aug. 18 Uncollectible Accounts Expense 22 Accounts Receivable/David Nye 23 To write off account determined to be uncollectible 24 25 2014 26 Sept. 28 Accounts Receivable/Martha Falls 27 Uncollectible Accounts Recovered 28 To restore part of account charged off May 16, 2013, 29 which was collected from estate of Martha Falls 30 today. 31 32 33 34 35

POST. REF.

DEBIT

CREDIT

6 0 0 00

1 0 0 0 00

3 0 0 00

3 2 4 00

5 0 0 00

1 2 6 0 0 00 3 4 5 6 1 0 0 0 00 7 8 9 10 3 0 0 00 11 12 13 14 15 3 0 0 00 16 17 18 19 20 21 3 2 4 00 22 23 24 25 26 5 0 0 00 27 28 29 30 31 32 33 34 35

Analyze: The net uncollectible accounts expense recorded for the year was $1,324.

Chapter 15  577

PROBLEM 15.1B 1. Businesses ($1,800,000 × 0.4%) Individuals ($1,200,000 × 0.9%) Total losses in uncollectible accounts

$7,200.00 10,800.00 $18,000.00 PAGE

GENERAL JOURNAL DATE DESCRIPTION 1 2013 (2) 2 Dec. 31 Uncollectible Accounts Expense 3 Allowance for Doubtful Accounts 4 To record estimated losses from uncollectible 5 accounts for the year, based on 0.4% of 6 business sales and 0.9% of individual sales 7 2014 (4) 8 Jan. 28 Allowance for Doubtful Accounts 9 Accounts Receivable/Fain Enterprises 10 To write off account determined to be 11 uncollectible 12 (5) 13 June 15 Accounts Receivable/Fain Enterprises 14 Allowance for Doubtful Accounts 15 To reverse portion of entry dated January 28 16 writing off this account, which was collected 17 today

POST. REF.

DEBIT

CREDIT

1 18 0 0 0 00 2 18 0 0 0 00 3 4 5 6 7 7 8 8 00 8 7 8 8 00 9 10 11 12 4 0 0 00 13 4 0 0 00 14 15 16 17

Ideal Plumbing Company Balance Sheet December 31, 2013 Accounts Receivable Less Allowance for Doubtful Accounts

281 5 0 0 00 18 6 0 0 00 262 9 0 0 00

Analyze: The amount charged to Uncollectible Accounts Expense would be $19,105.

578  Chapter 15

PROBLEM 15.2B ESTIMATE OF UNCOLLECTIBLE ACCOUNTS 1. Over 60 days past due ($1,046 × .40) 31–60 days past due ($2,398 × .14) 1–30 days past due ($4,389 × .04) Current ($8,815 × .01) Total estimated uncollectible accounts

$418.40 335.72 175.56 88.15 $1,017.83

ADJUSTMENT FOR ESTIMATED UNCOLLECTIBLE ACCOUNTS 2. Estimated uncollectible accounts $1,017.83 Plus debit balance in Allowance for Doubtful Accounts 310.00 Amount of adjustment for estimated uncollectible accounts $1,327.83 PAGE

GENERAL JOURNAL DATE DESCRIPTION 1 2013 (3) 2 July 31 Uncollectible Accounts Expense 3 Allowance for Doubtful Accounts 4 To record adjustment of allowance account to 5 needed balance of $1,017.83 based on aging 6 of accounts receivable 7 (4) 8 Aug. 28 Allowance for Doubtful Accounts 9 Accounts Receivable/Jorge Urbina 10 To write off account determined to be uncollectible 11 (5) 12 Sept. 21 Accounts Receivable/Barry King 13 Allowance for Doubtful Accounts 14 To reverse entry dated December 19, 2012, 15 writing off this account 16 (6) 17 July 31 Uncollectible Accounts Expense 18 Allowance for Doubtful Accounts 19 To record adjustment of allowance account to 20 needed balance of $1,331.84 based on 8% of 21 accounts receivable 22 (8% × $16,648) − $125.00 = $1,206.84

POST. REF.

DEBIT 1 3 2 7 83

1 8 2 00

2 5 0 00

1 2 0 6 84

CREDIT 1 2 1 3 2 7 83 3 4 5 6 7 8 1 8 2 00 9 10 11 12 2 5 0 00 13 14 15 16 17 1 2 0 6 84 18 19 20 21 22

Chapter 15  579

PROBLEM 15.3B 1. a. Credit sales Less sales returns and allowances on credit sales Net credit sales Amount to be charged to the Uncollectible Accounts Expense (0.0034 × $38,870,000)

b. Accounts Receivable Accounts Receivable estimated uncollectible (0.028 × $3,910,000) Less credit balance in Allowance for Doubtful Accounts Amount to be charged to the Uncollectible Accounts Expense

$39,100,000 230,000 $38,870,000 $132,158

$3,910,000 109,480 (6,500) $102,980

2. a. Computations and answers are the same as for 1a. b. Accounts Receivable estimated uncollectible Add debit balance in Allowance for Doubtful Accounts Amount to be charged to the Uncollectible Accounts Expense

$109,480 6,500 $115,980

Analyze: The method resulting in the highest uncollectible expense is 1a.

580  Chapter 15

PROBLEM 15.4B PAGE

GENERAL JOURNAL DATE DESCRIPTION 1 2013 2 Mar. 15 Uncollectible Accounts Expense 3 Accounts Receivable/Tony Smith 4 To write off account of customer who died 5 6 Apr. 22 Uncollectible Accounts Expense 7 Accounts Receivable/Tom Greenberg 8 To write off account determined to be uncollectible 9 10 June 16 Accounts Receivable/Tony Smith 11 Uncollectible Accounts Expense 12 To reverse part of entry dated March 15 13 writing off this account, which was collected 14 in part from the estate of Tony Smith 15 16 July 13 Accounts Receivable/Tom Greenberg 17 Uncollectible Accounts Expense 18 To reverse part of entry dated April 22 19 writing off Greenberg account, which was 20 collected in part from the bankruptcy court 21 22 Oct. 8 Uncollectible Accounts Expense 23 Accounts Receivable/Lisa Holmes 24 To write off account determined to be uncollectible 25 26 2014 27 Feb. 12 Accounts Receivable/Tom Greenberg 28 Uncollectible Accounts Recovered 29 To reverse balance of entry dated April 22 30 writing off this account, balance of which was 31 collected from Tom Greenberg 32 33 34 35

POST. REF.

DEBIT

CREDIT

5 0 0 0 00

3 0 0 0 00

1 0 0 0 00

2 2 0 0 00

2 1 0 0 00

8 0 0 00

1 2 5 0 0 0 00 3 4 5 6 3 0 0 0 00 7 8 9 10 1 0 0 0 00 11 12 13 14 15 16 2 2 0 0 00 17 18 19 20 21 22 2 1 0 0 00 23 24 25 26 27 8 0 0 00 28 29 30 31 32 33 34 35

Analyze: The balance for Uncollectible Accounts Expense should be $6,900.

Chapter 15  581

CRITICAL THINKING PROBLEM 15.1 PAGE

GENERAL JOURNAL POST. REF.

DATE DESCRIPTION 1 2013 2 Dec. 31 Allowance for Doubtful Accounts 3 Accounts Receivable/Bob Anderson 4 Accounts Receivable/Suzanne Bennett 5 Accounts Receivable/James O'Brian 6 Accounts Receivable/Omar Tirado 7 Accounts Receivable/Casey Wilk 8 To charge off uncollectible accounts 9 10 31 Uncollectible Accounts Expense 11 Allowance for Doubtful Accounts 12 To record estimated bad-debt losses 13 based on 0.32% of net credit sales 14 15 31 Uncollectible Accounts Expense 16 Allowance for Doubtful Accounts 17 To record adjustment of allowance account to 18 $26,245 required balance based on aging of 19 accounts receivable 20 ($26,245 − $2,690 = $23,555) 21

DEBIT

CREDIT

1 25 5 1 0 00 2 10 8 0 0 00 3 2 1 8 0 00 4 4 2 0 0 00 5 5 2 3 0 00 6 3 1 0 0 00 7 8 9 28 4 8 0 00 10 28 4 8 0 00 11 12 13 14 23 5 5 5 00 15 23 5 5 5 00 16 17 18 19 20 21

ESTIMATE OF UNCOLLECTIBLE ACCOUNTS Over 60 days past due 0.40 × 31–60 days past due 0.1 × 1–30 days past due 0.05 × Current 0.01 × Total estimated uncollectible accounts

582  Chapter 15

$23,840 41,090 90,000 810,000

= = = =

$9,536 4,109 4,500 8,100 $26,245

CRITICAL THINKING PROBLEM 15.1 (continued) Allowance for Doubtful Accounts 12/31 Chg. Off 25,510 12/31 Beg. Bal. 12/31 Adjustment 12/31 Final Bal.

28,200 23,555 26,245

12/31 Beg. Bal. 12/31 Final Bal.

Accounts Receivable 990,440 12/31 Chg. Off 964,930

Balance in Allowance account before adjustment ($28,200 − $25,510) Needed balance Adjustment

25,510

$2,690 (credit) 26,245 (credit) $23,555 (credit)

Analyze: The consistency principle has been violated. A lack of consistency in the method used to determine uncollectible accounts results in financial statements that are not compatible. It is possible to change methods, but the details of the change must be disclosed in the notes accompanying the financial statements.

Chapter 15  583

CRITICAL THINKING PROBLEM 15.2 PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

DATE DESCRIPTION 2013 (1) Dec. 31 Accounts Receivable/Various Accounts Sales To record sales for 2013

POST. REF.

DEBIT

CREDIT

1 6,480 0 0 0 00 2 6,480 0 0 0 00 3 4 5 22 2 0 0 00 6 22 2 0 0 00 7 8 9 10 25 0 0 0 00 11 25 0 0 0 00 12 50 0 0 0 00 13 14 15 16 17 6 8 0 0 00 18 6 8 0 0 00 19 20 21 22 22 6 0 0 00 23 22 6 0 0 00 24 25 26 27

31 Allowance for Doubtful Accounts Accounts Receivable/Craine Toy Outlets To write off account determined to be uncollectible 31 Allowance for Doubtful Accounts Cash Accounts Receivable/Youth Fun Shops To record partial payment and write off balance of account determined to be uncollectible 31 Allowance for Doubtful Accounts Accounts Receivable/Toys on the Square To write off account determined to be uncollectible 31 Allowance for Doubtful Accounts Accounts Receivable/Various Accounts To write off accounts determined to be uncollectible in old territory

ESTIMATE OF UNCOLLECTIBLE ACCOUNTS Old territory ($6,280,000 × 0.003) New territory ($200,000 × 0.03) Total estimated loss

584  Chapter 15

$18,840.00 6000.00 $24,840.00

CRITICAL THINKING PROBLEM 15.2 (continued) PAGE

GENERAL JOURNAL DATE DESCRIPTION 1 2013 2 Dec. 31 Uncollectible Accounts Expense 3 Allowance for Doubtful Accounts 4 To record estimated bad debt losses 5

POST. REF.

DEBIT 24 8 4 0 00

CREDIT 1 2 24 8 4 0 00 3 4 5

Allowance for Doubtful Accounts Amounts written off Beg. Bal. 6,200 22,200 2013 Adjustment 24,840 25,000 6,800 22,600 Bal 45,560

ANALYSIS BY TERRITORY Old territory: Provision for losses in 2013 ($6,280,000 × 0.003) Actual losses during 2013 Excess losses in 2013 over provision in 2013 New territory: Provision for losses in 2013 ($200,000 × 0.03) Actual losses during 2013 Excess losses in 2013 over provision in 2013

$18,840.00 22,600.00 ($3,760.00) $6,000.00 54,000.00 ($48,000.00)

The provision for uncollectible accounts is grossly inadequate and must be increased for 2013. There is an ending debit balance in the allowance account which is not acceptable.

Chapter 15  585

SOLUTIONS TO BUSINESS CONNECTIONS Managerial Focus: 1. Permits losses from uncollectible accounts to be charged against period revenue. 2. Not desirable. The granting of credit is usually handled by administrative personnel, therefore not motivated by sales. 3. For correct historical documentation of customers’ accounts. 4. Prevents stealing, provides strong internal controls. Ethical Dilemma: It could be ethical if the current sales volume is to customers of unknown credit history. However, if the increase is from all known customers then it is unethical to increase the percentage solely to reduce the net income and therefore the tax liability. An audit of their tax returns will disclose the higher percentage and Jitters will need to justify the increase. Financial Statement Analysis: 1. $369.8 ($365.3 + $4.5) 2. 4.0% ($15.4 decrease divided by $380.7) 3. 37.6% ($365.3 ÷ $970.5) Teamwork: The sale of an invoice: Debit—A/R, Credit—Sales/Write off the account: Debit—Allowance for Uncollectible, Credit—A/R/ Reinstate A/R: Debit—A/R Credit—Allowance/ Pay the bill: Debit—Cash, Credit—A/R. Internet Connection: Commercial credit is the lifeline of your business. It is the critical factor in obtaining funding for expansio capital expenditures, staffing, research, and development. Commercial credit also allows you to use the cash that you have on hand to cover other expenses—it provides you with the liquidity that allows you to respond quickly to time sensitive decisions without halting or compromising operations.

586  Chapter 15

SOLUTIONS TO PRACTICE TEST Part A True-False 1. TRUE 2. FALSE 3. FALSE 4. FALSE 5. FALSE 6. FALSE 7. TRUE 8. FALSE 9. FALSE 10. TRUE

11. FALSE 12. TRUE 13. FALSE 14. TRUE 15. TRUE 16. TRUE 17. FALSE 18. TRUE 19. FALSE

Part B Exercise I 1. $8,703 2. $8,703 3. $5,900 4. $6,100 Part C Exercise II

ACCOUNT Ameche, John Duong, Kim Graham, Ken McCartney, Harold Torelli, Andrew Totals

NETWORK DISTRIBUTORS Schedule of Accounts Receivable by Age December 31, 2010 PAST DUE—DAYS BALANCE CURRENT 1–30 31–60 OVER 60 $6,000 $2,500 $3,500 7,000 2,500 $4,500 7,000 7,000 6,800 $6800 9,000 9,000 $35,800 $18,500 $6,800 $6,000 $4,500

Chapter 15  587

CHAPTER 16 NOTES PAYABLE AND NOTES RECEIVABLE Chapter Opener: Thinking Critically A strong financial position means that Bank of America was able to take advantage of new business ventures (like mortgage financing), and broaden product offerings while smaller and less fiscally strong banks were forced to close. Fast Facts • Bank of America reported net income of $14.9 billion in 2007 and $6.3 billion in 2009. • Bank of America is the No. 1 overall Small Business Administration (SBA) lender in the United States and the No. 1 SBA lender to minority-owned small businesses. • Bank of America serves 1 of 2 households in the U.S. Managerial Implications: Thinking Critically Answers will vary. In addition to borrowed funds, students might bring up stock sales. Discussion Questions 1. A sight draft is a commercial draft that is payable at the time it is presented to the debtor. 2. It is a draft on an account prepared by the bank and made payable to a specific party. The funds for the check are immediately removed from the account on which the check is written. 3. It becomes a contingent liability when the note is endorsed at the time it is transferred to another party. In effect, the original holder of the note is guaranteeing payment in the event the maker defaults. The contingency ends when the note is paid. 4. Compute the maturity value of the note being discounted. Compute the discount on the maturity value, using the bank’s discount rate times the number of days in the discount period. Subtract the discount from the maturity value. 5. 6. 7. 8. 9.

It refers to “selling” the note to a financial institution for cash. The financial institution charges discount (or interest) on the maturity value in return for providing immediate cash. A dishonored note receivable is a note whose maker has not made payment of principal and interest and has not worked out plans with the holder of the note on the date the note matures. The calculations are the same. A note receivable is a signed document that provides better legal protection in the event of default. An account receivable typically does not involve a signed agreement for each individual sale. It is important to know when they are maturing so that plans can be made to have enough cash available when they are due. Also, if due dates are not watched carefully, payments may be missed, leading to penalties and also damage to the borrower’s credit record.

588  Chapter 16

Discussion Questions (continued) 10. Notes payable are almost always given to cover the borrowing of money, especially from a bank or other financial institution because this is the normal contract for borrowing. Notes are sometimes, but not frequently, given to cover the purchase of merchandise because credit is extended for a short time through accounts payable. Notes payable are frequently given to cover the purchase of equipment because the seller wishes to have security for longer-term financing. 11. Notes payable maturing less than one year from the balance sheet date are shown as Current Liabilities. 12. Discounting a note payable means paying interest in advance (through a deduction from the borrowing proceeds). 13. Maturity value = principal ($8,000) + interest ($8,000 × .09 × 105/360) = $8,210. 14. The note is due on May 28. 15. The face amount of a note is the amount shown on the instrument as being the amount borrowed and that must be repaid on maturity, along with any specified interest. The maturity is the total amount, face (or principal), plus any interest specified on the note. 16. To be negotiable, an instrument must (a) be in writing and signed by the maker, (b) contain an unconditional promise or order to pay a definite amount of money, (c) be payable either on demand or at a specified time, (d) be payable to a specific person or bearer, (e) if addressed to a drawee, must clearly identify the person or entity.

Chapter 16  589

EXERCISE 16.1 1. 2. 3.

October 10, 2013 November 1, 2015 October 10, 2013

EXERCISE 16.2 1.

MV = P + I = $14,000 + ($14,000 × 0.06 × 3/12) = $14,000 + $210 = $14,210 MV = P + I = $8,000 + ($8,000 × 0.09 × 60/360) = $8,000 + $120 = $8,120

EXERCISE 16.3 1.

MV = P + I = $14,000 + ($14,000 × 0.09 × 90/360) = $14,000 + $315 = $14,315 MV = P + I = $7,200 + ($7,200 × 0.10 × 6/12) = $7,200 + $360 = $7,560

590  Chapter 16

EXERCISE 16.4 PAGE

GENERAL JOURNAL

DATE DESCRIPTION 2013 May 8 Cash Notes Payable—Bank Issued 90-day, 7% note

POST. REF.

1 2 3 4 5 6 Aug. 6 Notes Payable—Bank 7 Interest Expense 8 Cash 9 Paid 90-day, 7% note 10 11 Aug. 8 Cash 12 Interest Expense 13 Notes Payable—Bank 14 Issued 90-day note discounted at 7% 15 16 Nov. 6 Notes Payable—Bank 17 Cash 18 Paid 90-day note discounted at 7% 19 20

DEBIT

CREDIT

22 0 0 0 00

22 0 0 0 00 3 8 5 00

24 5 6 2 50 4 3 7 50

25 0 0 0 00

1 2 22 0 0 0 00 3 4 5 6 7 22 3 8 5 00 8 9 10 11 12 25 0 0 0 00 13 14 15 16 25 0 0 0 00 17 18 19 20

EXERCISE 16.5 PAGE

GENERAL JOURNAL

1 2 3 4 5 6

DATE DESCRIPTION 2013 Aug. 1 Delivery Equipment Notes Payable—Trade Issued 90-day, 8% note for truck

POST. REF.

DEBIT

CREDIT

48 5 0 0 00 48 5 0 0 00

1 2 3 4 5 6

Chapter 16  591

EXERCISE 16.6 PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 June 3 Notes Receivable 3 Accounts Receivable/Kevin Fralicks 4 Accepted 60-day, 10% note for 5 past-due account from Kevin Fralicks 6 7 June 18 Cash 8 Notes Receivable—Discounted 9 Interest Income 10 Discounted Kevin Fralicks note 11 Maturity Value = $2,800 + (2,800 × 0.10 × 60/360) 12 = $2,846.67 13 Discount = $2,846.67 × 0.12 × 45/360 = $42.70 14 Proceeds = $2,846.67 − $42.70 = $2,803.97

POST. REF.

DEBIT

CREDIT

1 2 2 8 0 0 00 3 4 5 6 2 8 0 3 97 7 2 8 0 0 00 8 3 97 9 10 11 12 13 14 2 8 0 0 00

EXERCISE 16.7 PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 Aug. 2 Notes Receivable—Discounted 3 Notes Receivable/Kevin Fralicks 4 Record payment of Kevin Fralicks note discounted

POST. REF.

DEBIT

CREDIT

2 8 0 0 00 2 8 0 0 00

1 2 3 4

EXERCISE 16.8 PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 Aug. 2 Notes Receivable—Discounted 3 Accounts Receivable/Kevin Fralicks 4 Notes Receivable/Kevin Fralicks 5 Cash 6 To record dishonor of Fralicks’s discounted note

592  Chapter 16

POST. REF.

DEBIT

CREDIT

2 8 0 0 00 2 8 9 6 67 2 8 0 0 00 2 8 9 6 67

1 2 3 4 5 6

PROBLEM 16.1A 1. I = P × R × T = $20,000 × 0.08 × 180/360 = $800 2. I = $6,000 × 0.12 × 3/12 = $180 3. I = $25,000 × 0.09 × 120/360 = $750 Analyze: The balance in Notes Payable on December 31, 2013, is $31,000.

PROBLEM 16.2A PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 May 14 Warehouse Equipment 3 Notes Payable—Trade 4 Issued 6-month, 8% note for 5 warehouse equipment 6 7 May 28 Cash 8 Interest Expense 9 Notes Payable—Bank 10 Discounted 180-day note at 9% 11 12 Nov. 14 Notes Payable—Trade 13 Interest Expense 14 Cash 15 Paid 6-month, 8% note for $75,000 16 dated May 14, 2013 17 18 Nov. 24 Notes Payable—Bank 19 Cash 20 Paid 180-day note for $29,000 21 discounted on May 28, 2013

POST. REF.

DEBIT

CREDIT

1 75 0 0 0 00 2 75 0 0 0 00 3 4 5 6 27 6 9 5 00 7 1 3 0 5 00 8 29 0 0 0 00 9 10 11 75 0 0 0 00 12 3 0 0 0 00 13 78 0 0 0 00 14 15 16 17 29 0 0 0 00 18 29 0 0 0 00 19 20 21

Analyze: The total interest expense on notes for the year was $4,305.00.

Chapter 16  593

PROBLEM 16.3A Note 21

I MV

= $40,000 × 0.10 × 3/12 = $1,000 = $40,000 + $1,000 = $41,000

Note 22

I MV

= $12,000 × 0.09 × 90/360 = $270 = $12,000 + $270 = $12,270

Note 23

I MV

= $6,000 × 0.08 × 3/12 = $120 = $6,000 + $120 = $6,120

Analyze: The interest expense for the year is $1,390 ($1,000 + $270 + $120)

PROBLEM 16.4A Note 31

Maturity value

Discount Proceeds Note 32

Maturity value

Discount Proceeds Note 33

Maturity value

Discount Proceeds

= $40,000 + ($40,000 × .08 × 6/12) = $40,000 + $1,600 = $41,600 = $41,600 × 0.10 × 61/360 = $704.89 = $41,600 – $704.89 = $40,895.11 = $12,000 + ($12,000 × .06 × 120/360) = $240 = $12,000 + $240 = $12,240 = $12,240 × 0.10 × 66/360 = $224.40 = $12,240 – $224.40 = $12,015.60 = $8,000 + ($8,000 × 0.10 × 60/360) = $8,000 + $133.33 = $8,133.33 = $8,133.33 × 0.10 × 56/360 = $126.52 = $8,133.33 – $126.52 = $8,006.81

Analyze: The net interest income is $917.52 ($895.11 + $15.60 + $6.81)

594  Chapter 16

PROBLEM 16.5A PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 May 16 Notes Receivable 3 Accounts Receivable/Vick Company 4 Accepted 90-day, 8% note for 5 past-due account 6 7 June 30 Cash 8 Interest Income 9 Notes Receivable—Discounted 10 Discounted 90-day note at 13% 11 12 Aug. 14 Notes Receivable—Discounted 13 Notes Receivable 14 To record payment of discounted 15 note receivable 16

Analyze:

Notes Receivable Less Notes Receivable—Discounted

POST. REF.

DEBIT 7 8 0

CREDIT

0 00 7 8 0 0 00

7 8

6 71 7

7 8 0

2 6 71 8 0 0 00

0 00 7 8 0 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

$7,800 (7,800) −0−

PROBLEM 16.1B 1. I = P × R × T = $8,800 × 0.10 × 90/360 = $220 2. I = $10,000 × 0.06 × 30/360 = $50 3. I = $15,000 × 0.075 × 6/12 = $562.50 Analyze: The accrued interest payable on December 31, 2013, would be $293.75 ($15,000 × 0.075 × 94/360)

Chapter 16  595

PROBLEM 16.2B PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 June 3 Office Equipment 3 Notes Payable 4 Issued 120-day, 9% note for new office 5 equipment

POST. REF.

6 7 Oct. 1 Notes Payable 8 Interest Expense 9 Cash 10 Paid note of June 3 for office equipment 11 purchase 12 13 Sept. 18 Cash 14 Interest Expense 15 Notes Payable—Bank 16 Discounted 90-day note at 10% 17 18 Dec. 17 Notes Payable—Bank 19 Cash 20 Paid 90-day note for $15,000 discounted 21 on September 18

DEBIT

CREDIT

35 0 0 0 00 35 0 0 0 00

35 0 0 0 00 1 0 5 0 00

14 6 2 5 00 3 7 5 00

15 0 0 0 00

1 2 3 4 5

6 7 8 36 0 5 0 00 9 10 11 12 13 14 15 0 0 0 00 15 16 17 18 15 0 0 0 00 19 20 21

Analyze: More favorable. For the same interest, the company would receive $375 more to use for 90 days. PROBLEM 16.3B Note 30

I MV

= $12,000 × 0.105 × 60/360 = $210 = $12,000 + $210 = $12,210

Note 31

I MV

= $8,000 × 0.085 × 90/360 = $170 = $8,000 + $170 = $8,170

Note 32

I MV

= $10,000 × 0.09 × 4/12 = $300 = $10,000 + $300 = $10,300

Analyze: The balance in Notes Receivable on July 31 would be $8,000.

596  Chapter 16

PROBLEM 16.4B Note 20 Maturity v = $20,000 + ($20,000 × .08 × 120/360) = $20,000 + $533.33 = $20,533.33 Discount = $20,533.33 × 0.10 × 16/360 = $91.26 Proceeds = $20,533.33 – $91.26 = $20,442.07 Note 21 Maturity v = $9,000 + ($9,000 × .09 × 6/12) = $9,000 + $405 = $9,405 Discount = $9,405 × 0.10 × 67/360 = $175.04 Proceeds = $9,405 – $175.04 = $9,229.96 Note 22 Maturity v = $8,000 + ($8,000 × 0.12 × 120/360) = $8,000 + $320 = $8,320 Discount = $8,320 × 0.10 × 88/360 = $203.38 Proceeds = $8,320 – $203.38 = $8,116.62

Analyze: The notes receivable would be shown on the balance sheet as: Notes Receivable $37,000 Less Notes Receivable—Discounted (37,000) −0−

Chapter 16  597

PROBLEM 16.5B PAGE

GENERAL JOURNAL

DATE DESCRIPTION 2013 (1) Apr. 2 Notes Receivable Accounts Receivable/Matt Jones Accepted 6-month, 8% note for past-due account receivable

1 2 3 4 5 6 7 28 Cash 8 Interest Expense 9 Notes Receivable—Discounted 10 Discounted 6 months note 11 receivable at 10% 12 13 14 Oct. 2 Notes Receivable—Discounted 15 Notes Receivable 16 To record payment of discounted note 17 (2) 18 Oct. 2 Notes Receivable—Discounted 19 Accounts Receivable/Matt Jones 20 Notes Receivable 21 Cash 22 To record dishonor of note receivable

POST. REF.

DEBIT

CREDIT

1 2 9 8 0 0 00 3 4 5 6 9 7 4 7 52 7 5 2 48 8 9 8 0 0 00 9 10 11 12 13 9 8 0 0 00 14 9 8 0 0 00 15 16 17 9 8 0 0 00 18 10 2 4 2 00 19 9 8 0 0 00 20 10 2 4 2 00 21 22 9 8 0 0 00

Analyze: Chu will report interest expense of $52.48.

598  Chapter 16

CRITICAL THINKING PROBLEM 16.1 The bookkeeper is incorrect in saying that once a note is discounted it becomes the bank’s problem. When a business discounts a note at a bank, the business is required to endorse the note and as a result becomes contingently liable to the bank for the maturity value of the note. If the maker pays the note, the contingent liability ends. If the maker dishonors the note, the business—as an endorser—must pay the principal and interest to the bank because the contingent liability becomes a real liability. In almost every case, the bank assesses a service charge against the endorser to cover the bank’s costs associated with the dishonored note. Contingent liabilities affect the financial position of the business if future events cause them to become real liabilities. Therefore, contingent liabilities should be disclosed with all pertinent details on the financial statements to inform the reader of the risks involved.

Chapter 16  599

CRITICAL THINKING PROBLEM 16.2 PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 Mar. 4 Cash 3 Notes Payable—Bank 4 5 11 Cash 6 Interest Expense 7 Notes Payable—Bank 8 9 22 Notes Receivable/Brian Fields 10 Sales 11 12 23 Cash 13 Interest Expense 14 Notes Receivable—Discounted/Brian Fields 15 16 25 Cash 17 Notes Receivable/Jeff Towne 18 Sales 19 20 28 Notes Receivable/Jason Cobb 21 Accounts Receivable/Jason Cobb 22 23 (a) 24 April 18 Notes Payable—Bank 25 Interest Expense 26 Cash 27 28 June 9 Notes Payable—Bank 29 Cash 30 31 (b) 32 June 5 Accounts Receivable/Brian Fields 33 Notes Receivable—Discounted 34 Cash 35 Notes Receivable/Brian Fields 36

600  Chapter 16

POST. REF.

DEBIT 10 0 0 0 00

8 7 7 5 00 2 2 5 00

15 0 0 0 00

14 9 3 4 79 6 5 21

2 0 0 0 00 18 0 0 0 00

4 5 0 0 00

10 0 0 0 00 1 0 0 00

9 0 0 0 00

15 3 4 2 50 15 0 0 0 00

CREDIT 1 2 10 0 0 0 00 3 4 5 6 9 0 0 0 00 7 8 9 15 0 0 0 00 10 11 12 13 15 0 0 0 00 14 15 16 17 20 0 0 0 00 18 19 20 4 5 0 0 00 21 22 23 24 25 10 1 0 0 00 26 27 28 9 0 0 0 00 29 30 31 32 33 15 3 4 2 50 34 15 0 0 0 00 35 36

CRITICAL THINKING PROBLEM 16.2 (continued) PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 (c) 2 April 24 Cash 3 Notes Receivable/Jeff Towne 4 Interest Income 5 6 (d) 7 April 27 Cash 8 Notes Receivable/Jason Cobb 9 Interest Income 10

Analyze:

POST. REF.

DEBIT

CREDIT

1 2 18 0 0 0 00 3 1 5 0 00 4 5 6 4 5 4 5 00 7 4 5 0 0 00 8 4 5 00 9 10

18 1 5 0 00

The Notes Payable account balance on March 25 is $19,000 (March 4, $10,000 + March 11, $9,000).

Chapter 16  601

SOLUTIONS TO BUSINESS CONNECTIONS Managerial Focus: 1. Management can discount notes receivable at many banks. 2. Only the owner or top manager should be allowed to borrow money. An individual who has access to accounting records should not have access to cash before others have made a record of receipts. 3. Helps management identify which customers have not paid their obligations. 4. High volume of notes receivable or notes payable. Ethical Dilemma: It is not ethical to hide the contingent liabilities when notes receivable are discounted. If the maker of a large note defaults on the note, Mills Corporation would be required to pay the bank for the amount of the note. This payment will directly affect the Corporation’s cash flow and potential net income by increasing the uncollectible account expense. Financial Statement Analysis: 1. 48.2% in 2010 ($10,363 ÷ $21,484); 47.7% in 2009 ($11,153 ÷ 23,387) 2. 51.8% in 2010 ($11,121 ÷ $21,484); 52.3% in 2009 ($12,234 ÷ 23,387) 3. 3.15% ($676 ÷ $21,484) Analyze Online: Answers will vary depending on the annual report fiscal period. Teamwork: Students should determine the length of the note, interest rate, maturity value, maturity date, potential renewing, making partial payments. Internet Connection: The Uniform Commercial Code is the set of laws promulgated for state adoption to govern commercial transactions. The Secretary of State’s Office is the central filing office for certain financing statements, agricultural liens, and other lien documents provided for in the Uniform Commercial Code (UCC).

602  Chapter 16

SOLUTIONS TO PRACTICE TEST Part A True-False 1.a. FALSE 1.b. TRUE 1.c. TRUE 1.d. TRUE 1.e. FALSE 1.f. TRUE 2. TRUE 3. FALSE 4. FALSE 5. TRUE 6. FALSE

7. 8. 9. 10. 11. 12. 13.a. 13.b. 13.c. 13.d.

FALSE TRUE FALSE TRUE FALSE FALSE TRUE FALSE FALSE FALSE

Part B Exercises 1.a. Maturity date, 6/8/13 Total interest, $270 Maturity value, $12,270 1.b.

Maturity date, 8/9/13 Interest rate, 6% Maturity value, $4,848

Discount = $3,600 × .10 × 30/360 = $30 Proceeds = $3,600 - $30 = $3,570

2013 Apr. 10 Cash Notes Payable—Bank June.9

Notes Payable—Bank Interest Expense Cash

24,000.00 24,000.00 24,000.00 320.00 24,320.00

Chapter 16  603

CHAPTER 17 MERCHANDISE INVENTORY Chapter Opener: Thinking Critically Students should realize that In-Store Pickup provides Best Buy with merchandising data. The company can generate reports on which products are in high demand in different geographic areas, improving product selection in each store location. Fast Facts • The Best Buy family of brands and partnerships collectively generates more than $45 billion in annual revenue and includes brands such as Best Buy; Audiovisions; The Carphone Warehouse; Future Shop; Geek Squad, Jiangsu Five Star; Magnolia Audio Video; Napster; Pacific Sales; and The Phone House. • • •

Best Buy employs more than 155,000 associates worldwide. Best Buy donated a combined $33.4 million in fiscal 2009 to improve the vitality of the communities where its employees and customers live and work. Net sales were $49.6 billion in 2010.

Managerial Implications: Thinking Critically Neither. The gross profit and retail methods are intended as supplements, not replacements, for the periodic physical count. Discussion Questions 1. Similar items are grouped, then computed at their cost and their market values. The lower of total cost or total market for the entire group is used as the value for that group. Then the values for each group are added together as the inventory value. 2. 3. 4.

The item-by-item method should almost always yield the lowest value. The FIFO method will generally yield the larger value. The cost flows used in valuing inventories are not intended to reflect actual physical flow of merchandise. It is simply a device for allocating costs between the ending inventory and the merchandise sold during the period.

Detailed records are kept of all factors affecting the selling price of merchandise available for sale. Thus, the sales price of goods on hand is available. By applying the ratio of cost of goods available to selling price for the period to the ending inventory at retail, the cost is determined.

6. 7.

Goods destroyed by fire or stolen; a quick estimate is needed for planning. The goal is to provide physical protection of inventory at all times. Keeping accurate records of items available at all times, encasing valuable items in locked display cases and less valuable items in closed cases, and requiring that only one item at a time is to be removed and shown to a customer, are typical steps taken.

The constraint of conservatism is the modifying constraint underlying the lower of cost or market rule.

604  Chapter 17

Discussion Questions (continued) 9. 10. 11. 12.

The ending inventory is deducted from cost of goods available for sale in determining gross profit. Thus, it has a direct impact on net income for the period. No. A physical count of inventory should be made at least once a year to verify accuracy of perpetual records. The advent of the computer, bar codes on all items, and other technical advances have made perpetual inventory records much easier to maintain. If there are few items in the inventory, each with significant cost and an individual identifying part number or serial number, specific identification is logical.

13.

The total cost of all quantities of a specific item available for sale is divided by the total number of units available (beginning inventory, plus purchases) to determine the average cost per unit.

14.

The first in, first out assumption is that (for costing purposes only) the costs of merchandise should be charged to cost of goods sold in the order in which units were available for sale, starting with the beginning inventory.

15.

Market is the current cost of acquiring identical items on the open market in normal quantities purchased.

Chapter 17  605

EXERCISE 17.1 Number of Units 180

Description Beginning Inventory, January 1 Purchases: April August October Total Merchandise Available for Sale

220 240 190 830

Unit Cost $315.00

Total Cost $56,700.00

320.00 325.00 327.00

70,400.00 78,000.00 62,130.00 $267,230.00

1. Average Cost Method Average cost ($267,230 ÷ 830) = Ending Inventory, December 31

$321.96 321.96

180

$57,952.80

2. FIFO Method From October Purchase Ending Inventory, December 31

180 180

$327.00

$58,860.00 $58,860.00

180 180

$315.00

$56,700.00 $56,700.00

Total Cost

Total Market

3. LIFO Method From Beginning Inventory Ending Inventory, December 31 EXERCISE 17.2

Description 1. Item by Item Accessories Item 620 Item 621 Total Accessories Men’s Jackets Item 726 Item 727 Total Men’s Jackets Totals

Quantity

Unit Cost

Market Value

240 150

$19 45

$22 42

$4,560 6,750 $11,310

$5,280 6,300 $11,580

100 130

85 36

92 35

8,500 4,680 13,180 $24,490

9,200 4,550 13,750 $25,330

Lower of cost or market by item: $4,560 + $6,300 + $8,500 + $4,550 = $23,910

606  Chapter 17

EXERCISE 17.2 (continued) 2. Total Cost or Total Market Value of Ending Inventory Total cost Total market Total cost ($24,490) is lower.

$24,490 25,330

3. By Groups Accessories (Cost is lower) Men’s Jackets (Cost is lower)

$11,310 13,180

$11,580 13,750

Ending inventory valuation = $11,310 + $13,180 = $24,490 EXERCISE 17.3 The LIFO method gives the lowest net income in a period of rising prices. The FIFO method gives the highest net income in a period of rising prices. EXERCISE 17.4 $220,000 940,000 $1,160,000 780,000 $380,000

Beginning Inventory, January 1 Purchases Cost of Goods Available for Sale Less Estimated Cost of Goods Sold (0.65 × $1,200,000) Estimated Ending Inventory

EXERCISE 17.5 ESTIMATED INVENTORY COST

Beginning Inventory Purchases Freight in Total Merchandise Available for Sale Less Sales Ending Inventory Priced at Retail Cost Ratio: $536,000 ÷ $824,000 = 65.05% Ending Inventory at Retail × Cost Ratio Ending Inventory at Cost

Cost

Retail

$210,000 320,000 6,000 $536,000

$334,000 490,000 $824,000 502,000 $322,000

$322,000 0.6505 $209,461

Chapter 17  607

PROBLEM 17.1A Description Beginning Inventory, January 1 Purchases: January 6 January 15 January 22 Total Merchandise Available for Sale

Number of Units 90

Unit Cost $103.00

Total Cost $9,270.00

60 45 35 230

102.00 102.00 96.00

$6,120.00 4,590.00 3,360.00 $23,340.00

$101.48

$8,930.24

35 45 8 88

$96.00 102.00 102.00

$3,360.00 4,590.00 816.00 $8,766.00

88 88

$103.00

$9,064.00 $9,064.00

a. Average Cost Method Average cost ($23,340.00 ÷ 230) = $101.48 Cost of Ending Inventory b. FIFO Method From January 22 Purchase From January 15 Purchase From January 6 Purchase Cost of Ending Inventory c. LIFO Method From Beginning Inventory Cost of Ending Inventory

Analyze: The inventory valuation resulting in the highest dollar amount for ending inventory was the LIFO method.

PROBLEM 17.2A 1. Description Beginning Inventory, January 1 Purchases: May-10 August-18 October-01 Total Merchandise Available for Sale

608  Chapter 17

Number of Units 170 110 180 170 630

Unit Cost $107.00

Total Cost $18,190.00

105.00 104.00 105.00

11,550.00 18,720.00 17,850.00 $66,310.00

PROBLEM 17.2A (continued)

Description a. FIFO Method From October 1 Purchase From August 18 Purchase Valuation of Ending Inv., Dec. 31 Cost of Goods Sold ($66,310.00 - $18,370.00) b. LIFO Method From Inventory, Jan. 1 From Purch. of May 10 Valuation of Ending Inv., Dec. 31 Cost of Goods Sold ($66,310.00 - $18,715.00) c. Average Cost Method Avg. cost per unit ($66,310.00 ÷ 630) Valuation of Ending Inv., Dec. 31 Cost of Goods Sold ($66,310.00 - $18,418.75)

Number of Units 170 5 175

Unit Cost $105.00 104.00

Inventory Valuation

Cost Of Goods Sold

$17,850.00 520.00 $18,370.00 $47,940.00

170 5 175

$107.00 105.00

$18,190.00 525.00 $18,715.00 $47,595.00

175

$105.25 $105.25

$18,418.75 $47,891.25

Valuation Based on:

Method a. FIFO b. LIFO c. Average Cost

Number of Units 175 175 175

Cost $18,370.00 18,715.00 18,418.75

Market $18,418.75 18,418.75 18,418.75

Valuation Basis Cost Market Cost

Lower of Cost or Market $18,370.00 18,418.75 18,418.75

Analyze: The difference between the cost and market value of the inventory using the LIFO method is $296.25.

Chapter 17  609

Unit Cost $16.00 17.25 23.00

$86.00 192.00 225.00

Quantity 50 60 90

15 10 9

$89.00 186.00 210.00

$16.50 17.10 23.50

Market Value

$1,290.00 1,920.00 2,025.00 $5,235.00 $9,140.00

$800.00 1,035.00 2,070.00 $3,905.00

Total Cost

Total Market

$1,290.00 1,860.00 1,890.00 $5,040.00 $8,936.00

$800.00 1,026.00 2,070.00 $3,896.00

Lower of Cost or Market

$3,905.00 5,085.00 $8,990.00

$8,936.00 $9,051.00

Lower of Cost or Market

$1,335.00 1,860.00 1,890.00 $5,085.00 $9,051.00

$825.00 1,026.00 2,115.00 $3,966.00

Analyze: The valuation method that will yield the highest net income is the lower of cost or market by total.

1. Lower of cost or market by individual items 2. Lower of total cost or total market 3. Lower of total cost or total market by groups Printer Cartridges Fax Machines Total inventory by groups

Inventory Valuations

Description Printer Cartridges Item 119 Item 120 Item 121 Total Cartridges Fax Machines Item 210 Item 211 Item 212 Total Fax Machines Grand Totals

PROBLEM 17.3A

PROBLEM 17.4A Beginning Inventory, January 1, 2013 Purchases Cost of Goods Available for Sale Less Estimated Cost of Goods Sold: Sales, $1,668,750 × Cost Ratio, 70% Estimated Ending Inventory

$117,000.00 1,170,000.00 $1,287,000.00 1,168,125.00 $118,875.00

If the previous gross profit rate is reliable as a basis for estimating the current year’s rate, it appears that the inventory of $136,875 estimated by employees is overstated and overstates gross profit by approximately $18,000. Analyze: The gross profit percentage would be 31.0% ($517,313/$1,668,750). PROBLEM 17.5A Estimated Inventory Beginning Inventory, August 1 Purchases Total Merchandise Available for Sale Less Sales 1. Ending Inventory at Retail Cost Ratio = $175,000 ÷ $257,000 = 68.09% Ending Inventory at Retail × Cost Ratio = $131,000 × 0.6809 2. Ending Inventory, August 31, at Cost 3. Cost of Goods Sold ($175,000 − $89,197.90)

Cost

Retail $80,000 95,000 $175,000

$115,000.00 142,000.00 $257,000.00 126,000.00 $131,000.00

89,197.90 $85,802.10

Analyze: The estimated gross profit on sales for August 31 was $40,197.90. ($126,000 − $85,802.10) PROBLEM 17.6A 1. The best method of valuing ending inventory is specific identification. Each item is easily identified and has high value. In addition, there very few items in the inventory.

Chapter 17  611

PROBLEM 17.6A (continued) 2. Cost of items still on hand in ending inventory on August 31: Item 28 ft. Starfish 30 ft. Perch 24 ft. Sea King Total Ending Inventory

Cost $35,000.00 55,000.00 21,000.00 $111,000.00

3. Cost of Goods Sold during August: 30 ft. Holiday 20 ft. Lake King Total Cost of Goods Sold

$41,000.00 23,000.00 $64,000.00

Analyze: The gross profit on sales in August was $15,500.00 PROBLEM 17.1B Description

Number of Units

Unit Cost

Total Cost

Beginning Inventory, May 1 Purchases: May-10 May-19 May-25 Total Merchandise Available for Sale

250

$20.50

$5,125.00

180 130 150 710

20.25 20.10 20.15

$3,645.00 2,613.00 3,022.50 $14,405.50

Inventory, May 31

222

222 222

$20.29

$4,504.38 $4,504.38

150 72 222

$20.15 20.10

$3,022.50 1,447.20 $4,469.70

222 222

$20.50

$4,551.00 $4,551.00

a. Average Cost Method Average cost ($14,405.50 ÷ 710) = $20.29 Ending Inventory, May 31 Cost of Ending Inventory b. FIFO Method From May 25 Purchase From May 19 Purchase Cost of Ending Inventory c. LIFO Method From Beginning Inventory Cost of Ending Inventory

Analyze: The greatest income amount will result from using the LIFO method.

612  Chapter 17

PROBLEM 17.2B 1. Description Beginning Inventory, January 1 Purchases: February 27 August 16 November 19 Total Merchandise Available for Sale

Description a. FIFO Method From November 19 Purchase Cost of Goods Sold: ($182,980.00 − $38,800.00) b. LIFO Method From Inventory, January 1 Cost of Goods Sold: ($182,980.00 − $41,280.00) c. Average Cost Method Average cost ($182,980.00 ÷ 76) Cost of inventory, Dec. 31 Cost of Goods Sold ($182,980.00 − $38,522.08) 2.

Number of Units 20

Unit Cost $2,580.00

Total Cost $51,600.00

18 22 16 76

2,320.00 2,310.00 2,425.00

41,760.00 50,820.00 38,800.00 $182,980.00

Number of Units

Unit Cost

Ending Inventory Cost

$2,425.00

$38,800.00

Cost Of Goods Sold

$144,180.00

$2,580.00

$41,280.00 $141,700.00

$2,407.63 $2,407.63

$38,522.08 $144,457.92

Valuation Based on:

Method a. FIFO b. LIFO c. Average Cost

Number of Units 16 16 16

Cost $38,800.00 $41,280.00 $38,522.08

Market $38,640.00 38,640.00 38,640.00

Valuation Basis Market Market Cost

Lower of Cost or Market $38,640.00 38,640.00 $38,522.08

Analyze: Because the market cost is used for both the LIFO and FIFO, they will show same gross incomes. Both show a higher ending inventory than the average cost method, so their gross incomes are higher.

Chapter 17  613

Unit Cost $9,800.00 10,250.00 12,475.00

$5,290.00 7,125.00 5,100.00

Quantity 15 25 12

8 7 6

$5,395.00 6,980.00 5,325.00

$9,675.00 11,390.00 12,800.00

Market Value

$42,320.00 49,875.00 30,600.00 $122,795.00 $675,745.00

$147,000.00 256,250.00 149,700.00 $552,950.00

Total Cost

$42,320.00 48,860.00 30,600.00 $121,780.00 $672,855.00

$145,125.00 256,250.00 149,700.00 $551,075.00

Lower of Cost or Market

$552,950.00 122,795.00 $675,745.00

$672,855.00 $675,745.00

Lower of Cost or Market

$43,160.00 48,860.00 31,950.00 $123,970.00 $707,445.00

$145,125.00 284,750.00 153,600.00 $583,475.00

Total Market

Analyze: The lower of total cost or total market method yields the same inventory valuation as the lower of cost or market by group. Both of these would yield higher income than lower of cost or market by individual items.

1. Lower of cost or market by individual items 2. Lower of total cost or total market 3. Lower of total cost or total market by groups Motor Bikes Boats Total inventory by groups

Inventory Valuations

Description Motor Bike Department Model 705 Model 766 Model 815 Total Motor Bikes Boat Department Model BX12 Model BX14 Model BX16 Total Boats Grand Totals

PROBLEM 17.3B

PROBLEM 17.4B $ 410,000.00 4,160,000.00 $4,570,000.00

Beginning Inventory, January 1, 2013 Purchases Cost of Goods Available for Sale Less Estimated Cost of Goods Sold: Sales, $6,100,000 × Cost Ratio, 65% Estimated Ending Inventory

3,965,000.00 $ 605,000.00

If the previous gross profit rate is reliable as a basis for estimating the current year’s rate, it appears that the inventory estimate of $596,000 is a reasonable estimate of inventory valuation. Analyze: The gross profit percentage would be 33%. ($2,040,000/$6,100,000). PROBLEM 17.5B Cost

Retail

$918,000 1,069,000 18,000 $2,005,000

$1,340,000 1,676,000 0 $3,016,000 2,150,000 $866,000

Estimated Inventory Beginning Inventory, April 1 Purchases Freight in Total Merchandise Available for Sale Less Sales 1. Ending Inventory at Retail Cost Ratio = $2,005,000 ÷ $3,016,000 = 66.48% Ending Inventory at Retail × Cost Ratio = $866,000 × 0.6648 2. Ending Inventory, April 30, at Cost 3. Cost of Goods Sold ($2,005,000 − $575,717.00)

575,717 $1,429,283

Analyze: Gross profit on sales for the period ending April 30 = $720,717 ($2,150,000 − $1,429,283) PROBLEM 17.6B 1. Specific identification. Each item is easily identified and has high value.

Chapter 17  615

PROBLEM 17.6B (continued) 2.

Cost of items still on hand in ending inventory: Item Unit #06-92 Unit #07-05 Total Ending Inventory

Cost $ 790,000.00 1,120,000.00 $1,910,000.00

Cost of Goods Sold during August: Unit #06-94 Unit #06-95 Unit #07-01 Unit #07-03 Total Cost of Goods Sold

$ 873,000.00 1,900,000.00 919,000.00 836,000.00 $4,528,000.00

Analyze:

Gross profit on sales for the quarter ending March 31 is $1,063,000 ($5,591,000 − $4,528,000).

CRITICAL THINKING PROBLEM 17.1 Because the accounting records have been preserved, the retail inventory method may be used to estimate the inventory destroyed in the fire. The approximate cost is $59,848.60 computed as Estimated Inventory

Retail

Beginning Inventory, January 1 Purchases, January 1–March 18 Freight in Total Merchandise Available for Sale Less Sales (a) Ending Inventory at Retail Cost Ratio = $328,200 ÷ $428,060 = 76.67% Ending Inventory at Retail × Cost Ratio = $78,060 × 76.67 b) Ending Inventory, March 18, at Cost

$80,000.00 240,000.00 8,200.00 $328,200.00

$107,560.00 320,500.00 $428,060.00 350,000.00 $78,060.00

$59,848.60

Analyze: The cost of goods sold for the period would be $268,351.40 ($328,200 − $59,848.60).

616  Chapter 17

CRITICAL THINKING PROBLEM 17.2 The gross profit method may be employed. By examining the income statement for the past few years, the rate of gross profit on sales and the percentage of cost of goods sold to sales can be determined for those years. This rate can be applied to sales for the period from the first of the year to the date of the fire to estimate cost of goods sold for that period. The cost of goods available for sale during the period is available from records of beginning inventory, purchases, purchase returns and allowances, freight in, etc. By subtracting the estimated cost of goods sold for the period from the cost of goods available for sale, the estimated cost of ending inventory (inventory destroyed by the fire) can be estimated.

Chapter 17  617

SOLUTIONS TO BUSINESS CONNECTIONS Managerial Focus: 1. Saves income taxes; more realistic cost figures are deducted from sales. 2. Use the retail method to estimate inventory cost. 3. Permits immediate adjustments for inventory quantities. 4. May perceive that the perpetual inventory system will require too much record keeping and paperwork. 5. In the event of fire or theft; for cash management or budgeting functions. 6. If strong inventory control systems are in place, the manager is probably correct. A quarterly estimate could be made that would provide a reasonable estimate of the inventory to be used for most purposes. A physical inventory count at least once a year should be made. Ethical Dilemma: Nancy has been giving away baby clothes to her friends, thus reducing the inventory. No sales receipt is recorded which would account for the decreased revenue and net income. Shelia could prosecute Nancy depending on the amount of inventory stolen. Shelia would need to estimate the amount that Nancy had stolen. First the correct inventory needs to be calculated by subtracting the sales (cost of sales) from the purchases of clothing. A physical inventory should be taken. The difference between the physical inventory and the estimated inventory would be the amount of Nancy’s fraud. Financial Statement Analysis: 1. Merchandise inventory has decreased by $485,000. 2. Inventory comprises 73.3% of total Current Assets. Analyze Online: Answers will vary depending on the annual report fiscal period. Team Work: Basic Inventory control measures are limited access, documentation, and a physical inventory. Other inventory control measures could be electronic tags on clothing, stickers that need to be deactivated by the sales clerk, controlled access to the store. Grocery stores might only put these controls on large ticket items not on basic foods. Internet Connection: Inventory for a corporation should be higher depending on the number of store locations. If the store locations have remained constant so should the inventory. Any major increase in inventory without an increase in locations will indicate a slowing of sales. Inventory will also change if the costing method changes.

618  Chapter 17

SOLUTIONS TO PRACTICE TEST Part A True-False 1. FALSE 2. TRUE 3. TRUE 4. FALSE 5. TRUE 6. TRUE 7. FALSE 8. TRUE 9. TRUE 10. TRUE 11. FALSE 12. FALSE 13. FALSE Part B Matching 1. d (markdown) 2. c (last in, first out) 3. e (markup) 4. b (first in, first out) 5. g (specific identification) 6. f (retail method) 7. a (average cost)

Chapter 17  619

CHAPTER 18 PROPERTY, PLANT, AND EQUIPMENT Chapter Opener: Thinking Critically The $1 billion investment will pay off in increased sales and an edge over competitors who do not have the financial strength to expand their global presence. The Coca Cola Company’s expectation is that increased sales in an emerging new market will exceed the investment. Fast Facts • The Coca-Cola Company is the world’s largest non-alcoholic beverage company. • The Coca-Cola Company sells over 3,300 beverages including Hi-C, Fruitopia, Dasani water, Sprite, Minute Maid, and Powerade. • Coca-Cola-Zero, introduced in 2005, was one of the most successful new product launches in the company’s history. • In 2009, the Company generated $8.2 billion in cash from operations, up 8 percent from 2008. • The company employs over 92,000 people world wide. Managerial Implications: Thinking Critically The method of depreciation used determines the timing of the amount that is charged to expense. This affects the book value shown on the balance sheet and the net income shown on the income statement. Discussion Questions 1. If the useful life can be more closely related to units of service rather than to age of the asset. 2. Depreciation for the period, balances in the accounts for depreciable assets, accumulated depreciation, and general description of methods used in computing depreciation. 3. General decline in economic activity; decreasing demand for product associated with the asset; natural disasters such as floods, severe freezes, fires; new competitors; new technology that may make the asset obsolete; decreasing productivity of the asset; international tensions or wars; and new statutes or court decisions that may impact use of the asset. 4. A motor home being used temporarily as an office is not real property. 5. All costs that are treated as part of the costs of an asset and entered in the asset account. 6. All of the costs are capitalized as part of the land cost. 7. Annual depreciation = (Cost – Expected net salvage) ÷ Expect life, measured in years 8. Personal property: assets that can be readily moved (machinery, equipment, vehicles). 9. Sum-of-years’-digits, double-declining balance methods. 10. Declining balance 11. Comparing book value of the asset with its market value. A commonly used definition of market value is discounted value of estimated future net cash flows to be derived from the asset’s use. 12. Depletion 13. Compare the book value of the asset traded in with the true trade-in allowance given by the other party.

620  Chapter 18

Discussion Questions (continued) 14. To be recorded an intangible asset, the right must have been obtained for consideration and must clearly provide a value. So, if goodwill is purchased it will be recorded as an asset if it is clear that a value has been received beyond the value of tangible assets acquired. 15. Under GAAP, a loss on an asset must be recorded; however, a gain must not be recognized and recorded. 16. Research costs are charged to expense when they are incurred because there is no certainty that the costs will result in increased value. 17. The first classification is an intangible that can be determined to provide benefits for a specified period or for a period that can be reasonably estimated. The second classification is an intangible that can be determined to provide future benefits, but there is no way to reasonably estimate how long that period may be. 18. Cost of an intangible in the first category is amortized over its estimated useful life. An intangible in the second category is subject to an impairment test to determine whether the estimated value is greater than the book value. If estimated value is less than book value, the difference (impairment) is removed from the asset and charged to expense. 19. Each year, a percentage equal to twice the straight line rate (2 × 16-2/3%, or 33-1/3%) is applied to the book value of the asset at the beginning of the year. 20. Debit Depreciation Expense—Trucks; credit Accumulated Depreciation— Trucks 21. Compute the sum of the digits of each year of life (1 + 2 + 3 + 4 + 5 + 6 = 21.) This is the denominator of the fractional share of depreciable cost to be charged off each year. The fraction’s numerator for any year is the number of years left in the useful life of the asset at the beginning of that year. The depreciation for the fourth year of life would be 4/21 × depreciable cost. 22. The MACRS method would not be acceptable under GAAP because it does not fairly reflect cost and benefit. 23. Straight-line depreciation will yield higher depreciation expense in the later years of an asset’s life than the declining- balance method because a constant amount is charged to depreciation in each year of the asset’s life. The declining-balance method results in a lower depreciation charge in later years than does the straight-line method because more of the cost will have been charged to expense in the early years under declining-balance depreciation. 24. Are projected net cash flows from using the asset less than the book value of the asset?

Chapter 18  621

EXERCISE 18.1 Land Purchase price of land Demolition cost of old building Cost to level building site Cost to construct building Legal costs related to building Total capitalized cost

Warehouse

$300,000 18,250 10,200

$328,450

850,000 16,725 $866,725

EXERCISE 18.2 Cost of new machine: Invoice price Less cash discount Transportation costs Installation costs Total capitalized cost of new bearing machine

$180,000 (6,400) 4,820 2,375 $180,795

EXERCISE 18.3 PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 Dec. 31 Depreciation Expense 3 Accumulated Depreciation—Office Equipment 4 To record depreciation for year on 5 office equipment 6 7

622  Chapter 18

POST. REF.

DEBIT

CREDIT

1 76 0 0 0 00 2 76 0 0 0 00 3 4 5 6 7

EXERCISE 18.4 STRAIGHT-LINE METHOD Year 1 2

Acquisition Cost $880,000 880,000

Salvage Value $80,000 80,000

Useful Life 5 years 5 years

Depreciation $160,000 160,000

Accumulated Depreciation $160,000 320,000

DOUBLE-DECLINING-BALANCE METHOD

Year 1 2

Beginning Book Value $880,000 528,000

Rate 40% 40%

Depreciation $352,000 211,200

Accumulated Depreciation $352,000 563,200

SUM-OF-THE-YEARS’-DIGITS METHOD

Year 1 2

Fraction 5/15 4/15

Cost Less Salvage $800,000 800,000

Depreciation $266,667 213,333

Accumulated Depreciation $266,667 480,000

EXERCISE 18.5 Cost − Salvage = $640,000 − $40,000 = $600,000 = $0.75 per unit Total Estimated 800,000 units 800,000 units Units 2013 Depreciation = $ 0.75 × 80,000 = $60,000 2014 Depreciation = $ 0.75 × 110,000 = $82,500

Chapter 18  623

EXERCISE 18.6 1. Lightweight trucks are included in the "5-year class" for MACRS purposes. 2. The MACRS rate in the first year of life for assets in this class is 20%.The rate in the record year is 32%. MACRS for 2013 = $40,000 × .20 = $8,000 MACRS for 2014 = $40,000 × .32 = $12,800

EXERCISE 18.7 PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 (1) 2 Jan. 8 Cash 3 Accumulated Depreciation—Trucks 4 Loss on sale of Truck 5 Trucks 6 To record sale of Truck at a loss 7 (2) 8 8 Cash 9 Accumulated Depreciation—Trucks 10 Trucks 11 Gain on sale of Truck 12 To record sale of Truck at a gain 13

POST. REF.

DEBIT

CREDIT

1 14 2 5 0 00 2 25 0 0 0 00 3 1 7 5 0 00 4 41 0 0 0 00 5 6 7 17 0 0 0 00 8 25 0 0 0 00 9 41 0 0 0 00 10 1 0 0 0 00 11 12 13

EXERCISE 18.8 Depreciation on old asset = ($900,000 − $90,000) ÷ 8 = $101,250 per year January 5, 2009 to July 3, 2013 = 4 1⁄2 years 4 1⁄2 × $101,250 = $455,625 Note: Under current financial accounting rules, gains and loses on exchanges are recognized.

624  Chapter 18

EXERCISE 18.8 (continued) PAGE

GENERAL JOURNAL DATE DESCRIPTION 1 2013 2 July 3 Equipment (New) 3 Accumulated Depreciation—Equipment (Old) 4 Loss on Exchange 5 Cash 6 Equipment (Old) 7 Trade-in old equipment for new equipment 8 3 9 Equipment (New) 10 Accumulated Depreciation—Equipment (Old) 11 Gain on Exchange of Equipment 12 Cash 13 Equipment (Old) 14 Trade-in old equipment for new equipment

POST. REF.

DEBIT

CREDIT

1 2 3 4 590 0 0 0 00 5 900 0 0 0 00 6 7 8 1,000 0 0 0 00 9 455 6 2 5 00 10 15 6 2 5 00 11 540 0 0 0 00 12 900 0 0 0 00 13 14

1,000 0 0 0 00 455 6 2 5 00 34 3 7 5 00

EXERCISE 18.9 1. No gain or loss is recognized for tax purposes on a trade-in 2. For tax purposes, the basis of the new asset acquired by trade-in is the sum of the basis of the old asset traded-in and the amount of the boot (cash) given: The cost of the asset for tax purposes is therefore deemed to be: Cost of Truck purchased on January 20, 2013 $40,000 Accum. Depreciation of Truck purchased on Jan. 20, 2013 8,000 Remaining costs, January 4, 2014 32,000 Cash paid as boot on trade-in 43,600 Cost of New truck for tax purposes $75,600 EXERCISE 18.10 Cost depletion = (Cost of natural resource ÷ total estimated units of the resource) = Depletion per unit Depletion expense for period = depletion per unit x amount extracted during period For 2013 cost depletion = ($2,400,000 ÷ 1,500,000 tons) = $1.60 per ton = $1.60/ton × 100,000 tons = $160,000

Chapter 18  625

EXERCISE 18.11 a. Yes. Given the facts presented it seems almost certain that the asset is impaired and therefore should be “written down” to fair value. Since several similar assets have been found to have a price of $89,000 to $91,000, this is the range of fair value.Conservatism suggests that the lowest commonly found figure would be appropriate. b. An account such as Loss from Impairment of Equipment should be debited and theGrinding Equipment credited directly for $35,000 ($124,000 − $89,000).

EXERCISE 18.12 1. Goodwill is an asset with a life not limited by contract. Intangibles without limited lives, such as goodwill, brand names, and trademarks are assessed periodically for impairment and are written down to estimated value if they are impaired.The entry to record impairment of goodwill is a debit to an account such as Impairment Expense— Goodwill for $25,000, reflecting the excess of carrying value of goodwill ($125,000) over its present fair value ($100,000). The credit is made directly to the Goodwill account. 2. The remaining cost of patents, franchises, and other intangible assets with useful lives limited by time should be amortized over their estimated remaining lives. The balance in thePatent account, $234,000 as of January 1, 2013 should be amortized over ten years. Thus, the amount to be charged to Amortization of Patent and credited to the Patent account for 2013 is $23,400.

626  Chapter 18

PROBLEM 18.1A 1.

Manufacturing Plant Construction of manufacturing plant Cost of manufacturing plant

$4,200,000 $4,200,000

Land Purchase of land Demolition of building Less salvage Attorney fees Inspection fees Permit to raze facility Purchase of fill dirt Leveling of site Cost of land

$2,400,000 $16,000 (10,000)

6,000 6,400 1,850 1,150 50,400 32,000 $2,497,800

Land Improvements Paving of sidewalks and curbs Construction and paving of parking lot Cost of land improvements

$125,000 125,700 $250,700

Analyze: The costs should not be capitalized. They are costs that do not contribute directly to the value of any of the assets and were not necessary in order to get the facilities constructed.

PROBLEM 18.2A STRAIGHT-LINE METHOD

Year 1 2 3

Acquisition Cost $550,000 550,000 550,000

Salvage Value $50,000 50,000 50,000

Useful Life 4 years 4 years 4 years

Annual Depreciation $125,000 125,000 125,000

Accumulated Depreciation $125,000 250,000 375,000

Chapter 18  627

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PROBLEM 18.2A (continued) SUM-OF-THE-YEARS’-DIGITS METHOD Cost Less Salvage $500,000 500,000 500,000

Annual Depreciation $200,000 150,000 100,000

Year 1 2 3

Fraction 4/10 3/10 2/10

Year 1 2 3

DOUBLE-DECLINING-BALANCE METHOD Beginning Annual Book Value Depreciation Rate $550,000 0.5 $275,000 275,000 0.5 137,500 137,500 0.5 68,750

Accumulated Depreciation $200,000 350,000 450,000

Accumulated Depreciation $275,000 412,500 481,250

Analyze: The book value at the end of the second year is $200,000 ($550,000− $350,000).

PROBLEM 18.3A STRAIGHT-LINE METHOD

Year 2013 2014 2015

Acquisition Cost $560,000 560,000 560,000

628  Chapter 18

Salvage Value $20,000 20,000 20,000

Useful Life 5 years 5 years 5 years

Annual Depreciation $108,000 108,000 108,000

Accumulated Depreciation $108,000 216,000 324,000

Acquisition Cost $560,000 560,000 560,000

Salvage Value $20,000 20,000 20,000

Total Expected Units of Production 200,000 200,000 200,000

Actual Units of Production 40,000 56,000 46,000 Cost per unit $2.70 2.70 2.70

UNITS-OF-PRODUCTION METHOD Annual Depreciation $108,000 151,200 124,200

Accumulated Depreciation $108,000 259,200 383,400

Depreciation of van: 2013—($65,000 − $5,000) ÷ 8 Years = $7,500 2014—($65,000 − $5,000) ÷ 8 Years = $7,500

MACRS recovery of van: 2013—($65,000 × .20) = $13,000 2014—($65,000 × .32) = $20,800

The purposes of MACRS are (1) to accelerate the expensing of assets’ costs in order to stimulate investment in business assets because of lower taxes in the early years of the asset’s life (even though taxes will be higher in later years) and (2) to simplify depreciation computations.

MACRS recovery of computer: 2013—($8,200 × .20) = $1,640 2014—($8,200 × .32) = $2,624

Analyze:

Depreciation of computer: 2013—($8,200 − $1,000) ÷ 4 Years = $1,800 2014—($8,200 − $1,000) ÷ 4 Years = $1,800

PROBLEM 18.4A

Analyze: Presuming the estimate of number of anticipated units is adjusted each year, they should be the same. The total depreciable cost of $540,000 will be depreciated over the life of the asset regardless of the method used.

Year 2013 2014 2015

PROBLEM 18.3A (continued)

PROBLEM 18.5A GENERAL JOURNAL DATE DESCRIPTION 2013 Mar. 25 Depreciation Expense—Office Equipment Accumulated Depreciation—Office Equipment To record depreciation for 3 months on printer traded in on new printer.

1 2 3 4 5 6 7 25 Office Equipment (New) 8 Accumulated Depreciation—Office Equipment 9 Gain on Trade-In of Equipment 10 Office Equipment (Old) 11 Cash 12 Traded in old printer on new printer 13 14 July 19 Depreciation Expense—Vehicles 15 Accumulated Depreciation—Vehicles 16 To record depreciation for 7 months on 17 truck traded in on new truck 18 19 19 Vehicles (New) 20 Accumulated Depreciation—Vehicles 21 Loss on Trade-In of Equipment 22 Vehicles (Old) 23 Cash 24 Traded in truck on new truck, at loss 25 26 Aug. 18 Depreciation Expense—Vehicles 27 Accumulated Depreciation—Vehicles 28 To record depreciation for eight months 29 on truck traded-in for new truck 30 31 Case A: Truck is sold for $19,000 32 33 18 Cash 34 Accumulated Depreciation—Vehicles 35 Vehicles (Old truck) 36 Gain on Sale of Truck 37 Sold truck for $1,333 more than book value

PAGE POST. REF.

DEBIT

CREDIT

2 7 5 00 2 7 5 00

9 6 0 0 00 2 4 7 5 00 4 7 5 00 6 8 0 0 00 4 8 0 0 00

4 1 1 3 00 4 1 1 3 00

42 8 0 0 00 22 3 2 6 00 1 1 7 4 00 34 0 0 0 00 32 3 0 0 00

5 3 3 3 00 5 3 3 3 00

19 0 0 0 00 21 3 3 3 00 39 0 0 0 00 1 3 3 3 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37

Note: Under current financial accounting rules, gains and loses on exchanges are recognized.

630  Chapter 18

PROBLEM 18.5A (continued) PAGE

GENERAL JOURNAL

DATE 38 39 40 41 42 43 44

DESCRIPTION Case B: Truck is sold for $16,000

POST. REF.

18 Cash Accumulated Depreciation—Vehicles Loss on Sale of Truck Vehicles (old truck) Sold truck for $1,667 less than book value

DEBIT

CREDIT

38 39 16 0 0 0 00 40 21 3 3 3 00 41 1 6 6 7 00 42 39 0 0 0 00 43 44

Analyze: The book value prior to sale was $17,667.

Chapter 18  631

PROBLEM 18.6A PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36

DATE DESCRIPTION 2013 Jan. 10 Machinery Cash Purchased four machines at $3,000 each; estimated life, 6 years; salvage value, $600 each Dec.

2014 Apr.

Dec.

31 Depreciation Expense—Machinery Accumulated Depreciation—Machinery To record depreciation on four machines at $400 each

3 Depreciation Expense—Machinery Accumulated Depreciation—Machinery Three months’ depreciation on stolen machine

POST. REF.

DEBIT 12 0 0 0 00

12 0 0 0 00

1 6 0 0 00 1 6 0 0 00

1 0 0 00 1 0 0 00

3 Accumulated Depreciation—Machinery Loss on Stolen Machinery Machinery To record loss on stolen machine

5 0 0 00 2 5 0 0 00

31 Depreciation Expense—Machinery Accumulated Depreciation—Machinery To record depreciation on three machines at $400 each

1 2 0 0 00

2015 Sept. 18 Depreciation Expense—Machinery Accumulated Depreciation—Machinery Nine months’ depreciation on machine 2 18 Cash Accumulated Depreciation—Machinery Machinery Gain on Sale of Machinery Sold machine 2 above book value

CREDIT

3 0 0 0 00

1 2 0 0 00

3 0 0 00 3 0 0 00

2 2 0 0 00 1 1 0 0 00 3 0 0 0 00 3 0 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36

Note: Under current financial accounting rules, gains and loses on exchanges are recognized.

632  Chapter 18

PROBLEM 18.6A (continued) PAGE

GENERAL JOURNAL DATE DESCRIPTION 1 2015 2 Dec. 31 Depreciation Expense—Machinery 3 Accumulated Depreciation—Machinery 4 To record depreciation for two machines 5 at $400 each 6 2016 7 June 4 Depreciation Expense—Machinery 8 Accumulated Depreciation—Machinery 9 To record depreciation on machine 3 10 for five months 11 12 4 Machinery (No. 5) 13 Accumulated Depreciation—Machinery (No. 3) 14 Gain on Trade In of Machinery 15 Machinery (Old) 16 Cash 17 Traded in machine 3 on new machine 18 19 Aug. 29 Depreciation Expense—Machinery 20 Accumulated Depreciation—Machinery 21 To record depreciation on machine 4 22 for eight months 23 24 29 Machinery (No. 6) 25 Accumulated Depreciation—Machinery 26 Loss on Trade In of Machinery 27 Machinery (Old) 28 Cash 29 Traded in machine 4 on new machine, at a loss 30 31 Dec. 31 Depreciation Expense—Machinery 32 Accumulated Depreciation—Machinery 33 To record depreciation on Machinery (New) 34 No. 5, $320.83; No.6, $189.00 35

POST. REF.

DEBIT

CREDIT

8 0 0 00

1 6 7 00

3 9 0 0 00 1 3 6 7 00

2 6 7 00

4 0 0 0 00 1 4 6 7 00 4 8 3 00

5 0 9 72

1 2 8 0 0 00 3 4 5 6 7 1 6 7 00 8 9 10 11 12 13 2 6 7 00 14 3 0 0 0 00 15 2 0 0 0 00 16 17 18 19 2 6 7 00 20 21 22 23 24 25 26 3 0 0 0 00 27 2 9 5 0 00 28 29 30 31 5 0 9 72 32 33 34 35

Analyze: The balance of the Accumulated Depreciation account on December 31, 2016 is $509.72.

Chapter 18  633

PROBLEM 18.7A 1. Depletion for financial accounting purposes. 2013: $656,000 ÷ 820,000 tons = $0.80 per ton $0.80 × 20,500 tons = $16,400 2014: $0.80 × 41,000 tons = $32,800 Depletion Expense would be debited and Accumulated Depletion would be credited for the depletion expense each year.

2. a. Percentage depletion in 2013 would be $164,000. Sales $2,050,000 × 0.08 = $164,000 b. Cost depletion for tax purposes in 2013 would be same as for financial accounting, $164,000. c. Cost depletion for tax purposes in 2014 would be $25,231 Capitalized costs of minerals $656,000 Less Depletion deducted in 2013 164,000 Remaining cost eligible for cost depletion $492,000 Depletion = $492,000 × (41,000 ÷ 799,500)* = $25,231 *(41,000 tons produced in 2014 ÷ 799,500 tons in mine on Jan. 1 2014) Original ore 820,000 tons Produced in 2013 20,500 tons Remaining ore 799,500 tons d $344,000. ($4,300,000 × .08) Percentage depletion can continue to be taken even though the total amount of percentage depletion may be many times greater then the cost of the minerals.

Analyze: Accounting rules are concerned with matching costs and revenues. Tax rules often, as in this case, reflect congressional policy of stimulating or restraining investments in specific industries. The basic idea is that natural resource undertakings are essential to the national welfare and that they are risky investments. Tax benefits such as depletion allowances are enacted to encourage investments in the industry.

634  Chapter 18

PROBLEM 18.8A 1. The steps leading to recording impairment have been taken. (1) There have been indications that impairment may exist. (2) An examination has been made that shows that impairment does exist. (3) It appears that an appropriate reasonable estimate has been made of the value of the building and the unlikelihood that cash flows will recover its cost. Where impairment exists, it should be recognized and recorded. 2. The amount of the impairment is $4.8 million (book value, $13 million – fair value, $8.2 million). 3. The necessary entry would be to debit Impairment of Building or some similar account and credit the Building account directly for $4.8 million. 4. Once impairment of property, plant and equipment has been recorded, the book value should not be restored merely because value has increased. To do so would give rise to recognition of unrealized income. Analyze: The present value of the building (an estimate of market value) could be determined by applying to the future net cash flows from the buildings operations a discount factor. The discount factor when applied to the future cash flows yields an amount equal to the maximum that the investor would be willing to invest in order to receive the stream of future cash flows. This amount establishes a “market value” or “fair value” for the asset involved. This approach is very commonly used in business to evaluate investment prospects.

Chapter 18  635

PROBLEM 18.9A PAGE

GENERAL JOURNAL DATE DESCRIPTION 1 2013 (1) 2 May 10 Product Formulas 3 Cash 4 To record purchase of formula expected to 5 have a useful life of 8 years 6 7 July 5 Patent 8 Cash 9 To record purchase of patent with estimated 10 useful life of 10 years 11 12 Sept. 22 Computer Software 13 Cash 14 To record purchase of computer program with 15 estimated useful life of five years 16 17 Dec. 31 Research and Development Expenses 18 Cash 19 To record expenditures incurred in research 20 department 21 (2) 22 31 Amortization Expense—Product Formulas 23 Product Formulas 24 To record amortization of product formula 25 purchased on May 10 ($192,000 ÷ 8 × 8/12) 26 27 31 Amortization of Patents 28 Patents 29 To record amortization of patent purchased on 30 July 5 ($640,000 ÷ 10 × 6/12) 31 32 31 Amortization of Computer Software 33 Computer Software 34 To record amortization of computer program 35 purchased on Sept. 22 ($240,000 ÷ 5 × 3/12) 36

636  Chapter 18

POST. REF.

DEBIT

CREDIT

192 0 0 0 00 192 0 0 0 00

640 0 0 0 00 640 0 0 0 00

240 0 0 0 00 240 0 0 0 00

210 0 0 0 00 210 0 0 0 00

16 0 0 0 00 16 0 0 0 00

32 0 0 0 00 32 0 0 0 00

12 0 0 0 00 12 0 0 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36

PROBLEM 18.9A (continued) PAGE

GENERAL JOURNAL

37 38 39 40 41 42

DATE DESCRIPTION 31 Impairment of Intangibles—Goodwill Goodwill To record Goodwill account balance to estimated value on December 31 ($200,000 − 20,000 − 150,000) = $30,000

POST. REF.

DEBIT 30 0 0 0 00

CREDIT 30 0 0 0 00

37 38 39 40 41 42

Analyze: Net book value of intangible assets on December 31, 2013 = $1,162,000 ($176,000 + $608,000 + $228,000 + $150,000).

Chapter 18  637

PROBLEM 18.1B 1.

Land Purchase of land Demolition of building Less salvage Attorney fees Inspection fees Permit to raze houses Purchase of fill dirt Leveling of site Cost of land

$375,000 $30,000 (17,000)

13,000 9,000 1,000 500 30,000 20,000 $448,500

Building Construction costs of building Cost of building

$3,750,000 $3,750,000

Land Improvements Paving of sidewalks and curbs Paving of parking lot Cost of land improvements

$90,000 102,500 $192,500

Analyze: These costs had no effect on owner’s equity because there were no expenses and no revenues. PROBLEM 18.2B STRAIGHT-LINE METHOD

Year 1 2 3

Acquisition Cost $620,000 620,000 620,000

638  Chapter 18

Salvage Value $40,000 40,000 40,000

Useful Life 5 years 5 years 5 years

Annual Depreciation $116,000 116,000 116,000

Accumulated Depreciation $116,000 232,000 348,000

PROBLEM 18.2B (continued) SUM-OF-THE-YEARS’-DIGITS METHOD

Year

Fraction

Cost Less Salvage

1 2 3

5/15 4/15 3/15

$580,000 580,000 580,000

Annual Depreciation

Accumulated Depreciation

$193,333 154,667 116,000

$193,333 348,000 464,000

DOUBLE-DECLINING-BALANCE METHOD

Year

Beginning Book Value

1 2 3

$620,000 372,000 223,200

Rate

Annual Depreciation

Accumulated Depreciation

0.40 0.40 0.40

$248,000 148,800 89,280

$248,000 396,800 486,080

Analyze: The book value at the end of the second year is $223,200 ($620,000− $396,800).

PROBLEM 18.3B STRAIGHT-LINE METHOD

Year 2013 2014 2015

Acquisition Cost $880,000 880,000 880,000

Salvage Value $80,000 80,000 80,000

Useful Life 8 years 8 years 8 years

Annual Depreciation $100,000 100,000 100,000

Accumulated Depreciation $100,000 200,000 300,000

Chapter 18  639

$880,000 880,000 880,000

Year

2013 2014 2015

3,200,000 3,200,000 3,200,000

Total Expected Units of Production 320,000 336,800 472,000

Actual Units of Production $0.25 0.25 0.25

Cost per unit $80,000 84,200 118,000

Annual Depreciation

MACRS recovery of computer: 2013—($18,200 × .20) = $3,640 2014—($18,200 × .32) = $5,824

Depreciation of van: 2013—($36,000 − $8,000) ÷ 7 Years = $4,000 2014—($36,000 − $8,000) ÷ 7 Years = $4,000

MACRS recovery of van: 2013—($36,000 × .20) = $7,200 2014—($36,000 × .32) = $11,520

$80,000 164,200 282,200

Accumulated Depreciation

Analyze: No. MACRS is not acceptable for financial accounting purposes.It does not match costs and revenues appropriately in most cases. The purpose of depreciation in financial accounting is to match net depreciable cost of the asset with the useful life of the asset. The purposes of MACRS are (1) to accelerate the expensing of assets’ costs in order to stimulate investment in business assets because of lowered taxes and (2) to simplify depreciation computations.

Depreciation of computer: 2013—($18,200 − $2,200) ÷ 4 Years = $4,000 2014—($18,200 − $2,200) ÷ 4 Years = $4,000

The book value of the machine at the end of 2014 would be $715,800 ($880,000− $164,200)

$80,000 80,000 80,000

Salvage Value

UNITS-OF-PRODUCTION METHOD

PROBLEM 18.4B

Analyze:

Acquisition Cost

PROBLEM 18.3B (continued)

PROBLEM 18.5B PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 Apr. 2 Depreciation Expense—Office Equipment 3 Accumulated Depreciation—Office Equipment 4 To record depreciation for 3 months on 5 printer traded in on new printer 6 7 2 Office Equipment (New) 8 Accumulated Depreciation—Office Equipment 9 Gain on Trade-In of Equipment 10 Office Equipment (Old) 11 Cash 12 Traded in old copier on new copier 13 14 July 8 Depreciation Expense—Vehicles 15 Accumulated Depreciation—Vehicles 16 To record depreciation for six months on 17 truck traded in on new truck 18 19 8 Vehicles (New) 20 Accumulated Depreciation—Vehicles 21 Loss on Trade-In of Equipment 22 Vehicles (Old) 23 Cash 24 Traded in truck on new truck, at loss 25 26 Sept. 23 Depreciation Expense—Store Equipment 27 Accumulated Depreciation—Store Equipment 28 To record depreciation for nine months 29 on refrigeration unit sold 30 31 Case A: Unit is sold for $13,500 32 23 Cash 33 Accumulated Depreciation—Store Equipment 34 Store Equipment (refrigeration unit) 35 Gain on Sale of Store Equipment 36 Sold refrigeration unit for $250 more than 37 book value

POST. REF.

DEBIT

CREDIT

1 2 2 2 0 00 3 4 5 6 12 0 0 0 00 7 2 8 6 0 00 8 1 1 6 0 00 9 5 2 0 0 00 10 8 5 0 0 00 11 12 13 2 8 0 0 00 14 2 8 0 0 00 15 16 17 18 44 0 0 0 00 19 16 8 0 0 00 20 6 2 0 0 00 21 33 0 0 0 00 22 34 0 0 0 00 23 24 25 3 7 5 0 00 26 3 7 5 0 00 27 28 29 30 31 13 5 0 0 00 32 18 7 5 0 00 33 32 0 0 0 00 34 2 5 0 00 35 36 37 2 2 0 00

Chapter 18  641

PROBLEM 18.5B (continued) PAGE

GENERAL JOURNAL

DATE 38 39 40 41 42 43

DESCRIPTION Case B: Unit is sold for $10,200

POST. REF.

23 Cash Accumulated Depreciation—Store Equipment Loss on Sale of Store Equipment Store Equipment Sold Store Equipment for $3,050 less than book value

DEBIT

CREDIT

38 10 2 0 0 00 39 18 7 5 0 00 40 3 0 5 0 00 41 32 0 0 0 00 42 43

Analyze: Recognizing gains and losses on the exchange of assets reflects the realization concept and the principle of recording transactions at cost (or fair market value).

642  Chapter 18

PROBLEM 18.6B PAGE

GENERAL JOURNAL DATE DESCRIPTION 1 2013 2 Jan. 4 Machinery 3 Cash 4 Purchased four machines at $9,000 each; 5 estimated life, 5 years; no salvage value 6 7 Dec. 31 Depreciation Expense—Machinery 8 Accumulated Depreciation—Machinery 9 To record depreciation on four machines 10 at $1,800 each 11 12 2014 13 Mar. 31 Depreciation Expense—Machinery 14 Accumulated Depreciation—Machinery 15 Three months’ depreciation on destroyed machine 16 17 31 Accumulated Depreciation—Machinery 18 Fire Loss on Machinery 19 Machinery 20 To record destruction of machine 1 21 22 Dec. 31 Depreciation Expense—Machinery 23 Accumulated Depreciation—Machinery 24 To record depreciation on three machines 25 at $1,800 each 26 27 2015 28 Oct. 2 Depreciation Expense—Machinery 29 Accumulated Depreciation—Machinery 30 To record depreciation for nine months for 31 machine 2, which was sold 32 33 2 Cash 34 Accumulated Depreciation—Machinery 35 Machinery 36 Gain on Sale of Machinery 37 To record sale of machine 2 at a gain

POST. REF.

DEBIT

CREDIT

1 2 36 0 0 0 00 3 4 5 6 7 2 0 0 00 7 7 2 0 0 00 8 9 10 11 12 4 5 0 00 13 4 5 0 00 14 15 16 2 2 5 0 00 17 6 7 5 0 00 18 9 0 0 0 00 19 20 21 5 4 0 0 00 22 5 4 0 0 00 23 24 25 26 27 1 3 5 0 00 28 1 3 5 0 00 29 30 31 32 4 4 0 0 00 33 4 9 5 0 00 34 9 0 0 0 00 35 3 5 0 00 36 37

36 0 0 0 00

Chapter 18  643

PROBLEM 18.6B (continued) PAGE

GENERAL JOURNAL DATE DESCRIPTION 1 2015 2 Dec. 31 Depreciation Expense—Machinery 3 Accumulated Depreciation—Machinery 4 To record depreciation for two machines 5 at $1,800 each 6 2016 7 May 28 Depreciation Expense—Machinery 8 Accumulated Depreciation—Machinery 9 To record five months' depreciation through 10 date of trade of machine 3 11 12 28 Machinery (No. 5) 13 Accumulated Depreciation—Machinery 14 Loss on Trade-In of Machinery 15 Machinery (No. 3) 16 Cash 17 To record trade-in of machine of new machine. 18 19 Sept. 3 Depreciation Expense—Machinery 20 Accumulated Depreciation—Machinery 21 To record eight months’ depreciation through 22 date of trade of machine 4 23 24 3 Machinery (No. 6) 25 Accumulated Depreciation—Machinery 26 Loss on Trade-In of Machinery 27 Machinery (No. 4) 28 Cash 29 Traded in machine 4 for a new machine 30 31 Income Tax Method: 32 3 Machinery (No. 6 ) 33 Accumulated Depreciation—Machinery 34 Machinery (No. 4) 35 Cash 36 Traded in machine 4 for a new machine

POST. REF.

DEBIT 3 6 0 0 00

7 5 0 00

8 8 0 0 00 6 1 5 0 00 5 0 00

1 2 0 0 00

9 2 0 0 00 6 6 0 0 00 4 0 0 00

9 6 0 0 00 6 6 0 0 00

CREDIT 1 2 3 6 0 0 00 3 4 5 6 7 7 5 0 00 8 9 10 11 12 13 14 9 0 0 0 00 15 6 0 0 0 00 16 17 18 19 1 2 0 0 00 20 21 22 23 24 25 26 9 0 0 0 00 27 7 2 0 0 00 28 29 30 31 32 33 9 0 0 0 00 34 7 2 0 0 00 35 36

Analyze: For financial accounting purposes, losses on trade-in are recorded. For tax purposes, the loss is not recognized, but added to cost of new asset.

644  Chapter 18

PROBLEM 18.7B 1. Depletion for financial accounting purposes. 2013: $900,000 ÷ 1,000,000 barrels = $.90 per barrel $0.90 × 4,000 barrels = $3,600 2014: $0.90 × 60,000 barrels = $54,000 Depletion Expense would be debited and Accumulated Depletionwould be credited for the depletion expense each year. 2. a. Cost depletion for tax purposes in 2013 would be same as for financial accounting, $3,600.00 b. The company could deduct $3,600 of depletion on its 2013 tax return. Cost depletion = $3,600 as computed above. Percentage depletion in 2013 would be $800: Sales $160,000 × 0.15 = $24,000, LIMITED TO NET INCOME = $800 ($160,000 − $159,200) Taxpayer would deduct cost depletion because it is larger. c. Cost depletion for tax purposes in 2014 would be $54,000 Capitalized costs of minerals $900,000 Less Depletion deducted in 2013 3,600 Remaining cost eligible for cost depletion $896,400 Depletion = $896,400 ÷ (996,000 barrels) × 60,000 barrels $54,000 d Percentage depletion would be $375,000 15% × $2,500,000 = $375,000 LIMITED TO NET INCOME, $2,180,000 ($2,500,000 − $320,000) (Net income limit is irrelevant because net income exceeds basic percentage depletion.) e. $720,000 ($4,800,000 × .15) Percentage depletion can continue to be taken even though the total amount of percentage depletion may be many times greater then the cost of the minerals. Analyze: Yes. The fact that depletion taken on the tax return exceeds the capitalized costs of the minerals does not eliminate percentage depletion. Percentage depletion continues as long as minerals are extracted and sold if the producer is otherwise qualified to claim percentage depletion. However, once the amount of depletion deducted (however computed) equals the capitalised costs, no further cost depeltion may be taken.

Chapter 18  645

PROBLEM 18.8B 1. The steps in assessing and measuring impairment have been taken: (1) There have been indications that impairment may exist. (2) An examination has been made that shows that impairment does exist. (3) It appears that a reasonable estimate has been made of the value of the planes and the unlikelihood that cash flows will recover their cost, so a reasonable estimate of the amount of impairment has been made. These are the necessary steps for detecting and recording impairment and they have been taken. Where impairment exists, it should be recognized and recorded. 2. The amount of the impairment is $14 million (book value, $46 million, less fair value, $32 million.) 3. The necessary entry would be to debit Impairment of Aircraft or some similar account and credit the Aircraft account for $14 million. 4. Under current GAAP, once impairment of property, plant and equipment has been recorded, the book value should not be restored merely because value has increased. To do so would give rise to recognition of unrealized income. Analyze: An examination should be made to determine whether the planes currently used are yielding a positive cash flow. If so, they are not impaired. Even if they are not currently yielding a positive cash flow, a case might be made for recording no impairment on them if they are close to a “break-even” on cash flow and it is likely that in the near future they will be yielding a positive cash flow. Obviously, management should pay close attention to the problem.

646  Chapter 18

PROBLEM 18.9B PAGE

GENERAL JOURNAL

DATE

DESCRIPTION

POST. REF.

1 2013 (1) 2 Apr. 10 Patents 3 Cash 4 To record purchase of patent with estimated 5 useful life of 8 years 6 7 Sept. 1 Computer Software 8 Cash 9 To record purchase of computer program with 10 estimated useful life of five years 11 12 Dec. 31 Research and Development Expenses 13 Cash 14 To record expenditures in R&D 15 activities for year 16 17 (2) 18 31 Amortization of Patents 19 Patents 20 To amortize cost of patent purchased on 21 April 10 ($400,000 ÷ 8) × 9/12) 22 23 31 Amortization of Computer Software 24 Computer Software 25 To record amortization of computer program 26 purchased on Sept 1 ($32,000 ÷ 7 × 4/12) 27 28 (3) 29 Note Goodwill is not amortized. No entry is required 30 if an assessment has been made that there 31 is no impairment of the balance in the account. 32

DEBIT 400 0 0 0 00

32 0 0 0 00

3,000 0 0 0 00

37 5 0 0 00

1 5 2 3 81

CREDIT 1 2 400 0 0 0 00 3 4 5 6 7 32 0 0 0 00 8 9 10 11 12 3,000 0 0 0 00 13 14 15 16 17 18 37 5 0 0 00 19 20 21 22 23 1 5 2 3 81 24 25 26 27 28 29 30 31 32

Analyze: The goodwill would be impaired by the amount of $600,000, requiring an adjustment. The entry would be a debit to Impairment Expense—Goodwill and a credit to Goodwill.

Chapter 18  647

CRITICAL THINKING PROBLEM 18.1 1. There are no rigid requirements that a business use any specific depreciation method for financial accounting purposes. The method used must be “generally acceptable.” The usual methods are straight-line, declining-balance, sum-of-years’ digits, and units-of-production. In a few cases, a specific method is specified for certain types of activities or assets. For example, equipment used in oil and gas production must be depreciated under the units-of production method, unless some other method may be justified in the circumstances. A single company may employ more than one method, though logically “like” assets should be depreciated under the same method by a business. 2. Depreciation for financial accounting purposes may (and usually does) differ materially from the “cost recovery” deducted under the Internal Revenue’s MACRS cost recovery system, which is used instead of the traditional depreciation methods. This is because financial accounting strives to match costs of an asset with the revenues the asset generates, to the extent possible. The matching principle is very important in financial accounting; however, depreciation calculations are complex, especially the choice of useful lives. To simplify this, the IRS uses “a cost recovery period” for determining the period over which costs will be charged to expense. The tax laws, written by Congress, usually at the Executive Branch’s urging, assign all assets to a “group,” based on the useful life. This assures consistency between taxpayers in the period over which they charge off the cost of a specific asset. The choice of a single life does not allow for different operating conditions or quality. In addition, the tax laws are designed to promote economic and social goals. In order to stimulate the economy, the cost recovery period is often considerably less than the actual expected life. The theory is that this reduces reported income in the early years of the asset’s life. These early tax savings stimulate the purchaser to buy the asset in order to have greater cash flows after taxes early in the asset’s life. This stimulation of investment helps stimulate the entire economy. 3. The entity will deduct smaller amounts of MACRS as the assets get older. This means that if all other factors were constant, income taxes would get higher as the assets get older. The result would be, because of increasing taxes, a propensity for net income after taxes to decrease as assets get older, especially if straight-line depreciation is deducted for financial accounting purposes. To forecast with any certainty which company will have lower or higher taxes (and income) would require full information about the relative ages of the entities’ assets and many other factors. 4. Essentially, management is responsible for the choice of depreciation methods. Usually the chief accounting officer and the chief financial officer are the critical players. In the case of firms using outside auditors, the auditors may also play a key role.

648  Chapter 18

CRITICAL THINKING PROBLEM 18.2 PAGE

GENERAL JOURNAL DATE DESCRIPTION 1 2014 (Instruction 1) 2 Dec. 31 Depreciation Expense—Buildings 3 Accumulated Depreciation—Buildings 4 To record depreciation for one-half year, using 5 the straight-line method 6 7 31 Depreciation Expense—Fencing 8 Accumulated Depreciation—Fencing 9 To record depreciation for one-half year, using 10 the straight-line depreciation 11 12 31 Depreciation Expense—Sidewalks and Parking 13 Accumulated Depreciation—Sidewalks and Parking 14 To record depreciation for one-half year, using 15 the straight-line method 16 17 31 Depreciation Expense—Telephone System 18 Accumulated Depreciation—Telephone System 19 To record depreciation for one-half year, using 20 the sum-of-years’ digits method 21 22 31 Depreciation Expense—Furniture and Fixtures 23 Accumulated Depreciation—Furniture and Equipment 24 To record depreciation for one-half year, using 25 the double-declining-balance method

POST. REF.

DEBIT

CREDIT

9 0 0 0 00 9 0 0 0 00

5 0 0 00 5 0 0 00

1 3 0 0 00 1 3 0 0 00

4 6 2 8 00 4 6 2 8 00

7 2 0 0 00 7 2 0 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

a. (Furniture and fixtures are in the MACRS 7-year cost recovery class.) 2014: MACRS cost recovery for 2014 = $72,000 × 14.29% = $10,289 2015: MACRS cost recovery for 2015 = $72,000 × 24.49% = $17,633 b. The MACRS recovery period for a nonresidential building placed in service after May 12, 1993, is 39 years.

3. There is strong indication that the asset may be impaired. A development (investigation for possible contamination because of existence of an old dump site) and the decline in business may suggest that impairment exists. Because the investigating team has not yet decided whether an environmental hazard exists, it is probably too early to conclude that impairment does exist and to attempt to measure the amount of impairment. However, it is a development that must be followed carefully to properly account for impairment if it has occurred.

Chapter 18  649

CRITICAL THINKING PROBLEM 18.2 (continued) 4. No. Unit-of-output depreciation is appropriate only where the asset’s useful life is affected directly by the quantity of its use during the year. An office building’s life is more appropriately measured by years. To use the approach favored by the executive manager suggests “income management” through the use of accounting entries.

650  Chapter 18

SOLUTIONS TO BUSINESS CONNECTIONS Managerial Focus: 1. An asset register listing all capital assets. A periodic physical inventory. Establish procedures to detail authorization of asset retirement, sale, or disposition. 2. Locking assets securely, assigning ID numbers, assign responsibility of asset to a person. 3. Recording assets at historical cost makes it easy to track the assets. Historical costs must be kept for many purposes, such as for federal income tax purposes. 4. A good system of internal control requires that capital assets be accounted for and that specific individuals be held responsible for them. 5. GAAP requires that such expenditures be charged to expense. It is rarely possible to determine whether specific expenditures for research and development will provide benefits through new discoveries, patents, processes, etc. Ethical Dilemma: It is an ethical transaction and the $100,000 would be included as Goodwill for Mr. Lopez. As long as Mr. Lopez and Mr. Lin agreed the value of the business is $200,000, it would be acceptable. However, it would not be ethical for Mr. Lin to open a competitive shop so close to pull his old customers away from Mr. Lopez. Customers were part of the value of the business. This should be a detail included in the contract. Financial Statement Analysis: 1. Straight-line method; 5-45 years 2. $1,707 million; $25,550 million Teamwork: If the team has selected a machine, units of production would be the best method with a small salvage value. For a building, straight-line would be best with a larger salvage value. Doubling the salvage value would decrease the amount of depreciation expense to be claimed. It would increase the net income and also the income tax expense. Reducing the salvage value by half would be more advantageous since it would increase the depreciation expense and decrease the net income and income tax expense. Internet Connection: The MACRS percent column for each year of the asset should be identical to the textbook. The five tests are: 1) It must be property you own, 2) It must be used in a business or other incomeproducing activity, 3) It must have a determinable useful life, 4) It must be expected to last more than one year, and 5) It must not be excepted property.

Chapter 18  651

SOLUTIONS TO PRACTICE TEST Part A True-False 1. FALSE 2. FALSE 3. TRUE 4. TRUE 5. TRUE 6. FALSE 7. TRUE 8. TRUE 9. TRUE 10. TRUE

11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

FALSE TRUE FALSE FALSE FALSE TRUE TRUE FALSE FALSE FALSE

Part B Matching 1. i 2. d 3. g 4. a 5. f 6. c 7. j 8. h 9. e 10. b Part C Exercise 1. Depreciation for 2013 = ($44,000 - $4,000) ÷ 8 years = $5,000 Depreciation for 2014 = ($44,000 - $4,000) ÷ 8 years = $5,000 2. Depreciation for 2013 = ($44,000 - $4,000) x 8/36 = $8,888 Depreciation for 2014 = ($44,000 - $4,000) x 7/36 = $7,778 3. Depreciation for 2013 = $44,000 x .25 = $11,000 Depreciation for 2014 = (44,000 - $11,000) x .25 = $8,250

652  Chapter 18

CHAPTER 19 ACCOUNTING FOR PARTNERSHIPS Chapter Opener: Thinking Critically Students should recognize that partners carry some responsibility for the debts of the partnership and benefit directly from company profits. Since partners benefit directly from the profits of the company, they have a vested interest in making sure all the firm’s clients are satisfied with the products and services they receive. Fast Facts HVP has assisted in the development of over 80 ambulatory care centers representing over $400 • million in value. HVP has worked with over 200 hospitals nationwide. • HVP is an employee-owned company. The founders of HVP personally fund the company. All • senior-level employees of HVP enjoy a degree of ownership and share in the success of HVP.

Managerial Implications: Thinking Critically Name, location, and nature of business • Starting date of the agreement • Life of the partnership • Rights and duties of each partner • Capital to be contributed by each partner • Drawings of the partners • Fiscal year and accounting method • Method of allocating income or loss • Dissolution and liquidation procedures • Discussion Questions 1. For each partner, and in total for all partners: beginning balances of capital, share of net income or loss for the year, withdrawals for the year, and ending capital balance. 2. No. This is a mixing of affairs of the separate entities (the business entity and the individual’s personal affairs). Such payments should be debited to the partner’s Drawing account. 3.

The capital account of the partner selling the interest is debited for the fractional share of the capital sold and the capital account of the new partner is credited for the fractional share of the balance of the interest purchased. A dissolution is the termination of the contract between the existing partners. Business operations may continue, usually with one or more new partners. A liquidation is the sale of the assets and discontinuation of the business. Skills, experience and reputation brought to the new business; time to be spent; amount of capital invested; any other pertinent factors related to the partners that affect the value and profitability of the business.

Chapter 19  653

Discussion Questions (continued) 6. a. The accounting records are closed and the net income or net loss is recorded and transferred to the partners’ capital accounts. b. Assets and liabilities are revalued and recorded at fair market value, as agreed on by the old partners and any new partners. 7. The drawing account for each partner is charged for cash withdrawn for any purpose (including salary allowances), and other assets (such as merchandise taken by the partner from the business). 8. The gains and losses resulting from differences between carrying amounts in the records and the fair values of those items belong to the original partner, not the new partner. 9. Each partner is empowered to act as an agent for the partnership, binding the firm by those acts if they are within the normal scope of the partnership’s activities. 10. The salary and interest allowances are charged to Income Summary. The resulting debit balance in Income Summary is charged to the partners’ capital accounts. 11. No. Salaries of the partners are only a factor in the allocation of net income or net loss. 12. Liability for the partnership debts is usually limited to the partner’s capital account balance. 13. The equity accounts are different. Individual capital and drawing accounts must be maintained for each partner. 14. Records must be kept of all amounts owed to the sole proprietor because they are (usually) transferred to the partnership. Frequently, some clearly uncollectible accounts are often identified and are not transferred, but retained by the owner of the predecessor business. 15. 16. 17. 18. 19.

Gains and losses of value prior to the new partner’s admission belong to the previous proprietor, not to the new partner. No. However, the individual partners pay income tax on their shares of the partnership’s income. Technically, the partnership is dissolved upon the death of a partner. However, if the remaining partners continue to carry on the business, they are deemed to have formed a new partnership. Unlimited liability of general partners; mutual agency; lack of continuity and difficulty of transfer of ownership. Ease of formation; pooling of skills and financial resources; and no federal income tax on the entity itself.

654  Chapter 19

EXERCISE 19.1 PAGE

GENERAL JOURNAL

DATE 1 2013 2 3 4

DESCRIPTION

POST. REF.

Cash Rosa Valdez, Capital To record investment of cash by Valdez

DEBIT

CREDIT

220 0 0 0 00 220 0 0 0 00

1 2 3 4

EXERCISE 19.2 PAGE

GENERAL JOURNAL

DATE 1 2013 2 3 4 5 6 7

DESCRIPTION Accounts Receivable Merchandise Inventory Furniture And Fixtures Allowance for Doubtful Accounts Accounts Payable Pamela Oliver, Capital To record investment of Oliver

POST. REF.

DEBIT 120 0 0 0 00 96 0 0 0 00 38 0 0 0 00

CREDIT

4 0 0 0 00 17 5 0 0 00 232 5 0 0 00

1 2 3 4 5 6 7

Chapter 19  655

EXERCISE 19.3 The Leisure Room Balance Sheet May 1, 2013 Assets Cash Merchandise Inventory Furniture Equipment Total Assets

48 0 0 0 00 24 0 0 0 00 24 0 0 0 00 76 0 0 0 00 172 0 0 0 00

Liabilities and Partners' Equity Accounts Payable Partners' Equity James Dear, Capital Joan Clay, Capital Total Liabilities and Partners' Equity

656  Chapter 19

10 0 0 0 00 108 0 0 0 00 54 0 0 0 00 172 0 0 0 00

EXERCISE 19.4 Chanda Salary Interest (10% × $408,000) 50% of net income after allowances Total share of net income to Chanda Jones Salary Interest (10% of $508,000) 50% of net income after allowances Total share of net income to Jones Total net income for year

$96,000 40,800 (19,800) $117,000

$140,000 50,800 (19,800) 171,000 $288,000

EXERCISE 19.5 Allocation of Net Income Reagan Interest (10% × $120,000) 60% of balance after interest Total share of net income Carter Interest (10% × $24,000) 40% of balance after interest Total share of net income Total net income for year

$12,000 135,360 $147,360 $2,400 90,240 $92,640 $240,000

EXERCISE 19.6 Allocation of Net Income Raymond Zeidan Salary 60% of balance after salary allowances Total net income to Zeidan Abe Foras Salary 40% of balance after salary allowances Total net income to Foras Total net income

$84,000 97,680 $181,680

$84,000 65,120 $149,120 $330,800

Chapter 19  657

EXERCISE 19.7 PAGE

GENERAL JOURNAL

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

DATE DESCRIPTION 2013 Dec. 31 Income Summary Gabe Monte, Capital Bob Ferguson, Capital To close Income Summary, allocating income equally Gabe Monte, Capital Gabe Monte, Drawing To close Monte’s drawing account Bob Ferguson, Capital Bob Ferguson, Drawing To close Ferguson’s drawing account

POST. REF.

DEBIT

CREDIT

1 2 48 0 0 0 00 3 48 0 0 0 00 4 5 6 70 0 0 0 00 7 70 0 0 0 00 8 9 174 0 0 0 00 10 174 0 0 0 00 11 12 96 0 0 0 00

EXERCISE 19.8 PAGE

GENERAL JOURNAL

1 2 3 4 5 6

DATE DESCRIPTION 2013 Dec. 31 Income Summary Dan Chase, Capital Chris Torres, Capital To close Income Summary and allocate income on ratio of 60:40

POST. REF.

DEBIT

CREDIT

24 0 0 0 00 14 4 0 0 00 9 6 0 0 00

1 2 3 4 5 6

EXERCISE 19.9 Each partner, Mary Ayers and Neil Stewart, will receive credit for one-half of the net income, or $94,000. In the absence of a provision to the contrary in the partnership agreement, profits and losses are split equally among the partners. EXERCISE 19.10 Effect of revaluation: Merchandise Inventory: Building: Total Change Johnson’s share: Wilner’s share:

658  Chapter 19

($3,800) 95,000 $91,200 $91,200 × 60% = $54,720 $91,200 × 40% = $36,480 $45,600 × 40% = $18,240

EXERCISE 19.10 (continued) (1) GENERAL JOURNAL

1 2 3 4 5 6

DATE DESCRIPTION 2013 Dec. 31 Building Merchandise Inventory Howard Johnson, Capital Neil Wilner, Capital To record allocation of gain on revaluation.

PAGE POST. REF.

DEBIT

CREDIT

95 0 0 0 00 3 8 0 0 00 54 7 2 0 00 36 4 8 0 00

1 2 3 4 5 6

(2) Johnson $250,000 54,720 $304,720

New Capital Account Balances Beginning balance Revaluation gain Balance after Revaluation

Wilner $350,000 36,480 $386,480

EXERCISE 19.11 PAGE

GENERAL JOURNAL DATE 1 2013 2 3 4

POST. REF.

DESCRIPTION James Walker, Capital Gloria Cox, Capital To record sale of ownership interest

New Capital Account Balances Beginning balance Transfer of capital New balances

DEBIT 100 0 0 0 00

CREDIT 100 0 0 0 00

Walker 200,000 (100,000) 100,000

Turner $220,000 $220,000

1 2 3 4

Cox 0 100,000 100,000

EXERCISE 19.12 The increase in net assets as a result of the revaluation is $31,000 Masten’s capital account balance before revaluation: Masten’s share of the revaluation: ($31,000 × 30%): Final Capital account balance:

$110,000 $9,300 $119,300

Masten will receive $119,300

Chapter 19  659

PROBLEM 19.1A PAGE

GENERAL JOURNAL DATE ACCOUNTS 1 2013 2 Jan. 1 Cash 3 Accounts Receivable 4 Merchandise Inventory 5 Furniture and Equipment 6 Allowance for Doubtful Accounts 7 Accounts Payable 8 Stan Otis, Capital 9 To record investment by Stan Otis in 10 Contemporary Computing 11 12 1 Cash 13 Reginald Pittman, Capital 14 To record investment of Reginald 15 Pittman in Contemporary Computing

POST. REF.

DEBIT 40 0 0 0 00 116 0 0 0 00 365 0 0 0 00 75 0 0 0 00

423 2 0 0 00

CREDIT 1 2 3 4 5 7 0 0 0 00 6 60 0 0 0 00 7 529 0 0 0 00 8 9 10 11 12 423 2 0 0 00 13 14 15

Contemporary Computing Balance Sheet January 1, 2013 Assets Cash Accounts Receivable Allowance for Doubtful Accounts Merchandise Inventory Furniture and Fixtures Total Assets

463 2 0 0 00 116 0 0 0 00 7 0 0 0 00

109 0 0 0 00 365 0 0 0 00 75 0 0 0 00 $1,012 2 0 0 00

Liabilities Accounts Payable Partners’ Equity Stan Otis, Capital Reginald Pittman, Capital Total Partners’ Equity Total Liabilities and Partners’ Equity

60 0 0 0 00 529 0 0 0 00 423 2 0 0 00 952 2 0 0 00 $1,012 2 0 0 00

Analyze: Otis owns 55.6% of the total equity ($529,000 ÷ $952,200).

660  Chapter 19

PROBLEM 19.2A PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2014 2 Jan. 1 Merchandise Inventory 3 Accounts Receivable 4 Furniture and Equipment 5 Cash 6 Allowance for Doubtful Accounts 7 Accounts Payable 8 James Bryant, Capital 9 To record investment by Bryant 10 11 1 Cash 12 Camille Willis, Capital 13 To record investment by Willis

POST. REF.

DEBIT 48 9 0 0 00 14 9 0 0 00 11 3 0 0 00 3 7 5 0 00

74 4 5 0 00

CREDIT 1 2 3 4 5 1 4 0 0 00 6 3 0 0 0 00 7 74 4 5 0 00 8 9 10 11 74 4 5 0 00 12 13

Bryant and Willis Angler’s Outpost Balance Sheet January 1, 2014 Assets Cash Accounts Receivable Allowance for Doubtful Accounts Merchandise Inventory Furniture and Fixtures Total Assets

78 2 0 0 00 14 9 0 0 00 1 4 0 0 00

13 5 0 0 00 48 9 0 0 00 11 3 0 0 00 151 9 0 0 00

Liabilities Accounts Payable Partners’ Equity James Bryant, Capital Camille Willis, Capital Total Partners’ Equity Total Liabilities and Partners’ Equity

3 0 0 0 00 74 4 5 0 00 74 4 5 0 00 148 9 0 0 00 151 9 0 0 00

Analyze: The net assets were increased by $10,200.

Chapter 19  661

PROBLEM 19.3A PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32

DATE DESCRIPTION 2013 Dec. 31 Income Summary Angie Castillo, Capital Ashlee Williams, Capital To record allocation of net income

Analyze:

POST. REF.

DEBIT 140 0 0 0 00

31 Angie Castillo, Capital Angie Castillo, Drawing To close drawing acount

48 0 0 0 00

31 Ashlee Williams, Capital Ashlee Williams, Drawing To close drawing account

42 0 0 0 00

31 Angie Castillo, Capital Ashlee Williams, Capital Income Summary

24 0 0 0 00 16 0 0 0 00

31 Angie Castillo, Capital Angie Castillo, Drawing To close drawing account

48 0 0 0 00

31 Ashlee Williams, Capital Ashlee Williams, Drawing To close drawing account

42 0 0 0 00

CREDIT 1 2 84 0 0 0 00 3 56 0 0 0 00 4 5 6 7 48 0 0 0 00 8 9 10 11 42 0 0 0 00 12 13 14 15 16 40 0 0 0 00 17 18 19 48 0 0 0 00 20 21 22 23 42 0 0 0 00 24 25 26 27 28 29 30 31 32

Ending balance in Castillo's capital account would be $136,000 ($100,000 + $84,000 − $48,000 = $136,000).

662  Chapter 19

PROBLEM 19.4A PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33

DATE DESCRIPTION 2013 Dec. 15 Larry Thomas, Capital Cash To Record permanent withdrawal of cash by Thomas

POST. REF.

DEBIT 100 0 0 0 00

31 Income Summary Larry Sims, Capital Larry Thomas, Capital Salary allowances for year

170 0 0 0 00

31 Income Summary Larry Sims, Capital Larry Thomas, Capital Interest allowances for year

76 0 0 0 00

31 Income Summary Larry Sims, Capital Larry Thomas, Capital Division of balance of net income after salary and interest allowances

74 0 0 0 00

31 Larry Sims, Capital Larry Sims, Drawing To close drawing account

90 0 0 0 00

31 Larry Thomas, Capital Larry Thomas, Drawing To close drawing account

80 0 0 0 00

CREDIT 1 2 100 0 0 0 00 3 4 5 6 7 90 0 0 0 00 8 80 0 0 0 00 9 10 11 12 40 0 0 0 00 13 36 0 0 0 00 14 15 16 17 29 6 0 0 00 18 44 4 0 0 00 19 20 21 22 23 90 0 0 0 00 24 25 26 27 80 0 0 0 00 28 29 30 31 32 33

Chapter 19  663

PROBLEM 19.4A (continued) Larry's Antiques Income Statement Year Ended December 31, 2013 Net Income for Year

320 0 0 0 00 Larry Sims Larry Thomas 90 0 0 0 00 80 0 0 0 00 40 0 0 0 00 36 0 0 0 00 29 6 0 0 00 44 4 0 0 00 159 6 0 0 00 160 4 0 0 00

Distribution of Net Income Salary Allowance Interest Allowance Remainder in 40:60 Ratio Totals

Total 170 0 0 0 00 76 0 0 0 00 74 0 0 0 00 320 0 0 0 00

Larry's Antiques Statement of Partners’ Equities Year Ended December 31, 2013 Capital Balances, January 1, 2013 Net Income Less: Permanent Withdrawals During Year Normal Withdrawals During Year Capital Balances, December 31, 2013

Larry Sims Larry Thomas 400 0 0 0 00 360 0 0 0 00 159 6 0 0 00 160 4 0 0 00 559 6 0 0 00 520 4 0 0 00

Total 760 0 0 0 00 320 0 0 0 00 1,080 0 0 0 00

100 0 0 0 00 80 0 0 0 00 340 4 0 0 00

100 0 0 0 00 170 0 0 0 00 810 0 0 0 00

90 0 0 0 00 469 6 0 0 00

Analyze: Sims capital account increased by 17.4%. (69,600 [469,600 - 400,000] ÷ 400,000)

664  Chapter 19

PROBLEM 19.5A PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37

DATE ACCOUNTS 2013 Dec. 31 Land Allowance for Depreciation—Building Allowance for Doubtful Accounts Merchandise Inventory Larry Thomas, Capital Hazel Thomas, Capital Isiah Thomas, Capital To record the revaluation of assets and allocation of gain to partners

POST. REF.

DEBIT 48 0 0 0 00 44 0 0 0 00

31 Cash Kathryn Thomas, Capital To record investment by K. Thomas

120 0 0 0 00

31 Cash Kathryn Thomas, Capital To record investment by K. Thomas

120 0 0 0 00

31 Kathryn Thomas, Capital Larry Thomas, Capital Hazel Thomas, Capital Isiah Thomas, Capital To record bonus to original partners

26 1 6 0 00

31 Cash Kathryn Thomas, Capital To record investment by K. Thomas

120 0 0 0 00

31 Larry Thomas, Capital Hazel Thomas, Capital Isiah Thomas, Capital Kathryn Thomas, Capital To record bonus to new partner

18 2 0 0 00 9 1 0 0 00 9 1 0 0 00

CREDIT 1 2 3 1 2 0 0 00 4 21 6 0 0 00 5 34 6 0 0 00 6 17 3 0 0 00 7 17 3 0 0 00 8 9 10 11 12 120 0 0 0 00 13 14 15 16 120 0 0 0 00 17 18 19 20 13 0 8 0 00 21 6 5 4 0 00 22 6 5 4 0 00 23 24 25 26 120 0 0 0 00 27 28 29 30 31 32 36 4 0 0 00 33 34 35 36 37

Chapter 19  665

PROBLEM 19.5A (continued) PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33

DATE DESCRIPTION 2013 Dec. 31 Hazel Thomas, Capital Cash To record cash payment to H. Thomas on her withdrawal from the partnership

Analyze:

POST. REF.

DEBIT 77 3 0 0 00

31 Hazel Thomas, Capital Cash Larry Thomas, Capital Isiah Thomas, Capital To record cash payment to H. Thomas on her withdrawal from the partnership and bonus to remaining partners

77 3 0 0 00

31 Hazel Thomas, Capital Larry Thomas, Capital Isiah Thomas, Capital Cash To record cash payment and bonus to H. Thomas on her withdrawal from the partnership

77 3 0 0 00 6 4 0 0 00 3 2 0 0 00

CREDIT 1 2 77 3 0 0 00 3 4 5 6 7 65 3 0 0 00 8 8 0 0 0 00 9 4 0 0 0 00 10 11 12 13 14 15 16 17 86 9 0 0 00 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33

His capital account balance would be $83,840 ($60,000 + $17,300 + $6,540)

666  Chapter 19

PROBLEM 19.6A PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32

DATE ACCOUNTS 2013 Jan. 1 David Masters, Capital June Cho, Capital Sale by Masters of one-half of his capital to Cho

POST. REF.

DEBIT 90 0 0 0 00

90 0 0 0 00

1 David Masters, Capital June Cho, Capital Sale by Masters of one-half of his capital to Cho

90 0 0 0 00

1 Cash June Cho, Capital Cash investment by Cho for 25% interest

120 0 0 0 00

1 June Cho, Capital David Masters, Capital Luis Anton, Capital To record bonus to original partners

10 0 0 0 00

1 Cash June Cho, Capital Cash investment by Cho for 30% interest

124 0 0 0 00

1 David Masters, Capital Luis Anton, Capital June Cho, Capital Bonus to new partner

CREDIT

90 0 0 0 00

120 0 0 0 00

5 0 0 0 00 5 0 0 0 00

124 0 0 0 00

4 6 0 0 00 4 6 0 0 00 9 2 0 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32

Analyze: The percentage of total equity owned is Masters—42%, Anton—33% and Cho—25%.

Chapter 19  667

PROBLEM 19.1B PAGE

GENERAL JOURNAL

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

DATE ACCOUNTS 2014 Jan. 1 Cash Accounts Receivable Merchandise Inventory Fixtures and Store Equipment Allowance for Doubtful Accounts Accounts Payable Horace Brock, Capital To record investment by Brock

POST. REF.

1 Cash Carolyn Brown, Capital To record investment by Brown

DEBIT 12 4 0 0 00 12 0 0 0 00 92 0 0 0 00 88 0 0 0 00

96 6 0 0 00

CREDIT 1 2 3 4 5 7 2 0 0 00 6 4 0 0 0 00 7 193 2 0 0 00 8 9 10 11 96 6 0 0 00 12 13

Brock-Brown Broadcast Company Balance Sheet January 1, 2014 Assets Cash Accounts Receivable Allowance for Doubtful Accounts Merchandise Inventory Furniture and Fixtures Total Assets

109 0 0 0 00 12 0 0 0 00 7 2 0 0 00

4 8 0 0 00 92 0 0 0 00 88 0 0 0 00 293 8 0 0 00

Liabilities Accounts Payable

4 0 0 0 00

Partners’ Equity Horace Brock, Capital Carolyn Brown, Capital Total Partners’ Equity Total Liabilities and Partners’ Equity

193 2 0 0 00 96 6 0 0 00 289 8 0 0 00 293 8 0 0 00

Analyze: Brock’s equity was adjusted upward by $45,200

668  Chapter 19

PROBLEM 19.2B PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 Jan. 1 Cash 3 Accounts Receivable 4 Merchandise Inventory 5 Furniture and Equipment 6 Allowance for Doubtful Accounts 7 Accounts Payable 8 Homer Litton, Capital 9 To record investment of assets by Litton 10 11 1 Cash 12 Deborah Simpson, Capital 13 To record investment of cash by Simpson

POST. REF.

DEBIT 9 0 0 0 00 9 0 0 0 00 86 0 0 0 00 23 8 0 0 00

117 6 0 0 00

CREDIT 1 2 3 4 5 2 2 0 0 00 6 8 0 0 0 00 7 117 6 0 0 00 8 9 10 11 117 6 0 0 00 12 13

The Artist’s Supply Balance Sheet January 1, 2013 Assets Cash Accounts Receivable Allowance for Doubtful Accounts Merchandise Inventory Furniture and Fixtures Total Assets

126 6 0 0 00 9 0 0 0 00 2 2 0 0 00

6 8 0 0 00 86 0 0 0 00 23 8 0 0 00 243 2 0 0 00

Liabilities Accounts Payable

8 0 0 0 00 Partners’ Equity

Homer Litton, Capital Deborah Simpson, Capital Total Partners’ Equity Total Liabilities and Partners’ Equity

117 6 0 0 00 117 6 0 0 00 235 2 0 0 00 243 2 0 0 00

Analyze: If Simpson had invested 80% of the value of Litton’s Investment, Simpson’s capital account balance would be $94,080.

Chapter 19  669

PROBLEM 19.3B PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33

DATE DESCRIPTION 2013 Dec. 31 Income Summary Howard Johnson, Capital Neil Wayne, Capital To record allocation of net income

POST. REF.

DEBIT 210 0 0 0 00

31 Howard Johnson, Capital Howard Johnson Drawing To close drawing acount

84 0 0 0 00

31 Neil Wayne, Capital Neil Wayne, Drawing To close drawing account

60 0 0 0 00

31 Howard Johnson, Capital Neil Wayne, Capital Income Summary To allocate net loss to partners

38 5 0 0 00 71 5 0 0 00

31 Howard Johnson, Capital Howard Johnson, Drawing To close drawing account

84 0 0 0 00

31 Neil Wayne, Capital Neil Wayne, Drawing To close drawing account

60 0 0 0 00

CREDIT 1 2 73 5 0 0 00 3 136 5 0 0 00 4 5 6 7 84 0 0 0 00 8 9 10 11 60 0 0 0 00 12 13 14 15 16 110 0 0 0 00 17 18 19 20 84 0 0 0 00 21 22 23 24 60 0 0 0 00 25 26 27 28 29 30 31 32 33

Analyze: His capital account would have a $226,500 credit balance ($150,000 + $136,500 − $60,000).

670  Chapter 19

PROBLEM 19.4B PAGE

GENERAL JOURNAL

DATE DESCRIPTION 2013 Jul. 15 Cliff Hanson, Capital Cash To record permanent withdrawal of cash by Hanson

POST. REF.

1 2 3 4 5 6 7 Dec. 31 Income Summary 8 Alika Myers, Capital 9 Cliff Hanson, Capital 10 To record salary allowances for year 11 12 31 Income Summary 13 Alika Myers, Capital 14 Cliff Hanson, Capital 15 To record interest allowance of 10% of 16 January 1, 2013 capital accounts balances 17 18 31 Income Summary 19 Alika Myers, Capital 20 Cliff Hanson, Capital 21 To allocate balance of net income after salary 22 and interest allowances equally to partners 23 24 31 Alika Myers, Capital 25 Alika Myers, Drawing 26 To close drawing account 27 28 31 Cliff Hanson, Capital 29 Cliff Hanson, Drawing 30 To close drawing account 31 32 33 34

DEBIT 80 0 0 0 00

108 0 0 0 00

32 8 0 0 00

52 0 0 0 00

60 0 0 0 00

48 0 0 0 00

CREDIT 1 2 80 0 0 0 00 3 4 5 6 7 60 0 0 0 00 8 48 0 0 0 00 9 10 11 12 10 4 0 0 00 13 22 4 0 0 00 14 15 16 17 18 26 0 0 0 00 19 26 0 0 0 00 20 21 22 23 24 60 0 0 0 00 25 26 27 28 48 0 0 0 00 29 30 31 32 33 34

Chapter 19  671

PROBLEM 19.4B (continued) Downtown Apartments Income Statement Year Ended December 31, 2013 Net Income for Year

192 8 0 0 00

Distribution of Net Income Salary Allowance Interest Allowance Remainder equally to partners Totals

Alika Myers 60 0 0 0 00 10 4 0 0 00 26 0 0 0 00 96 4 0 0 00

Cliff Hanson 48 0 0 0 00 22 4 0 0 00 26 0 0 0 00 96 4 0 0 00

Total 108 0 0 0 00 32 8 0 0 00 52 0 0 0 00 192 8 0 0 00

Alika Myers 104 0 0 0 00 96 4 0 0 00 200 4 0 0 00

Cliff Hanson 224 0 0 0 00 96 4 0 0 00 320 4 0 0 00

Total 328 0 0 0 00 192 8 0 0 00 520 8 0 0 00

60 0 0 0 00 140 4 0 0 00

80 0 0 0 00 48 0 0 0 00 192 4 0 0 00

80 0 0 0 00 108 0 0 0 00 332 8 0 0 00

Downtown Apartments Statement of Partners’ Equities Year Ended December 31, 2013 Capital Balances, Jan. 1, 2013 Net Income Less: Permanent Withdrawals During Year Monthly Withdrawals of salary allowances Capital Balances, Dec. 31, 2013

Analyze: The interest allowance is a means of paying for the use of capital. If interest is based on beginning capital, the calculation ignores withdrawals for salary allowances and other types of withdrawals. The partners should consider modifying the agreement to base interest on the monthly average capital. At the least, the amount of a permanent withdrawal made during the year should not bear interest for the full year.

672  Chapter 19

PROBLEM 19.5B PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37

DATE ACCOUNTS 2013 Dec. 31 Allowance for Depreciation—Building Land Allowance for Doubtful Accounts Merchandise Inventory Allowance for Depreciation—Equipment Helen Rush, Capital Billy Hatten, Capital Quinton Booker, Capital To record revaluation of assets and allocation of gain to partners

POST. REF.

DEBIT 8 0 0 0 00 24 2 0 0 00

31 Cash Rosie Hinojosa, Capital To record investment by Hinojosa

66 0 0 0 00

31 Cash Rosie Hinojosa, Capital To record investment by Hinojosa

66 0 0 0 00

31 Rosie Hinojosa, Capital Helen Rush, Capital Billy Hatten, Capital Quinton Booker, Capital To record bonus to original partners

19 5 5 2 00

31 Cash Rosie Hinojosa, Capital To record investment by Hinojosa

66 0 0 0 00

31 Helen Rush, Capital Billy Hatten, Capital Quinton Booker, Capital Rosie Hinojosa, Capital To record bonus to new partner

19 2 5 4 00 7 7 0 2 00 11 5 5 2 00

CREDIT 1 2 3 1 9 6 0 00 4 8 0 0 0 00 5 1 0 0 0 00 6 10 6 2 0 00 7 4 2 4 8 00 8 6 3 7 2 00 9 10 11 12 13 66 0 0 0 00 14 15 16 17 66 0 0 0 00 18 19 20 21 9 7 7 6 00 22 3 9 1 0 00 23 5 8 6 6 00 24 25 26 27 66 0 0 0 00 28 29 30 31 32 33 38 5 0 8 00 34 35 36 37

Chapter 19  673

PROBLEM 19.5B (continued) PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33

DATE DESCRIPTION 2013 Dec. 31 Quinton Booker, Capital Cash To record cash payment to Booker on his withdrawal from the partnership

Analyze:

POST. REF.

DEBIT 51 3 7 2 00

31 Quinton Booker, Capital Cash Helen Rush, Capital Billy Hatten, Capital To record cash payment to Booker on his withdrawal from the partnership

51 3 7 2 00

31 Quinton Booker, Capital Helen Rush, Capital Billy Hatten, Capital Cash To record cash payment to Booker on his withdrawal from the partnership

51 3 7 2 00 6 4 2 9 00 2 5 7 1 00

CREDIT 1 2 51 3 7 2 00 3 4 5 6 7 44 8 7 2 00 8 4 6 4 3 00 9 1 8 5 7 00 10 11 12 13 14 15 16 60 3 7 2 00 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33

His capital account balance would be $36,105 ($30,000 + $4,248 + $1,857)

674  Chapter 19

PROBLEM 19.6B PAGE

GENERAL JOURNAL DATE ACCOUNTS 1 2013 2 Jan. 2 Haywood Nelson, Capital 3 Stanley Carpenter, Capital 4 Record sale of one-half of Nelson’s capital 5 to Carpenter 6 7 2 Fred Kenamond, Capital 8 Stanley Carpenter, Capital 9 Record sale of one-half of Kenamond 10 capital to Carpenter 11 12 2 Cash 13 Stanley Carpenter, Capital 14 Record investment of cash by Carpenter 15 for one-fourth interest in partnership 16 17 2 Stanley Carpenter, Capital 18 Haywood Nelson, Capital 19 Fred Kenamond, Capital 20 Record allocation of bonus paid by 21 Carpenter for partnership interest 22 23 2 Cash 24 Stanley Carpenter, Capital 25 Cash investment by Carpenter for 35% 26 interest 27 28 2 Haywood Nelson, Capital 29 Fred Kenamond, Capital 30 Stanley Carpenter, Capital 31 Record allocation of bonus paid by original 32 partners to Carpenter on admission to 33 partnership

POST. REF.

DEBIT

CREDIT

1 120 0 0 0 00 2 120 0 0 0 00 3 4 5 6 160 0 0 0 00 7 160 0 0 0 00 8 9 10 11 240 0 0 0 00 12 240 0 0 0 00 13 14 15 16 40 0 0 0 00 17 22 0 0 0 00 18 18 0 0 0 00 19 20 21 22 240 0 0 0 00 23 240 0 0 0 00 24 25 26 27 22 0 0 0 00 28 18 0 0 0 00 29 40 0 0 0 00 30 31 32 33

Analyze: The percentages of equity owned are Nelson—27.25%, Kenamond—37.75%. $218,000 Nelson 302,000 Kenamond 280,000 Carpenter $218,000

27.25% 37.75% 35.00% 100.00%

Chapter 19  675

CRITICAL THINKING PROBLEM 19.1 There is no one correct answer to the division of income and losses for this partnership. Students’ answers will vary from the simple to the complex. Some students will opt for the easy solution and divide income and losses equally, while others will be more creative and allocate income and losses over a salary allowance and/or interest allowance with the remainder divided according to a set ratio. You might want to divide the students into teams. Each team will determine how it wants to divide income and losses and then the team solutions can be presented to the class for comparison and discussion. One possible provision for division of income and losses for the BK Motorcycle Repair Shop partnership follows:

Salary Allowance Interest Allowance (@8%) Remainder in 43:57 Ratio Totals

DISTRIBUTION OF NET INCOME Beehler Keller $80,000 $40,000 30,000 40,000 23,650 31,350 $133,650 $111,350

Total $120,000 70,000 55,000 $245,000

This arrangement gives a larger salary allowance to Beehler because he will work full-time while Keller works only part-time. The interest allowance gives each partner credit for his or her investment in the partnership.

676  Chapter 19

CRITICAL THINKING PROBLEM 19.2 PAGE

GENERAL JOURNAL

DATE ACCOUNTS 2013 Jan. 1 Accounts Receivable Merchandise Inventory Furniture and Equipment Allowance for Doubtful Accounts Accounts Payable Ted Coe, Capital To record investment by Coe

POST. REF.

1 2 3 4 5 6 7 8 9 10 1 Cash 11 Herschel Anderson, Capital 12 To record investment by Anderson 13 14 various Ted Coe, Drawing 15 Cash ($9,000 × 12) 16 To record the withdrawal of cash for salary 17 18 Herschel Anderson, Drawing 19 Cash ($8,000 × 12) 20 To record the withdrawal of cash for salary 21 22 Income Summary 23 Ted Coe, Capital 24 Herschel Anderson, Capital 25 To record 10% interest allowance on 26 beginning investment 27 28 Income Summary 29 Ted Coe, Capital 30 Herschel Anderson, Capital 31 32 Ted Coe, Capital 33 Ted Coe, Drawing 34 35 Herschel Anderson, Capital 36 Herschel Anderson, Drawing

DEBIT

CREDIT

128 0 0 0 00 175 0 0 0 00 35 0 0 0 00 8 4 0 0 00 30 0 0 0 00 299 6 0 0 00

199 7 3 3 00 199 7 3 3 00

108 0 0 0 00 108 0 0 0 00

96 0 0 0 00 96 0 0 0 00

49 9 3 3 00 29 9 6 0 00 19 9 7 3 00

196 0 6 7 00 98 0 3 3 50 98 0 3 3 50 108 0 0 0 00 108 0 0 0 00 96 0 0 0 00 96 0 0 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36

Chapter 19  677

CRITICAL THINKING PROBLEM 19.2 (continued) PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2014 2 Jan. 1 Cash 3 Mary Wells, Capital 4 To record investment of Wells 5 6 1 Ted Coe, Capital 7 Herschel Anderson, Capital 8 Mary Wells, Capital 9 To record bonus to new partner 10

Analyze:

POST. REF.

DEBIT

CREDIT

1 120 0 0 0 00 2 120 0 0 0 00 3 4 5 48 1 6 6 50 6 48 1 6 6 50 7 96 3 3 3 00 8 9 10

Coe owns 43.8% of the capital ($427,593.50 - 48,166.50 ÷ $865,333 = 0.438475).

678  Chapter 19

CRITICAL THINKING PROBLEM 19.2 (continued) GENERAL LEDGER ACCOUNT

DATE DESCRIPTION 2013 Jan. 1 Beginning balance Dec. 31 Salary allowances Dec. 31 Interest allowance 31 Share of balance of income 31 Withdrawals

ACCOUNT

ACCOUNT NO.

Ted Coe, Capital POST. REF.

DEBIT

CREDIT

299 6 0 0 00 407 6 0 0 00 437 5 6 0 00

98 0 3 3 50

535 5 9 3 50 427 5 9 3 50

108 0 0 0 00

POST. REF.

BALANCE DEBIT CREDIT

299 6 0 0 00 108 0 0 0 00 29 9 6 0 00

ACCOUNT NO.

Herschel Anderson, Capital

DATE DESCRIPTION 2013 Jan. 1 Beginning balance Dec. 31 Salary allowances 31 Interest allowance 31 Share of balance of income 31 Withdrawals

DEBIT

301

CREDIT

311

BALANCE DEBIT CREDIT

199 7 3 3 00 96 0 0 0 00 19 9 7 3 00

199 7 3 3 00 295 7 3 3 00 315 7 0 6 00

98 0 3 3 50

413 7 3 9 50 317 7 3 9 50

96 0 0 0 00

Chapter 19  679

CRITICAL THINKING PROBLEM 19.2 (continued)

Net Income for Year Allocation of net income Salary Allowance Interest Allowance Remainder equally to partners Totals

Coe 108 0 0 0 00 29 9 6 0 00 98 0 3 3 50 235 9 9 3 50

Anderson 96 0 0 0 00 19 9 7 3 00 98 0 3 3 50 214 0 0 6 50

450 0 0 0 00 Total 204 0 0 0 00 49 9 3 3 00 196 0 6 7 00 450 0 0 0 00

Anderson-Coe Professional Management Consultants Statement of Partners’ Equities Year Ended December 31, 2013 Capital Balances, January 1, 2013 Investment During Year Net Income for Year Totals Less Withdrawals During Year Capital Balances, December 31, 2013

680  Chapter 19

Coe Capital Anderson Capital Total Capital −0− −0− −0− 299 6 0 0 00 199 7 3 3 00 499 3 3 3 00 235 9 9 3 50 214 0 0 6 50 450 0 0 0 00 535 5 9 3 50 413 7 3 9 50 949 3 3 3 00 108 0 0 0 00 96 0 0 0 00 204 0 0 0 00 427 5 9 3 50 317 7 3 9 50 745 3 3 3 00

SOLUTIONS TO BUSINESS CONNECTIONS Managerial Focus: 1. Unlimited liability for the debts of the firm; potential for disagreements between partners; mutual agency. 2. A written agreement lessens the potential for disagreements. 3. General partners are personally liable for the debts of the partnership. Limited partners’ liability is limited to their partnership equity. 4. Consider skills, experience, time invested, amounts invested, goodwill. 5. A draw is the withdrawal of cash in anticipation of income. A salary allowance is a factor in the allocation of income or loss between the partners and must be specifically provided for in the partnership agreement. 6. Generally, assets and liabilities must be revalued and the withdrawing partner is entitled to the account balance after revaluation. Ethical Dilemma: Since Donald does not have the business expertise to run the business, Donald’s only option is to dissolve the partnership and go out of business. Donald is liable for all the taxes owed to the IRS as well as any state taxes that have been unpaid. Checking your future partner’s business and personal situations could have avoided this problem. To avoid this from happening, each partner should develop certain check points that would indicate the business is good or having problems. Trust but verify is always a good motto. Financial Statement Analysis: 1. 1.20% 2. $598,900,000 3. General partner: 73.8% Limited partners: 26.2% Analyse Online: Answers will vary depending on the annual report referenced. Team Work: Though the answers will vary, the important concept is that there should be a value placed on each talent the partner brings into the business. If one partner has technical knowledge that is required to make the business possible, a higher share of the income might be required. However, if it is a typical business then the partner having the day to day running should share in the net income, as well as the loss, at a higher ratio.

Chapter 19  681

SOLUTIONS TO BUSINESS CONNECTIONS (continued) Internet Connection: Advantages of a Partnership: 1) Partnerships are relatively easy to establish; however time should be invested in developing the partnership agreement, 2) With more than one owner, the ability to raise funds may be increased, 3) The profits from the business flow directly through to the partners’ personal tax returns, 4) Prospective employees may be attracted to the business if given the incentive to become a partner, 5) The business usually will benefit from partners who have complementary skills. Disadvantages of a Partnership: 1) Partners are jointly and individually liable for the actions of the other partners 2) Profits must be shared with others 3) Since decisions are shared, disagreements can occur 4) Some employee benefits are not deductible from business income on tax returns 5) The partnership may have a limited life; it may end upon the withdrawal or death of a partner. Types of Partnerships that should be considered, and tax forms of interest to partnerships, Federal Tax Forms for Partnerships.

682  Chapter 19

SOLUTIONS TO PRACTICE TEST Part A True-False 1. TRUE 2. TRUE 3. TRUE 4. FALSE 5. FALSE 6. TRUE 7. FALSE 8. TRUE 9. TRUE 10. TRUE 11. TRUE 12. TRUE 13. FALSE 14. TRUE 15. FALSE 16. TRUE 17. FALSE 18. FALSE Part B Matching 1. f 2. i 3. e 4. b 5. c 6. j 7. h 8. k 9. g 10. d 11. a Part C Completion 1. partnership agreement 2. limited 3. partnership agreement 4. continuity 5. partners 6. market values 7. liquidation 8. partner's drawing 9. capital 10. incoming

Chapter 19  683

CHAPTER 20 CORPORATIONS: FORMATION AND CAPITAL STOCK TRANSACTIONS Chapter Opener: Thinking Critically Along with the rights to participate in stockholder meetings and elect the board of directors, stockholders can vote on basic corporate policy issues. Fast Facts • ConAgra has 24,000 employees worldwide. • ConAgra sells nearly 13 million packages of food products every day. • From 2006 to 2010, ConAgra saved over $1 billion through supply chain initiatives focused on better management of inventory and materials, smarter transportation, and increased manufacturing efficiency. • In 2010, ConAgra piloted a line of ultra-convenient meals which generated double-digit growth in its retail category. Managerial Implications: Thinking Critically Answers will vary. A corporation is a legal entity subject to laws and regulations. Information can be obtained from a state’s Secretary of State office, Department of Corporations, and taxing authority; and from the IRS. Discussion Questions 1. Stated value for stock is much more flexible than par value. Par value is assigned in the charter and to change the par value, the charter must be amended. However, stated value is assigned by the directors and they can change the stated value to meet market conditions. 2. Subscription plans might attract investments by persons who do not have large enough sums of money available to pay for blocks of stock immediately. When the capital market is tight, a corporation may be willing to accept stock subscriptions in order to raise the funds it needs. When a new corporation is being formed, subscriptions are especially important because the corporation may not be ready to accept cash for a period after formation first occurs, yet the organizers must know who is willing to purchase stock and how many shares will be bought. 3. 4. 5. 6. 7.

Initially, the corporation’s organizers select an acting board of directors. After stock is sold, the stockholders elect the long-term directors. The minute book is a place to formally record all the decisions made at meetings of stockholders and meetings of the board of directors. As stocks are bought and sold, the transfer agent issues and cancels the stock certificates, makes entries in the capital stock ledger, and prepares lists of stockholders of record who are to receive dividends. Par value is the value assigned by the corporate charter to each share of stock for accounting and certain legal purposes. A corporation may issue no-par stock. Restricted agency means that a shareholder cannot act on behalf of the business whose stock they own merely because of the ownership relation.

684  Chapter 20

Discussion Questions (continued) 8. 9.

10. 11. 12.

13.

14. 15. 16. 17. 18.

19.

20.

21. 22. 23.

24.

The corporation’s officers and managers make day-to-day decisions. Stockholders elect directors. Directors make policies and appoint officers. Officers carry out policies and hire managers. Managers oversee and supervise operations. Other employees perform assigned tasks. A stock subscription is a contract in which an investor agrees to buy stock at a specified price, to pay for it in accordance with a fixed plan, and to receive the stock when payment has been completed. Organization costs are the costs incurred in getting the corporation organized and ready to do business. The registrar accounts for all of the stock issued by the corporation. The registrar receives from the transfer agent all the canceled certificates and all of the new certificates to be issued. The new certificates must be countersigned by the registrar before they are valid. Organization costs are normally charged to expense as they are incurred, primarily because if capitalized they would be an intangible asset with an unlimited life, subject to the impairment rules of GAAP. The value of organization costs would be very difficult to measure. This fact, plus the fact that the costs are relatively immaterial for most companies, leads to charging them to expense when incurred. For federal tax purposes, they are capitalized and amortized over a period of not less than 60 months. The control account for stockholders is Capital Stock—Common (or Common Stock). Participating preferred stock is preferred stock that not only receives the regular preferred dividend, but may share with common stock in further dividends. Cumulative preferred stock is that stock on which regular specified dividends must be paid in the current year and for prior years before any dividend can be paid on common stock. If there is no par value or stated value, the entire proceeds from issue of the stock should be credited to the Common Stock account. Convertible preferred stock is preferred stock that can be converted into common stock at a predetermined conversion rate after a specified date. The contract also may require conversion before a specified date. Common Stock Subscribed reflects the par value or stated value of the stock subscribed and is shown within the Shareholders’ Equity section of the balance sheet. Subscriptions Receivable—Common Stock is the amount owed to the corporation by subscribers and is shown as an asset—usually as a current asset—in the balance sheet. Almost all corporations are chartered by the state, though a few are chartered by the federal government. Application for the charter must be made to the appropriate state official, usually the Secretary of State. Bylaws are the guidelines for operating the business. If there is only one class of stock it is called “common stock.”. The major benefits are (a) a Subchapter S Corporation does not pay a federal income tax, but the entity is taxed in much the same way as a partnership, which means that taxable income is taxed to the individual owners and (b) the Subchapter S Corporation permits the owners to avoid personal liability for the debts of the corporate entity. Par value is specified in the charter. In order to change par value, it would be necessary to amend the charter. Stated value is assigned to no-par stock by the directors and can be changed by them.

Chapter 20  685

EXERCISE 20.1 $640,000 × 0.15 = $96,000 total dividend $96,000 ÷ 80,000 shares = $1.20 dividend per share $1.20/share × 250 shares = $300 to Sherrye White

EXERCISE 20.2 1. 2013 Dividend requirement for preferred stock = $400,000 (40,000 shares $10 per share) (Par value per share of preferred stock: $10 = $100 par x 10%) Dividends paid = $360,000 Preferred Stock: $360,000 ÷ 40,000 shares = $9.00 per preferred share Common shareholders will receive nothing. 2. 2014 Dividend requirement for preferred stock = $400,000 $400,000 ÷ 40,000 shares = $10.00 per preferred share Dividend on common stock: Total dividends paid = Preferred dividend requirement = Total dividend on common stock = $350,000 ÷ 70,000 shares = $5 per common share

$750,000 400,000 $350,000

EXERCISE 20.3 1. 2013 Dividend requirement for preferred stock = $1,200,000 (assuming no dividends in arrears) (100,000 shares × $80 par value × 0.15) Total dividends paid = $900,000 Dividend on preferred stock: Dividends on preferred stock, $1,200,000 ($80 par value × 0.15 = $12.00 per share × 100,000 shares). Dividends paid to preferred stock, $900,000, or $9.00 per share ($900,000 ÷ 100,000). Preferred dividends in arrears, $300,000 ($1,200,000 - $900,000) Common shareholders will receive nothing.

686  Chapter 20

EXERCISE 20.3 (continued) 2. 2014 Dividend requirement for preferred stock $1,500,000 = $1,200,000 + $300,000 dividends in arrears (100,000 shares x $80 par value per share x 0.15 = $1,200,000) Dividends paid = $1,800,000 Dividend on preferred stock: $1,500,000 ÷ 100,000 shares = $15.00 per share Dividend on common stock: Total dividends paid = $1,800,000 Dividends on preferred stock = 1,500,000 Dividends on common stock = $300,000 $300,000 ÷ 400,000 shares = $0.75 per share

EXERCISE 20.4 Common stock received = 480 shares (240 shares of preferred × 2)

EXERCISE 20.5 Preferred stock received = 2,100 shares ($42,000 ÷ $20 per share) Common stock received = 6,950 shares [($320,000 − $42,000) ÷ $40 per share]

EXERCISE 20.6 1. In most cases today, organization costs are charged to expense when they are incurred. It is difficult to evaluate organization costs and to determine the period that they will be of benefit. 2. The minimum period to amortize these costs for tax purposes is 60 months. The maximum is 40 years.

Chapter 20  687

EXERCISE 20.7 PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7

DATE DESCRIPTION 2013 Jan. 2 Cash Common Stock (25,000 shares x $15) Preferred Stock (4,000 shares x $90) Issuance of common stock at $15 per share and preferred stock at $90 per share

POST. REF.

DEBIT

CREDIT

735 0 0 0 00 375 0 0 0 00 360 0 0 0 00

1 2 3 4 5 6 7

EXERCISE 20.8 PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 Jan. 2 Cash 3 Common Stock (2,000 shares x $10) 4 Paid-in Capital in Excess of Par Value—Common Stock 5 Issuance of 2,000 shares of $10 par common stock 6 at $26 per share

POST. REF.

DEBIT

CREDIT

52 0 0 0 00 20 0 0 0 00 32 0 0 0 00

1 2 3 4 5 6

EXERCISE 20.9 PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 Jan. 2 Cash 3 Common Stock (5,200 shares x $40) 4 Paid-in Cap. in Exc. of Stated Value—Common Stock 5 Issuance of 5,200 shares of no-par common stock 6 at $48 per share (stated value, $40/share)

688  Chapter 20

POST. REF.

DEBIT

CREDIT

249 6 0 0 00 208 0 0 0 00 41 6 0 0 00

1 2 3 4 5 6

EXERCISE 20.10 PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 May 1 Subscriptions Receivable—Common 2 Common Stock Subscribed Paid-in Capital in Excess of Par Value—Common 3 4 Subscription from Angelina Paz to buy 5 600 shares of $1 par-value common 6 stock at $23 per share 7 8 1 Cash 9 Subscriptions Receivable—Common 10 Payment by Angelina Paz of one-half of 11 subscription price 12 13 June 1 Cash 14 Subscriptions Receivable—Common 15 Payment by Angelina Paz of balance 16 due on stock subscription 17 18 1 Common Stock Subscribed (600 shares) 19 Common Stock (600 shares) 20 Issuance of 600 shares of common stock 21 to Angelina Paz 22 23 24 25 26 27 28 29 30 31 32 33 34

POST. REF.

DEBIT 13 8 0 0 00

CREDIT

1 6 0 0 00 2 13 2 0 0 00 3 4 5 6 7 6 9 0 0 00 8 6 9 0 0 00 9 10 11 12 6 9 0 0 00 13 6 9 0 0 00 14 15 16 17 6 0 0 00 18 6 0 0 00 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34

Chapter 20  689

6,000 62,000

6,000 110,000

2014 2015

$38,000 24,000 $62,000

$4,000

$4,000 6,000 24,000

$4,000

$4,000 6,000 110,000

$19.00 12.00 $31.00

31.00

3.00

$2.00

$2.00 3.00 12.00

Preferred Stock Total Per Share

2013

2013 2014 2015

Year

Total Dividends

$48,000

48,000

−0−

$ −0−

$ −0− −0− 86,000

$1.20

1.20

−0−

$ −0−

$ −0− −0− 2.15

Common Stock Total Per Share

Analyze: $7,750 in total dividends should be paid to the stockholder for the fiscal year, 2015 (250 x $31.00)

Computation of 2015 dividend: Arrearage from 2013 & 2014 2015 Preferred dividend Totals

Case B All dividends to Preferred ($20,000 in arrears to Preferred) All dividends to Preferred ($38,000 in arrears to Preferred) 10% preference plus $38,000 in arrears to Preferred—balance to Common

Case A All dividends to Preferred All dividends to Preferred 10% to Pref.—bal. to Common

PROBLEM 20.1A

PROBLEM 20.2A PART I 1. $13,500 to preferred for dividends in arrears for 2011 and 2012 2011 dividend ($75,000 × 0.09) $6,750 2012 dividend ($75,000 × 0.09) 6,750 2013 dividend ($75,000 × 0.09) 6,750 2. Total shares to preferred stock $20,250 ÷ 1,500 shares = $13.50 per share 3. Remainder to common stock 3,750 ÷ 14,000 shares = $0.27 per share 4. Total dividend paid $24,000 5. None in arrears

PART II 1. same calculation as #1 in Part I for total dividends paid to preferred 2. $20,250 ÷1,500 shares = $13.50 per share 3. Total dividends paid $90,000 Less preferred stock dividend 20,250 Balance to common stock $69,750 4. $69,750 ÷ 14,000 shares = $4.98 per share 5. None in arrears

Analyze: $13,500 would be paid to the preferred stockholders ($6,750 × 2 years = $13,500).

Chapter 20  691

PROBLEM 20.3A PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

DATE DESCRIPTION 2013 Dec. 31 N & G Appliance Center, Inc. has been organized to sell appliances and operate an appliance repair service. It is authorized to issue 4,000 shares of $100 par-value, 10% preferred stock and 100,000 shares of no-par-value common stock ($20 stated value).

Analyze:

31 Cash Accounts Receivable Merchandise Inventory Parts Inventory Land Building Furniture and Equipment Allowance for Doubtful Accounts Accounts Payable Preferred Stock Common Stock Issued stock in payment of net assets of N & G Appliance Center: 1,000 shares of preferred stock at par ($100) and 52,500 shares of common stock at stated value ($20).

POST. REF.

DEBIT

CREDIT

12 2 4 0 00 54 4 0 0 00 450 6 0 0 00 39 2 0 0 00 80 0 0 0 00 477 8 0 0 00 89 5 0 0 00 2 7 4 0 00 51 0 0 0 00 100 0 0 0 00 1,050 0 0 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

52.5% (52,500 sh/100,000 sh) of authorized common stock has been issued as of 1/1/2014.

692  Chapter 20

PROBLEM 20.4A PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35

DATE DESCRIPTION 2013 Cash Jan. 2 Accounts Receivable Merchandise Inventory Allowance for Doubtful Accounts Accounts Payable Accrued Expenses Payable Common Stock Paid in capital in excess of par-common stock Issued 45,000 shares of $15 par-value common stock for net assets of Delta Art

POST. REF.

DEBIT 50 5 0 0 00 362 0 0 0 00 690 0 0 0 00

20 0 0 0 00

2 Cash Common Stock Issued 8,000 shares of common stock at par to Carol Kennedy for cash

120 0 0 0 00

2 Cash Preferred Stock Issued 4,000 shares of preferred stock at par to James Walker for cash

40 0 0 0 00

CREDIT

12 6 0 0 00 375 0 0 0 00 20 8 0 0 00 675 0 0 0 00 19 1 0 0 00

2 Cash Preferred Stock Issued 2,000 shares of preferred stock ($10 par value) to Harriet Denzel

20 0 0 0 00

120 0 0 0 00

40 0 0 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35

Chapter 20  693

PROBLEM 20.4A (continued) Denzel Corporation Balance Sheet January 2, 2013 Assets Current Assets Cash Accounts Receivable Less Allowance for Doubtful Accounts Merchandise Inventory Total Current Assets Total Assets Liabilities and Stockholders’ Equity Current Liabilities Accounts Payable Accrued Expenses Payable Total Current Liabilities Stockholders’ Equity Preferred Stock ($1.00 per share annual stated dividend, $10 par value, 400,000 shares authorized) (6,000 shares issued) Common Stock ($15 par value, 600,000 shares authorized) (53,000 shares issued) Paid in Capital in Excess of Par Value - Common Stock Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity

230 5 0 0 00 362 0 0 0 00 12 6 0 0 00

349 4 0 0 00 690 0 0 0 00 1,269 9 0 0 00 1,269 9 0 0 00

375 0 0 0 00 20 8 0 0 00 395 8 0 0 00

60 0 0 0 00 795 0 0 0 00 19 1 0 0 00 874 1 0 0 00 1,269 9 0 0 00

Analyze: The current ratio for the corporation is 3.21 to 1 ($1,269,900/$395,800).

694  Chapter 20

PROBLEM 20.5A PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37

DATE DESCRIPTION 2013 Mar. 1 Jaguar Corporation has been organized to operate a delivery service. It is authorized to issue 75,000 shares of no-par-value common stock with stated value of $100 per share, and 30,000 shares of $100 par value, noncumulative, nonparticipating, 8% preferred stock.

POST. REF.

DEBIT

1 Cash Common Stock Issued 400 shares of common stock at $100 per share to Jerri Harris

101 301

40 0 0 0 00

3 Cash Preferred Stock Issued 150 shares of preferred stock to Gloria Amos at $100 per share

101 311

15 0 0 0 00

5 Cash Common Stock Paid-in Capital in Excess of Stated Value—Common Issued 150 shares of common stock at $106 per share to Carolyn Reed

101 301 305

15 9 0 0 00

5 Subscriptions Receivable—Common Stock Common Stock Subscribed Paid-in Capital in Excess of Stated Value—Common Stock subscription from Joan Patterson for 200 shares of common stock at $105 per share

114 302 305

21 0 0 0 00

14 Subscriptions Receivable—Preferred Stock Preferred Stock Subscribed Paid-in Capital in Excess of Par Value—Preferred Stock subscription from Robert Tolliver for 50 shares of preferred stock at $108 a share

115 312 315

5 4 0 0 00

CREDIT

40 0 0 0 00

15 0 0 0 00

15 0 0 0 00 9 0 0 00

20 0 0 0 00 1 0 0 0 00

5 0 0 0 00 4 0 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37

Chapter 20  695

PROBLEM 20.5A (continued) PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 Mar. 20 Cash 3 Subscriptions Receivable—Common Stock 4 Payment of subscription installment from 5 Joan Patterson 6 7 29 Cash 8 Subscriptions Receivable—Preferred Stock 9 Payment of subscription installment from 10 Robert Tolliver 11 12 30 Cash 13 Subscriptions Receivable—Common Stock 14 Full payment of Joan Patterson’s subscription 15 16 30 Common Stock Subscribed 17 Common Stock 18 Issued 200 shares of common stock to 19 Joan Patterson 20 21 22 23 24 25 26 27 28

696  Chapter 20

POST. REF. 101 114

101 115

101 114

302 301

DEBIT

CREDIT

1 10 5 0 0 00 2 10 5 0 0 00 3 4 5 6 2 7 0 0 00 7 2 7 0 0 00 8 9 10 11 10 5 0 0 00 12 10 5 0 0 00 13 14 15 20 0 0 0 00 16 20 0 0 0 00 17 18 19 20 21 22 23 24 25 26 27 28

PROBLEM 20.5A (continued) GENERAL LEDGER ACCOUNT

DATE 2013 Mar. 1 3 5 20 29 30

ACCOUNT

DATE 2013 Mar. 10 20 30

ACCOUNT

DATE 2013 Mar. 14 29

ACCOUNT NO.

Cash

DESCRIPTION

POST. REF.

DEBIT

J1 J1 J1 J2 J2 J2

40 0 0 0 00 15 0 0 0 00 15 9 0 0 00 10 5 0 0 00 2 7 0 0 00 10 5 0 0 00

CREDIT

BALANCE DEBIT CREDIT 40 0 0 0 00 55 0 0 0 00 70 9 0 0 00 81 4 0 0 00 84 1 0 0 00 94 6 0 0 00

114

Subscriptions Receivable—Common Stock

DESCRIPTION

POST. REF. J1 J2 J2

DEBIT

CREDIT

21 0 0 0 00 10 5 0 0 00 10 5 0 0 00

POST. REF. J1 J2

DEBIT

BALANCE DEBIT CREDIT 21 0 0 0 00 10 5 0 0 00 − 0−

ACCOUNT NO.

Subscriptions Receivable—Preferred Stock

DESCRIPTION

101

115

CREDIT

BALANCE DEBIT CREDIT

2 7 0 0 00

5 4 0 0 00 2 7 0 0 00

5 4 0 0 00

Chapter 20  697

PROBLEM 20.5A (continued) GENERAL LEDGER ACCOUNT

DATE 2013 Mar. 1 5 30

ACCOUNT

DATE 2013 Mar. 5 30

ACCOUNT

DATE 2013 Mar. 5 5

ACCOUNT

DATE 2013 Mar. 3

ACCOUNT NO.

Common Stock

DESCRIPTION

POST. REF.

DEBIT

J1 J1 J2

CREDIT 40 0 0 0 00 15 0 0 0 00 20 0 0 0 00

DESCRIPTION

POST. REF. J1 J2

DEBIT

CREDIT 20 0 0 0 00

20 0 0 0 00

Paid-in Capital in Excess of Stated Value—Common

DESCRIPTION

POST. REF.

DEBIT

J1 J1

CREDIT 9 0 0 00 1 0 0 0 00

698  Chapter 20

40 0 0 0 00 55 0 0 0 00 75 0 0 0 00

POST. REF. J1

DEBIT

CREDIT 15 0 0 0 00

302

BALANCE DEBIT CREDIT 20 0 0 0 00 −0−

ACCOUNT NO.

305

BALANCE DEBIT CREDIT 9 0 0 00 1 9 0 0 00

ACCOUNT NO.

Preferred Stock

DESCRIPTION

BALANCE DEBIT CREDIT

ACCOUNT NO.

Common Stock Subscribed

301

311

BALANCE DEBIT CREDIT 15 0 0 0 00

PROBLEM 20.5A (continued) GENERAL LEDGER ACCOUNT Preferred Stock Subscribed

DATE 2013 Mar. 14

DESCRIPTION

ACCOUNT NO.

POST. REF.

DEBIT

CREDIT

DATE 2013 Mar. 14

DESCRIPTION

POST. REF. J1

BALANCE DEBIT CREDIT

5 0 0 0 00

ACCOUNT Paid-in Capital in Excess of Par Value—Preferred

DEBIT

CREDIT

312

5 0 0 0 00

ACCOUNT NO.

315

BALANCE DEBIT CREDIT

4 0 0 00

Jaguar Corporation Balance Sheet (Partial) March 31, 2013 Stockholders’ Equity Preferred Stock ($8%, $100 par value, noncumulative, nonparticipating, 30,000 shares authorized) At Par Value (150 shares issued) Subscribed (50 shares) Paid-in Capital in Excess of Par Value Common Stock ($100 stated value, 75,000 shares authorized) At Stated Value (750 shares issued) Paid-in Capital in Excess of Stated Value Total Stockholders’ Equity

Analyze:

15 0 0 0 00 5 0 0 0 00 4 0 0 00 75 0 0 0 00 1 9 0 0 00

20 4 0 0 00

76 9 0 0 00 97 3 0 0 00

Common stockholders represent 79.0% of the total equity.

Chapter 20  699

$64,000 96,000 480,000

2014 2015

$64,000 96,000 480,000

2013

2013 2014 2015

Year

Total Dividends

Analyze: The total dividends for Case B would be $14,400. 2013 (1,600 shares x $2) = $3,200 2014 (1,600 shares x $3) = $4,800 2015 (1,600 shares x $4) = $6,400 $14,400

Computation of 2015 dividend: In arrears from 2014 2015 Preferred dividend Totals

Case B All dividends to Preferred ($32,000 in arrears to Preferred) All dividends to Preferred ($32,000 in arrears to Preferred 5% preference plus $32,000 in arrears to Preferred—balance to Common

Case A All dividends to Preferred All dividends to Preferred 5% to Pref.—balance to Common

PROBLEM 20.1B

$32,000 96,000 $128,000

128,000

96,000

$64,000

$64,000 96,000 96,000

$1.00 3.00 $4.00

4.00

3.00

$2.00

$2.00 3.00 3.00

Preferred Stock Total Per Share

$352,000

352,000

−0−

$ −0−

$ −0− −0− 384,000

$8.80

8.80

−0−

$ −0−

$ −0− −0− 9.60

Common Stock Total Per Share

PROBLEM 20.2B PART I 1. All $168,000 to preferred for dividends in arrears 2012 dividend in arrears $192,000 = (24,000 shares x $100 par x 8%) 2. Remaining dividends in arrears $216,000 = $192,000 + ($192,000 - $168,000) $168,000 ÷ 24,000 shares = $7 per share 3. None available to common stockholders 4. None paid on common stock 5. Total dividends due for 2012, and 2013 Less amount paid in 2013 Arrearage to be carried forward to future years

$168,000

$384,000 168,000 $216,000

PART II 1. $384,000 to preferred stockholders: 2012 dividend in arrears ($2,400,000 × 0.08) 2013 dividends ($2,400,000 × 0.08) Total to be distributed to preferred stockholders 2. $384,000 ÷ 24,000 shares = $16 per share 3. Total dividends paid Less amount distributed to preferred stockholders Total to be distributed to common stockholders 4. $576,000 ÷ 120,000 shares = $4.80 per share 5. None. Preferred dividends paid up to date.

$192,000 192,000 $384,000 $960,000 384,000 $576,000

Analyze: The per-share amount paid to the preferred stockholders would be $15.00 ($360,000/24,000 shares).

Chapter 20  701

PROBLEM 20.3B PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

DATE DESCRIPTION 2013 Dec. 31 Toy Chest Corporation has been organized to sell toys. It is authorized to issue 2,000 shares of noncumulative and nonparticipating 12% preferred stock with a par value of $50 and 8,000 shares of no-par common stock ($25 stated value). 31 Cash Accounts Receivable Merchandise Inventory Furniture and Equipment Allowance for Doubtful Accounts Accounts Payable Preferred Stock Common Stock Issued stock for net assets of Creative Toys Nook: 500 shares of preferred stock at par value value of $50 per share; 4,920 shares of common stock at $25 stated value per share

POST. REF.

DEBIT

6 9 6 0 00 26 5 4 0 00 102 0 0 0 00 43 6 0 0 00

CREDIT 1 2 3 4 5 6 7 8 9 10 11 6 5 0 00 12 30 4 5 0 00 13 25 0 0 0 00 14 123 0 0 0 00 15 16 17 18 19 20

Analyze: The fundamental accounting equation for Toy Chest Corporation is Assets ($178,450) = Liabilities ($30,450) + Stockholders’ Equity ($148,000)

702  Chapter 20

PROBLEM 20.4B PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36

DATE DESCRIPTION 2013 June 5 Cash Accounts Receivable Merchandise Inventory Allowance for Doubtful Accounts Accounts Payable Accrued Expenses Payable Common Stock Issued 37,200 shares of common stock ($10 stated value) for net assets of Worldwide Travel Agency to Rosa Davis

POST. REF.

DEBIT

CREDIT

58 4 0 0 00 112 0 0 0 00 248 0 0 0 00 4 0 0 0 00 20 0 0 0 00 22 4 0 0 00 372 0 0 0 00

5 Cash Common Stock Issued 4,000 shares of common stock for cash, at stated value

40 0 0 0 00

5 Cash Preferred Stock Issued 1,200 shares of preferred stock for cash, at par

30 0 0 0 00

40 0 0 0 00

30 0 0 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36

Chapter 20  703

PROBLEM 20.4B (continued) Delta Travel Agency Balance Sheet June 5, 2013 Assets Current Assets Cash Accounts Receivable Less Allowance for Doubtful Accounts Merchandise Inventory Total Current Assets Total Assets Liabilities and Stockholders’ Equity Current Liabilities Accounts Payable Accrued Expenses Payable Total Current Liabilities Stockholders’ Equity Preferred Stock ($2 per-share dividend, $ 25 par value; 20,000 shares authorized, 1,200 shares issued at par) Common Stock (no-par value, stated value of $10; 300,000 shares authorized, 41,200 shares issued) Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity

128 4 0 0 00 112 0 0 0 00 4 0 0 0 00

108 0 0 0 00 248 0 0 0 00 484 4 0 0 00 484 4 0 0 00

20 0 0 0 00 22 4 0 0 00 42 4 0 0 00

30 0 0 0 00 412 0 0 0 00 442 0 0 0 00 484 4 0 0 00

Analyze: The total stockholders’ equity as of June 5, 2013 is $442,000.

704  Chapter 20

PROBLEM 20.5B PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37

DATE DESCRIPTION 2013 Jan. 2 Pet Palace Corporation has been organized to operate pet supply stores. It is authorized to issue 18,000 shares of $50 par-value, 8% preferred stock that is noncumulative and nonparticipating and 50,000 shares of $10 par-value common stock.

POST. REF.

DEBIT

CREDIT

3 Cash Common Stock Issued 3,000 shares of common stock at par for cash

101 301

30 0 0 0 00

3 Cash Preferred Stock Issued 1,500 shares of preferred stock at par for cash

101 311

75 0 0 0 00

10 Cash Common Stock Paid-in Capital in Excess of Par Value—Common Issued 200 shares of common stock at $14 per share

101 301 305

2 8 0 0 00

12 Subscriptions Receivable—Common Stock Common Stock Subscribed Paid-in Capital in Excess of Par Value—Common Subscription from Nora Barnett for 500 shares of common stock at $12 per share

114 302 305

6 0 0 0 00

14 Subscriptions Receivable—Preferred Stock Preferred Stock Subscribed Paid-in Capital in Excess of Par Value—Preferred Subscription from Sun Wu for 500 shares of preferred stock at $54 per share

115 312 315

27 0 0 0 00

30 0 0 0 00

75 0 0 0 00

2 0 0 0 00 8 0 0 00

5 0 0 0 00 1 0 0 0 00

25 0 0 0 00 2 0 0 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37

Chapter 20  705

PROBLEM 20.5B (continued) PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 Jan. 17 Cash 3 Subscriptions Receivable—Common Stock 4 Payment of 1/2 subscription installment 5 by Nora Barnett 6 7 24 Cash 8 Subscriptions Receivable—Preferred Stock 9 Payment of 1/2 subscription installment 10 by Sun Wu 11 12 27 Cash 13 Subscriptions Receivable—Common Stock 14 Payment in full of Nora Barnett’s subscription 15 16 27 Common Stock Subscribed 17 Common Stock 18 Issued common stock to Nora Barnett 19 20 21 22

706  Chapter 20

POST. REF.

DEBIT

101 114

3 0 0 0 00

101 115

13 5 0 0 00

101 114

3 0 0 0 00

302 301

5 0 0 0 00

CREDIT 1 2 3 0 0 0 00 3 4 5 6 7 13 5 0 0 00 8 9 10 11 12 3 0 0 0 00 13 14 15 16 5 0 0 0 00 17 18 19 20 21 22

PROBLEM 20.5B (continued) GENERAL LEDGER ACCOUNT

DATE 2013 Jan. 3 3 10 17 24 27

ACCOUNT

DATE 2013 Jan. 12 17 27

ACCOUNT

DATE 2013 Jan. 14 24

ACCOUNT NO.

Cash

DESCRIPTION

POST. REF.

DEBIT

J1 J1 J1 J2 J2 J2

30 0 0 0 00 75 0 0 0 00 2 8 0 0 00 3 0 0 0 00 13 5 0 0 00 3 0 0 0 00

CREDIT

BALANCE DEBIT CREDIT 30 0 0 0 00 105 0 0 0 00 107 8 0 0 00 110 8 0 0 00 124 3 0 0 00 127 3 0 0 00

114

Subscriptions Receivable—Common Stock

DESCRIPTION

POST. REF. J1 J2 J2

DEBIT

CREDIT

BALANCE DEBIT CREDIT

3 0 0 0 00 3 0 0 0 00

6 0 0 0 00 3 0 0 0 00 −0−

6 0 0 0 00

ACCOUNT NO.

Subscriptions Receivable—Preferred Stock

DESCRIPTION

POST. REF. J1 J2

DEBIT

101

115

CREDIT

BALANCE DEBIT CREDIT

13 5 0 0 00

27 0 0 0 00 13 5 0 0 00

27 0 0 0 00

Chapter 20  707

PROBLEM 20.5B (continued) GENERAL LEDGER ACCOUNT

DATE 2013 Jan. 3 10 27

ACCOUNT

DATE 2013 Jan. 12 27

ACCOUNT

DATE 2013 Jan. 10 12

ACCOUNT

DATE 2013 Jan. 3

ACCOUNT NO.

Common Stock

DESCRIPTION

POST. REF.

DEBIT

J1 J1 J2

CREDIT 30 0 0 0 00 2 0 0 0 00 5 0 0 0 00

DESCRIPTION

POST. REF. J1 J2

DEBIT

CREDIT 5 0 0 0 00

5 0 0 0 00

Paid-in Capital in Excess of Par Value—Common

DESCRIPTION

POST. REF.

DEBIT

J1 J1

CREDIT 8 0 0 00 1 0 0 0 00

708  Chapter 20

30 0 0 0 00 32 0 0 0 00 37 0 0 0 00

POST. REF. J1

DEBIT

CREDIT 75 0 0 0 00

302

BALANCE CREDIT DEBIT 5 0 0 0 00 −0−

ACCOUNT NO.

305

BALANCE DEBIT CREDIT 8 0 0 00 1 8 0 0 00

ACCOUNT NO.

Preferred Stock

DESCRIPTION

BALANCE CREDIT DEBIT

ACCOUNT NO.

Common Stock Subscribed

301

311

BALANCE DEBIT CREDIT 75 0 0 0 00

PROBLEM 20.5B (continued) GENERAL LEDGER ACCOUNT

DATE 2013 Jan. 14

ACCOUNT

DATE 2013 Jan. 14

ACCOUNT NO.

Preferred Stock Subscribed

DESCRIPTION

POST. REF.

DEBIT

CREDIT

DESCRIPTION

BALANCE DEBIT CREDIT

25 0 0 0 00

POST. REF.

DEBIT

25 0 0 0 00

ACCOUNT NO.

Paid-in Capital in Excess of Par Value—Preferred

CREDIT

312

315

BALANCE DEBIT CREDIT

2 0 0 0 00

Pet Palace Corporation Balance Sheet (Partial) January 31, 2013 Stockholders’ Equity Preferred Stock (8%, $50 par value, noncumulative, nonparticipating, 18,000 shares authorized) At Par Value (1,500 shares issued) Subscribed (500 shares) Paid-in Capital in Excess of Par Value

75 0 0 0 00 25 0 0 0 00 2 0 0 0 00

102 0 0 0 00

37 0 0 0 00 1 8 0 0 00

38 8 0 0 00

Common Stock ($10 par value, 50,000 shares authorized) At Par Value (3,700 shares issued) Paid-in Capital in Excess of Par Value Total Stockholders’ Equity

140 8 0 0 00

Analyze: 7.40% of common stock has been issued at January 27, 2013 (3,700 sh./50,000 sh.).

Chapter 20  709

CRITICAL THINKING PROBLEM 20.1 1. a. 10,108 shares ($252,700 ÷ $25 per share) b. 2,640 shares ($66,000 ÷ $25 per share) c. 1,000 shares ($40,000 ÷ $40 per share) d. 500 shares ($20,000 ÷ $40 per share) e. $27.17 per share ($346,300 ÷ 12,748 shares) Common Stock Common Stock Subscribed Paid-in Capital in Excess of Par Value Total paid for common stock

$252,700 66,000 27,600 $346,300

f. None. The preferred stock is noncumulative. If the preference dividend is not paid in a year, the preferred shareholders simply lose the dividends for that year. g. $35.45 per share ($93,600 ÷ 2,640 shares) Common Stock Subscribed Paid-in Capital in Excess of Par Value Total subscription price

$66,000 27,600 $93,600

h. Only the regular preference dividend of $4 per share would have to be paid on the preferred stock. The stock is noncumulative, so the dividend missed in the previous year would not have to be paid. The total preference dividend is $4,000 (1,000 shares x $4 per share). This ignores the preferred stock subscribed. If that stock is issued, the total shares of preferred stock would be 1,500 shares, so that the preference dividend to be paid would be $6,000 (1,500 shares × $4 per share).

710  Chapter 20

CRITICAL THINKING PROBLEM 20.1 (continued) 2.

Videos Unlimited, Inc. Balance Sheet September 1, 2013 Current Assets Cash Accounts Receivable Less Allowance for Doubtful Accounts

42 4 0 0 00 44 0 0 0 00 4 0 0 0 00

Subscriptions Receivable—Common Stock Subscriptions Receivable—Preferred Stock Merchandise Inventory

66 0 0 0 00 20 0 0 0 00 133 9 0 0 00

Total Current Assets Property, Plant, and Equipment Furniture and Fixtures Building

302 3 0 0 00 50 0 0 0 00 200 0 0 0 00

Total Property, Plant, and Equipment

250 0 0 0 00

Total Assets Liabilities and Stockholders' Equity Current Liabilities Accrued Expense Payable Accounts Payable Notes Payable

40 0 0 0 00

552 3 0 0 00

10 0 0 0 00 80 0 0 0 00 50 0 0 0 00

Total Current Liabilities Stockholders’ Equity Preferred Stock (10%, $40 par value, 10,000 shares authorized), At Par Value (1,000 shares issued) Subscribed (500 shares) Paid-in Capital in Excess of Par Value

40 0 0 0 00 20 0 0 0 00 6 0 0 0 00

66 0 0 0 00

Common Stock ($25 par value, 50,000 shares authorized) At Par Value (10,108 shares issued) Subscribed (2,640 shares) Paid-in Capital in Excess of Par Value

252 7 0 0 00 66 0 0 0 00 27 6 0 0 00

346 3 0 0 00

Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity

140 0 0 0 00

412 3 0 0 00 552 3 0 0 00

Analyze: The current ratio for the corporation as of September 1, 2013 is 2.16 to 1 ($302,300/$140,000).

Chapter 20  711

CRITICAL THINKING PROBLEM 20.2 1. Preferred dividends per share = $75 par value × 0.08 = $6 Total preferred dividends = $6 × 80,000 shares = $480,000 2. Number of common stock shares issued = $9,000,000 ÷ $5 stated value = 1,800,000 shares 3. Average price paid for preferred stock = ($6,000,000 + $320,000) ÷ 80,000 shares = $79 4. Average price paid for common stock = ($9,000,000 + $12,600,000) ÷ 1,800,000 shares = $12 5. Number of common shares outstanding = 1,800,000 shares (the number of shares issued) 6. Total dividends Less Preferred Stock Dividends Total Common Stock Dividends

$2,550,000 (480,000) $2,070,000

$2,070,000 ÷ 1,800,000 shares outstanding = $1.15 dividend per share

712  Chapter 20

SOLUTIONS TO BUSINESS CONNECTIONS Managerial Focus: 1. Personal liability, taxation, and transferability of stock. 2. Advantages: limited liability, free transferability, tax advantages. Disadvantages: regulation, funding. 3. Difficulty of sale of preferred stock, bond interest payments, dividends. 4. Apply for charter, organizers purchase stock, stockholders elect board of directors, board of directors selects officers. 5. Management must make sure that the corporation gets fair value for the stock that is issued. State laws generally prohibit the issuance of stock for overvalued assets. Asset values are also subject to audit by the Internal Revenue Service and other authorities. If the corporation seeks loans, it is likely that bankers or other prospective lenders will examine asset valuations. Assets must be properly valued so that subsequent profits and losses can be correctly measured. Ethical Dilemma: This action borders on unethical. Sally should not receive stock options if she has any control over the market value of the stock. The stock options should state the length of time for the stock to be held before selling. If no limitation is imposed on Sally’s stock option, it is not unethical for her to sell. Financial Statement Analysis: 1. 17.16% (1.716 billion ÷ 10 billion) 2. No journal entry is required when shares are authorized. However, a memorandum entry is made to record the details of the authorized capital stocks. 3. $414,200,000 (10,000,000,000 – 1,716,000,000 = 8,284,000,000 x $0.05) Analyze Online: Answers will vary depending on the annual report being referenced. Teamwork: Though the answers will vary there should be some standards. 100,000 shares of each is a good start to be authorized. A par value of 5 cents is a good starting par value. One-fourth of the share is a good IPO amount and $25 is a good conservative price per share. Internet Connection: Answers will vary depending on the annual report being referenced.

Chapter 20  713

SOLUTIONS TO PRACTICE TEST Part A True-False 1. FALSE 2. TRUE 3. TRUE 4. TRUE 5. FALSE 6. FALSE 7. FALSE 8. FALSE 9. FALSE 10. TRUE 11. FALSE 12. TRUE 13. FALSE 14. FALSE 15. FALSE 16. TRUE 17. FALSE 18. FALSE 19. TRUE Part B Completion 1. par value 2. preferred stock 3. stated value 4. charter 5. cumulative 6. capital stock transfer 7. premium 8. stock certificate 9. minute book 10. capital stock ledger 11. Subchapter S (or "S")

714  Chapter 20

CHAPTER 21 CORPORATE EARNINGS AND CAPITAL TRANSACTIONS Chapter Opener: Thinking Critically Financial factors might include income level and long-term obligations. Nonfinancial factors might include personal experience with the company or products. Fast Facts • •

The first McDonald’s hamburger stand was located in San Bernardino, CA. Ray Kroc convinced the McDonald brothers to expand their business and open several new restaurants so Kroc could sell more of the multi-mixer milkshake machines he was selling. Kroc decided to take matters into his own hands and opened his own McDonald’s restaurant in Des Plains, IL in 1955.

•

Glen Volkman, one of McDonald’s first customers in 1955, recalled ordering a cheeseburger, french fries, and shake for about 80 cents at the original McDonald’s in Des Plains.

• • •

Ronald McDonald made his first TV appearance in 1963 and was portrayed by Willard Scott. Total revenues for 2009 were $22.7 billion. The company is headquartered just outside Chicago, in Oak Brook, Il. where 2,800 employees provide a wide variety of support functions to more than 32,000 McDonald’s restaurants in 100 countries around the world.

Managerial Implications: Thinking Critically • Dividend policy, legality, and financial feasibility. Discussion Questions 1. Income tax expense is usually presented as a separate line on the income statement immediately below the line net income before tax. This amount is subtracted from net income before tax to arrive at net income. 2. Deferred income taxes arise because tax deductions or income items subject to tax are not reported in the same years for financial accounting and tax purposes. Thus, the tax paid in a year does not apply to the net income shown in the financial statements. The difference will be “made up” in later years. 3.

(a) the date on which the board of directors declares the dividend (date of declaration), (b) date on which owners to receive dividends are identified (date of record) and (c) date on which checks are issued (date of payment). Journal entries are made on date of declaration and date of payment.

A cash dividend reduces the cash account and no other asset or liability, thus reducing total stockholders’ equity. A stock dividend involves no assets or liabilities, but merely transfers the amount from Retained Earnings to Paid-in Capital, therefore, total stockholder’s equity is unchanged.

Retained Earnings is debited and an account such as Stock Dividend Distributable is credited for the par value of the stock and Paid in Capital in Excess of Par is credited for the excess of market value over par value. The amount involved is the estimated market value of the new shares. Common Stock Dividend Distributable is classified as part of stockholders’ equity. Extraordinary gains and losses are those that are unusual, nonrecurring, and of a material amount.

6. 7.

Chapter 21  715

Discussion Questions (continued) 8. 9.

10.

Extraordinary items are shown at the bottom of the income statement, following Income from Operations, After Income Taxes. A stock split has no effect on retained earnings. The number of shares is simply increased. If the stock has a par value or stated value per share, the per-share amount is reduced proportionately. A split of par-value stock would require charter revision. An appropriation is a part of retained earnings, but is not available for distribution to shareholders. The appropriation has no effect on total retained earnings.

11.

The appropriation probably will be transferred back to the Retained Earnings account by a debit to the appropriations account and a credit to Retained Earnings. However, the transfer requires official action.

12. 13. 14.

A debit to Land and a credit to Donated Capital for the fair market value. Treasury stock is reported at cost. It is deducted from the total of all other capital. All changes in the Retained Earnings account during the year are reported in the statement of retained earnings. The statement reconciles the beginning and ending balances of Retained Earnings. The Statement of Stockholders’ Equity provides an analysis reconciling the beginning and ending balances of each equity account.

15.

716  Chapter 21

EXERCISE 21.1 Tax for year =

94,400

$50,000 x 15% = 25,000 x 25% = 25,000 x 34% = 185,000 x 39% =

$7,500 6,250 8,500 72,150 Total: $94,400

EXERCISE 21.2 PAGE

GENERAL JOURNAL

DATE

DESCRIPTION Adjusting Entry

POST. REF.

1 2 2013 3 Dec. 31 Income Tax Expense 4 Income Tax Payable 5 Record estimated tax due 6

DEBIT

CREDIT

4 5 0 0 00 4 5 0 0 00

1 2 3 4 5 6

EXERCISE 21.3 a. Loss of $40,000. Debit Retained Earnings for $40,000, Credit Income Summary $40,000. b. Profit after taxes of $36,000. Debit Income Summary for $36,000 and Credit Retained Earnings for $36,000. c. Profit of $7,175. Debit Income Summary for $7,175 and Credit Retained Earnings for $7,175.

EXERCISE 21.4 PAGE

GENERAL JOURNAL

DATE

DESCRIPTION Closing Entry

POST. REF.

1 2 2013 3 Dec. 31 Retained Earnings 4 Income Summary 5 Close Income Summary 6

DEBIT

CREDIT

49 0 0 0 00 49 0 0 0 00

1 2 3 4 5 6

Chapter 21  717

EXERCISE 21.5 PAGE

GENERAL JOURNAL

DATE DESCRIPTION 2013 Oct. 15 Retained Earnings Dividends Payable—Common Declared dividend payable on November 15

POST. REF.

1 2 3 4 5 6 Nov. 15 Dividends Payable—Common 7 Cash 8 Paid dividend

DEBIT

CREDIT

150 0 0 0 00 150 0 0 0 00

1 2 3 4 5 6 7 8

EXERCISE 21.6 PAGE

GENERAL JOURNAL

DATE DESCRIPTION 2013 Aug. 13 Retained Earnings Common Stock Dividend Distributable Paid-in Capital in Excess of Par Value—Common Declared stock dividend distributable Sept. 15

POST. REF.

1 2 3 4 5 6 7 Sept. 15 Common Stock Dividend Distributable 8 Common Stock 9 Distribution of stock dividend

DEBIT

CREDIT

250 0 0 0 00 50 0 0 0 00 200 0 0 0 00

50 0 0 0 00 50 0 0 0 00

1 2 3 4 5 6 7 8 9

EXERCISE 21.7 PAGE

GENERAL JOURNAL

1 2 3 4 5

DATE DESCRIPTION 2013 Dec. 1 On this date the board of directors declared a 2-for-1 stock dividend. Stated value will be reduced to $6 per share. After issue, 200,000 shares of common stock will be outstanding.

718  Chapter 21

POST. REF.

DEBIT

CREDIT 1 2 3 4 5

EXERCISE 21.8 PAGE

GENERAL JOURNAL POST. REF. DATE DESCRIPTION 1 2013 2 Dec. 31 Retained Earnings 3 Retained Earnings Appropriated for Contingencies 4 Appropriation for contingency fund

DEBIT

CREDIT

1 100 0 0 0 00 2 100 0 0 0 00 3 4

EXERCISE 21.9 PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 Nov. 1 Retained Earnings Appropriated for Contingencies 3 Retained Earnings 4 Close appropriation account as ordered by 5 board of directors in November 1 meeting 6

POST. REF.

DEBIT

CREDIT

1 178 0 0 0 00 2 178 0 0 0 00 3 4 5 6

EXERCISE 21.10 PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 May 10 Land 3 Donated Capital 4 Appraised value of plant site donated by city 5

POST. REF.

DEBIT 250 0 0 0 00

CREDIT 1 2 250 0 0 0 00 3 4 5

Chapter 21  719

EXERCISE 21.11 PAGE

GENERAL JOURNAL

1 2 3 4 5

DATE DESCRIPTION 2013 Mar. 31 Treasury Stock—Preferred Cash Repurchased 10,000 shares of treasury stock

POST. REF.

DEBIT 123 0 0 0 00

CREDIT 1 2 123 0 0 0 00 3 4 5

EXERCISE 21.12 First Company Balance Sheet (Partial) December 31, 2013 Stockholders’ Equity Paid-in Capital Common Stock ($25 par, authorized 8,000 shares) Issued and Outstanding, 6,000 shares Paid-in Capital in Excess of Par Total Paid-in Capital Retained Earnings (deficit) Total Stockholders’ Equity

720  Chapter 21

150 0 0 0 00 8 0 0 0 00 158 0 0 0 00 (24 0 0 0 00) 134 0 0 0 00

PROBLEM 21.1A PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38

DATE DESCRIPTION 2013 Mar. 15 Income Tax Payable Income Tax Expense Cash Filed tax return and paid balance due

POST. REF.

DEBIT 3 6 0 0 00 1 6 5 0 00

April 15 Income Tax Expense Cash Quarterly income tax deposit

32 0 0 0 00

May

3 Retained Earnings Dividends Payable—Common Declared dividend of $0.25 per share on 40,000 shares, payable June 2 to holders of record May 20

10 0 0 0 00

June

2 Dividends Payable—Common Cash Paid dividend on common stock

10 0 0 0 00

15 Income Tax Expense Cash Quarterly income tax deposit

32 0 0 0 00

Sept. 15 Income Tax Expense Cash Quarterly income tax deposit

32 0 0 0 00

Nov.

2 Retained Earnings Dividends Payable—Common Declared dividend of $0.25 per share on 40,000 shares, payable December 2 to holders of record November 20

10 0 0 0 00

Dec.

2 Dividends Payable—Common Cash Paid dividend on common stock

10 0 0 0 00

CREDIT 1 2 3 5 2 5 0 00 4 5 6 7 32 0 0 0 00 8 9 10 11 10 0 0 0 00 12 13 14 15 16 17 10 0 0 0 00 18 19 20 21 32 0 0 0 00 22 23 24 25 32 0 0 0 00 26 27 28 29 10 0 0 0 00 30 31 32 33 34 35 10 0 0 0 00 36 37 38

Chapter 21  721

PROBLEM 21.1A (continued) PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10

DATE DESCRIPTION 2013 Dec. 15 Income Tax Expense Cash Quarterly income tax deposit

POST. REF.

DEBIT 32 0 0 0 00

31 Income Tax Expense Income Tax Payable Adjust income tax expense

9 4 0 00

CREDIT 1 2 32 0 0 0 00 3 4 5 6 9 4 0 00 7 8 9 10

Analyze: A dividend of $0.50 per share was paid to common stockholders in 2013.

722  Chapter 21

PROBLEM 21.2A Bruin Corporation Worksheet Year Ended December 31, 2013 ACCOUNT NAME

TRIAL BALANCE DEBIT CREDIT

1 Cash 46 5 7 0 00 2 Accounts Receivable 149 8 0 0 00 3 Allowance for Doubtful Accounts 2 0 0 0 00 4 Inventory 100 0 0 0 00 5 Land 100 0 0 0 00 6 Buildings 300 0 0 0 00 7 Accumulated Depreciation—Buildings 37 5 0 0 00 8 Equipment 250 0 0 0 00 9 Accumulated Depreciation—Equip. 25 0 0 0 00 10 Accounts Payable 105 2 2 0 00 11 Dividends Payable—Preferred 19 2 0 0 00 12 Dividends Payable—Common 21 6 0 0 00 13 Accrued Expenses Payable 14 Income Tax Payable 15 Preferred Stock, 12% 160 0 0 0 00 16 Paid-in Capital in Excess of Par Value 16 0 0 0 00 17 Common Stock 240 0 0 0 00 18 Retained Earnings 128 0 0 0 00 19 Sales (Net) 1,100 5 5 0 00 20 Purchases 600 0 0 0 00 21 Selling Expenses (Control) 162 8 0 0 00 22 23 24 General Expenses (Control) 76 7 0 0 00 25 26 27 Amortization of Organization Costs 28 Income Tax Expense 69 2 0 0 00 29 Income Summary 30 Totals 1,855 0 7 0 00 1,855 0 7 0 00 31 Net Income After Taxes 32 33 34 35

ADJUSTMENTS DEBIT CREDIT

(a)105 0 0 0 00 (a)100 0 0 0 00

(b) 12 5 0 0 00 (c) 25 0 0 0 00

(d) 8 0 0 0 00 (f) 6 5 00

(b) 10 (c) 17 (d) 6 (b) 2 (c) 8 (d) 2

0 0 0 00 0 0 0 00 0 0 0 00 5 0 0 00 0 0 0 00 0 0 0 00

(f) 6 5 00 (a)100 0 0 0 00 (a)105 0 0 0 00 250 5 6 5 00 250 5 6 5 00

Chapter 21  723

PROBLEM 21.2A (continued)

INCOME STATEMENT DEBIT CREDIT

BALANCE SHEET DEBIT CREDIT 46 5 7 0 00 149 8 0 0 00 2 0 0 0 00 105 0 0 0 00 100 0 0 0 00 300 0 0 0 00 50 0 0 0 00 250 0 0 0 00 50 0 0 0 00 105 2 2 0 00 19 2 0 0 00 21 6 0 0 00 8 0 0 0 00 6 5 00 160 0 0 0 00 16 0 0 0 00 240 0 0 0 00 128 0 0 0 00

1,100 5 5 0 00 600 0 0 0 00 195 8 0 0 00

89 2 0 0 00

69 2 6 5 00 100 0 0 0 00 1,054 2 6 5 00 151 2 8 5 00 1,205 5 5 0 00

724  Chapter 21

105 0 0 0 00 1,205 5 5 0 00

951 3 7 0 00

1,205 5 5 0 00

951 3 7 0 00

800 0 8 5 00 151 2 8 5 00 951 3 7 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35

PROBLEM 21.2A (continued) Bruin Corporation Income Statement Year Ended December 31, 2013 Sales (Net) Cost of Goods Sold: Inventory, January 1, 2013 Purchases Goods Available for Sale Less Inventory, December 31, 2013 Cost of Goods Sold Gross Profit on Sales Expenses Selling Expenses General Expenses Net Income Before Income Tax Income Tax Expense Net Income After Income Tax

1,100 5 5 0 00 100 0 0 0 00 600 0 0 0 00 700 0 0 0 00 105 0 0 0 00 595 0 0 0 00 505 5 5 0 00 195 8 0 0 00 89 2 0 0 00

220 5 5 0 00 69 2 6 5 00 151 2 8 5 00

Chapter 21  725

PROBLEM 21.2A (continued) Bruin Corporation Balance Sheet December 31, 2013 Assets Current Assets Cash Accounts Receivable Less Allowance for Doubtful Accounts Inventory Total Current Assets Property, Plant, and Equipment Land Buildings Less Accumulated Depreciation—Buildings Equipment Less Accumulated Depreciation—Equipment Total Property, Plant, and Equipment Total Assets

46 5 7 0 00 149 8 0 0 00 2 0 0 0 00 147 8 0 0 00 105 0 0 0 00 299 3 7 0 00 100 0 0 0 00 300 0 0 0 00 50 0 0 0 00 250 0 0 0 00 250 0 0 0 00 50 0 0 0 00 200 0 0 0 00 550 0 0 0 00 849 3 7 0 00

Liabilities and Stockholders’ Equity Current Liabilities Accounts Payable 105 2 2 0 00 Dividends Payable—Preferred 19 2 0 0 00 Dividends Payable—Common 21 6 0 0 00 Accrued Expenses Payable 8 0 0 0 00 Income Tax Payable 6 5 00 Total Current Liabilities 154 0 8 5 00 Stockholders’ Equity Paid-in Capital Preferred Stock (12%, $100 par value, 5,000 shares authorized) Issued and Outstanding, 1,600 shares 160 0 0 0 00 Paid-in Capital in Excess of Par Value 16 0 0 0 00 176 0 0 0 00 Common Stock ($10 par value, 200,000 shares authorized) Issued and Outstanding, 24,000 shares 240 0 0 0 00 Total Paid-in Capital 416 0 0 0 00

726  Chapter 21

PROBLEM 21.2A (continued) Bruin Corporation Balance Sheet (continued) December 31, 2013 Retained Earnings Balance, January 1, 2013 Add Net Income for Year Deductions: Dividends on Preferred Stock Dividends on Common Stock Total Retained Earnings, December 31, 2013 Total Stockholders’ Equity, December 31, 2013 Total Liabilities and Stockholders’ Equity

168 8 0 0 00 151 2 8 5 00 320 0 8 5 00 19 2 0 0 00 21 6 0 0 00

279 2 8 5 00 695 2 8 5 00 849 3 7 0 00

Chapter 21  727

PROBLEM 21.2A (continued) PAGE

GENERAL JOURNAL

DATE

DESCRIPTION Adjusting Entries

1 2 2013 (a) 3 Dec. 31 Income Summary 4 Inventory 5 6 31 Inventory 7 Income Summary 8 9 (b) 10 31 Selling Expenses (Control) 11 General Expenses (Control) 12 Accumulated Depreciation—Buildings 13 14 (c) 15 31 Selling Expenses (Control) 16 General Expenses (Control) 17 Accumulated Depreciation—Equipment 18 19 (d) 20 31 Selling Expenses (Control) 21 General Expenses (Control) 22 Accrued Expenses Payable 23 24 (e) 25 No Entry Required 26 27 (f) 28 31 Income Tax Expense 29 Income Tax Payable 30 31

728  Chapter 21

POST. REF.

DEBIT

CREDIT

100 0 0 0 00 100 0 0 0 00 105 0 0 0 00 105 0 0 0 00

10 0 0 0 00 2 5 0 0 00 12 5 0 0 00

17 0 0 0 00 8 0 0 0 00 25 0 0 0 00

6 0 0 0 00 2 0 0 0 00 8 0 0 0 00

6 5 00 6 5 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

PROBLEM 21.2A (continued) PAGE

GENERAL JOURNAL

DATE

DESCRIPTION Closing Entries

1 2 2013 3 Dec. 31 Sales (Net) 4 Income Summary 5 6 31 Income Summary 7 Purchases 8 Selling Expenses (Control) 9 General Expenses (Control) 10 Income Tax Expense 11 12 31 Income Summary 13 Retained Earnings 14 15

Analyze:

POST. REF.

DEBIT

CREDIT

1,100 5 5 0 00 1,100 5 5 0 00 954 2 6 5 00 600 0 0 0 00 195 8 0 0 00 89 2 0 0 00 69 2 6 5 00 151 2 8 5 00 151 2 8 5 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

The amount of net income before taxes is $220,550. The percentage of annual income before taxes spent on dividends was 18.5% ($19,200 + $21,600) / $220,550.

Chapter 21  729

PROBLEM 21.3A PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 June 15 Retained Earnings 3 Dividends Payable—Preferred 4 Declared 5% dividend on preferred stock, 5 payable July 15 to holders of record June 30 6 7 July 15 Dividends Payable—Preferred 8 Cash 9 Paid dividends on preferred 10 11 Dec. 15 Retained Earnings 12 Dividends Payable—Preferred 13 Declared 5% dividend on preferred stock, 14 payable Jan. 15, 2014, to holders of record 15 Dec. 31, 2013 16 17 15 Retained Earnings 18 Dividends Payable—Common 19 Declared $3 dividend per share on common 20 stock, payable Jan. 15, 2014, to holders of record 21 Dec. 31, 2013 22 23 15 Retained Earnings 24 Common Stock Dividend Distributable 25 Paid-in Capital in Excess of Par Value—Common 26 Declared 5% stock dividend, distributable 27 Jan. 15, 2014, to holders of record Dec. 31, 2013 28 29 31 Retained Earnings 30 Retained Earnings Appropriated for Contingencies 31 Set up appropriation 32 Closing Entry 33 34 31 Retained Earnings 35 Income Summary 36 Close Income Summary 37

730  Chapter 21

POST. REF. 381

DEBIT 3 0 0 0 00

3 0 0 0 00

381

3 0 0 0 00

381

30 0 0 0 00

381

15 0 0 0 00

381

50 0 0 0 00

381

15 0 0 0 00

CREDIT 1 2 3 0 0 0 00 3 4 5 6 7 3 0 0 0 00 8 9 10 11 3 0 0 0 00 12 13 14 15 16 17 30 0 0 0 00 18 19 20 21 22 23 10 0 0 0 00 24 5 0 0 0 00 25 26 27 28 29 50 0 0 0 00 30 31 32 33 34 15 0 0 0 00 35 36 37

PROBLEM 21.3A (continued) GENERAL LEDGER ACCOUNT

Retained Earnings

DATE DESCRIPTION 2013 Jan. 1 Balance June 15 Dec. 15 15 15 31 31

ACCOUNT NO. POST. REF. ✔ J6 J6 J6 J6 J6 J6

DEBIT

CREDIT

3 0 0 0 00 3 0 0 0 00 30 0 0 0 00 15 0 0 0 00 50 0 0 0 00 15 0 0 0 00

381

BALANCE DEBIT CREDIT 197 2 0 0 00 194 2 0 0 00 191 2 0 0 00 161 2 0 0 00 146 2 0 0 00 96 2 0 0 00 81 2 0 0 00

Chapter 21  731

PROBLEM 21.3A (continued) Solomon Corporation Statement of Retained Earnings December 31, 2013 Unappropriated Retained Earnings Balance, January 1, 2013 Deductions: Net Loss for year Cash Dividend on Common Stock Cash Dividend on Preferred Stock Stock Dividend on Common Stock Transfer to Appropriation for Contingencies Balance, Unappropriated Retained Earnings, Dec. 31, 2013 Appropriated Retained Earnings: Appropriated for Contingencies: Balance, January 1, 2013 Add Appropriation for the Year Balance, Retained Earnings Appropriated for Contingencies, December 31, 2013 Total Retained Earnings, December 31, 2013

197 2 0 0 00 15 0 0 0 00 30 0 0 0 00 6 0 0 0 00 15 0 0 0 00 50 0 0 0 00 116 0 0 0 00 81 2 0 0 00

─0─ 50 0 0 0 00 50 0 0 0 00 131 2 0 0 00

Analyze: The Unappropriated Retained Earnings account at December 31, 2013, would be $126,200 if no dividends had been declared on common stock ($81,200 + $30,000 + $15,000).

732  Chapter 21

PROBLEM 21.4A PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 Feb. 15 Treasury Stock—Preferred 3 Cash 4 Repurchased 4,000 shares of preferred stock 5 6 15 Retained Earnings 7 Retained Earnings Appropriated for Treasury Stock 8 Appropriated retained earnings for treasury 9 stock purchased 10 11 Mar. 4 On this date the board of directors declared a 2-for-1 12 stock split and reduced stated value of common to $25.00 13 per share. Total common outstanding shares will be 14 4,000 shares. 15 16 April 1 On this date 2,000 additional shares of common stock 17 were issued to common shareholders as declared by 18 directors on March 4. 19 20 June 17 Retained Earnings 21 Dividends Payable—Preferred 22 Declared dividend of 5% on preferred stock, 23 payable July 12 to holders of record June 30 24 25 July 12 Dividends Payable—Preferred 26 Cash 27 Payment of dividends on preferred 28 29 Sept. 25 Treasury Stock—Preferred 30 Cash 31 Purchased 500 shares of preferred stock 32 as treasury stock at $10 per share 33 34 25 Retained Earnings 35 Retained Earnings Appropriated for Treasury Stock 36 Appropriated retained earnings for treasury stock 37

POST. REF.

DEBIT

372

44 0 0 0 00

381 382

44 0 0 0 00

381

2 0 0 0 00

372

5 0 0 0 00

381 382

5 0 0 0 00

CREDIT 1 2 44 0 0 0 00 3 4 5 6 44 0 0 0 00 7 8 9 10 11 12 13 14 15 16 17 18 19 20 2 0 0 0 00 21 22 23 24 25 2 0 0 0 00 26 27 28 29 5 0 0 0 00 30 31 32 33 34 5 0 0 0 00 35 36 37

Chapter 21  733

PROBLEM 21.4A (continued) PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 Dec. 15 Retained Earnings 3 Dividends Payable—Preferred 4 Declared 5% dividend on preferred, payable 5 January 12 to holders of record December 30 6 7 15 Retained Earnings 8 Dividends Payable—Common 9 Declared $1 per share dividend on common, 10 payable January 12 to holders of record 11 December 30 12 13 15 Land 14 Donated Capital 15 Donation of land for building site 16 17 Closing Entry 18 31 Income Summary 19 Retained Earnings 20 Close Income Summary 21 22

734  Chapter 21

POST. REF. 381

381

371

381

DEBIT

CREDIT

1 2 1 7 5 0 00 3 4 5 6 4 0 0 0 00 7 4 0 0 0 00 8 9 10 11 12 150 0 0 0 00 13 150 0 0 0 00 14 15 16 17 70 0 0 0 00 18 70 0 0 0 00 19 20 21 22 1 7 5 0 00

PROBLEM 21.4A (continued) GENERAL LEDGER ACCOUNT 10% Preferred Stock, $10 Par

DATE DESCRIPTION 2013 Jan. 1 Balance

POST. REF.

DEBIT

ACCOUNT NO.

CREDIT

80 0 0 0 00

ACCOUNT Paid-in Capital in Excess of Par Value—Preferred

DATE 2013 Jan. 1 Balance

DEBIT

CREDIT

POST. DESCRIPTION REF.

BALANCE DEBIT CREDIT

DEBIT

ACCOUNT NO.

CREDIT

311

BALANCE DEBIT CREDIT 100 0 0 0 00

✔

POST. DESCRIPTION REF.

305

8 0 0 0 00

ACCOUNT Paid-in Capital in Excess of Stated Value—Common

DATE 2013 Jan. 1 Balance

ACCOUNT NO.

✔

ACCOUNT Common Stock, No-Par, Stated Value, $50

DATE 2013 Jan. 1 Balance

BALANCE DEBIT CREDIT

✔

POST. DESCRIPTION REF.

301

DEBIT

CREDIT

ACCOUNT NO.

315

BALANCE DEBIT CREDIT

✔

4 0 0 0 00

Chapter 21  735

PROBLEM 21.4A (continued) ACCOUNT Donated Capital

DATE 2013 Dec. 15

ACCOUNT NO.

POST. DESCRIPTION REF.

DEBIT

CREDIT

DATE 2013 Feb. 15 Sept. 25

POST. DESCRIPTION REF. J1 J1

DEBIT

CREDIT

44 0 0 0 00 5 0 0 0 00

BALANCE DEBIT CREDIT 44 0 0 0 00 49 0 0 0 00

✔ J1 J1 J1 J2 J2 J2

POST. REF. J1 J1

381

BALANCE DEBIT

CREDIT

DEBIT

70 0 0 0 00

DEBIT

CREDIT 44 0 0 0 00 5 0 0 0 00

CREDIT 130 0 0 0 00 86 0 0 0 00 84 0 0 0 00 79 0 0 0 00 77 2 5 0 00 73 2 5 0 00 143 2 5 0 00

44 0 0 0 00 2 0 0 0 00 5 0 0 0 00 1 7 5 0 00 4 0 0 0 00

ACCOUNT Retained Earnings Appropriated for Treasury Stock

736  Chapter 21

372

ACCOUNT NO.

POST. DESCRIPTION REF.

DATE DESCRIPTION 2013 Feb. 15 Sept. 25

150 0 0 0 00

ACCOUNT NO.

ACCOUNT Retained Earnings

DATE 2013 Jan. 1 Balance Feb. 15 June 17 Sept. 25 Dec. 15 Dec. 15 Dec. 31

BALANCE DEBIT CREDIT

150 0 0 0 00

ACCOUNT Treasury Stock—Preferred

371

ACCOUNT NO.

382

BALANCE DEBIT CREDIT 44 0 0 0 00 49 0 0 0 00

PROBLEM 21.4A (continued) Willy Corporation Balance Sheet (Partial) December 31, 2013 Stockholders’ Equity Paid-in Capital Preferred Stock (10% cumulative, $10 par value, 200,000 shares authorized) Issued 8,000 shares (of which 4,500 shares are held as treasury stock) 80 0 0 0 00 Paid-in Capital in Excess of Par Value—Preferred 8 0 0 0 00 88 0 0 0 00 Common Stock (no-par, $25 stated value, 200,000 shares authorized) Issued and Outstanding, 4,000 shares 100 0 0 0 00 Paid-in Capital in Excess of Stated Value 4 0 0 0 00 104 0 0 0 00 Donated Capital 150 0 0 0 00 Total Paid-in Capital 342 0 0 0 00 Retained Earnings Appropriated for Treasury Stock 49 0 0 0 00 Unappropriated 143 2 5 0 00 Total Retained Earnings 192 2 5 0 00 534 2 5 0 00 Deduct Treasury Stock—Preferred 4,500 shares 49 0 0 0 00 Total Stockholders’ Equity 485 2 5 0 00

Analyze: The total stockholders’ equity on December 31, 2013, would be $530,125 ($485,250 + $49,000 - $4,125).

Chapter 21  737

PROBLEM 21.1B PAGE

GENERAL JOURNAL POST. REF. DATE DESCRIPTION 2013 Mar. 15 Income Tax Payable Income Tax Expense Cash Filed tax return and paid balance due for 2012

1 2 3 4 5 6 7 April 15 Income Tax Expense 8 Cash 9 Quarterly income tax deposit 10 11 May 30 Retained Earnings 12 Dividends Payable—Common 13 Declared dividend of $0.10 per share on 14 50,000 shares, payable June 30 to holders 15 of record June 15 16 17 June 15 Income Tax Expense 18 Cash 19 Quarterly income tax deposit 20 21 30 Dividends Payable—Common 22 Cash 23 Paid dividend on common stock 24 25 Sept. 15 Income Tax Expense 26 Cash 27 Quarterly income tax deposit 28 29 Oct. 30 Retained Earnings 30 Dividends Payable—Common 31 Declared dividend of $0.10 per share on 32 50,000 shares, payable December 1 to 33 holders of record November 15 34 35 Dec. 1 Dividends Payable—Common 36 Cash 37 Paid dividend on common stock

738  Chapter 21

DEBIT 4 0 0 0 00 1 0 0 0 00

45 0 0 0 00

5 0 0 0 00

45 0 0 0 00

5 0 0 0 00

45 0 0 0 00

5 0 0 0 00

CREDIT 1 2 3 5 0 0 0 00 4 5 6 7 45 0 0 0 00 8 9 10 11 5 0 0 0 00 12 13 14 15 16 17 45 0 0 0 00 18 19 20 21 5 0 0 0 00 22 23 24 25 45 0 0 0 00 26 27 28 29 5 0 0 0 00 30 31 32 33 34 35 5 0 0 0 00 36 37

PROBLEM 21.1B (continued) PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10

DATE DESCRIPTION 2013 Dec. 15 Income Tax Expense Cash Quarterly income tax deposit

POST. REF.

31 Income Tax Receivable Income Tax Expense Adjust income tax expense

DEBIT 45 0 0 0 00

5 0 0 0 00

CREDIT 1 2 45 0 0 0 00 3 4 5 6 5 0 0 0 00 7 8 9 10

Analyze: The Dividends Payable account would be $5,000.

Chapter 21  739

PROBLEM 21.2B Pacific Corporation Worksheet Year Ended December 31, 2013 TRIAL BALANCE ADJUSTMENTS DEBIT CREDIT DEBIT CREDIT ACCOUNT NAME 1 Cash 40 0 0 0 00 2 Accounts Receivable 52 8 0 0 00 3 Allowance for Doubtful Accounts 7 0 0 00 (b) 6 0 0 00 4 Merchandise Inventory 74 9 2 0 00 (a)78 0 0 0 00 (a)74 9 2 0 00 5 Land 60 0 0 0 00 6 Buildings 88 0 0 0 00 7 Accumulated Depreciation—Buildings 8 0 0 0 00 (c) 4 0 0 0 00 8 Equipment 78 0 0 0 00 9 Accumulated Depreciation—Equipment 12 0 0 0 00 (d) 6 0 0 0 00 10 Accounts Payable 31 4 5 0 00 11 Dividends Payable—Preferred 2 4 0 0 00 12 Accrued Expenses Payable (e) 3 8 0 0 00 13 Income Tax Payable (f) 2 4 0 1 00 14 Preferred Stock, 10% 80 0 0 0 00 15 Paid-in Cap. in Excess of Par Value—Pref. 6 0 0 0 00 16 Common Stock 80 0 0 0 00 17 Retained Earnings 89 1 7 0 00 18 Sales (Net) 445 0 0 0 00 19 Purchases 220 0 0 0 00 20 Selling Expenses Control 85 0 0 0 00 (b) 6 0 0 00 21 (c) 3 6 0 0 00 22 (d) 2 0 0 0 00 23 (e) 1 2 0 0 00 24 General Expenses Control 40 0 0 0 00 (c) 4 0 0 00 25 (d) 4 0 0 0 00 26 (e) 2 6 0 0 00 27 Income Tax Expense 16 0 0 0 00 (f) 2 4 0 1 00 28 Income Summary (a) 74 9 2 0 00 (a)78 0 0 0 00 29 Totals 754 7 2 0 00 754 7 2 0 00 169 7 2 1 00 169 7 2 1 00 30 Net Income After Taxes 31 32 33

740  Chapter 21

PROBLEM 21.2B (continued)

INCOME STATEMENT DEBIT CREDIT

BALANCE SHEET DEBIT CREDIT 40 0 0 0 00 52 8 0 0 00 1 3 0 0 00 78 0 0 0 00 60 0 0 0 00 88 0 0 0 00 12 0 0 0 00 78 0 0 0 00 18 0 0 0 00 31 4 5 0 00 2 4 0 0 00 3 8 0 0 00 2 4 0 1 00 80 0 0 0 00 6 0 0 0 00 80 0 0 0 00 89 1 7 0 00

445 0 0 0 00 220 0 0 0 00 92 4 0 0 00

47 0 0 0 00

18 4 0 1 00 74 9 2 0 00

78 0 0 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

452 7 2 1 00 70 2 7 9 00

523 0 0 0 00

396 8 0 0 00

326 5 2 1 00 29 70 2 7 9 00 30

523 0 0 0 00

396 8 0 0 00

396 8 0 0 00 31 32 33

Chapter 21  741

PROBLEM 21.2B (continued) Pacific Corporation Income Statement Year Ended December 31, 2013 Sales (Net) Cost of Goods Sold: Merchandise Inventory, January 1, 2013 Purchases Goods Available for Sale Less Merchandise Inventory, December 31, 2013 Cost of Goods Sold Gross Profit on Sales Expenses Selling Expenses General Expenses Total Expenses Net Income Before Income Tax Income Tax Expense Net Income After Income Tax

742  Chapter 21

445 0 0 0 00 74 9 2 0 00 220 0 0 0 00 294 9 2 0 00 78 0 0 0 00 216 9 2 0 00 228 0 8 0 00 92 4 0 0 00 47 0 0 0 00 139 4 0 0 00 88 6 8 0 00 18 4 0 1 00 70 2 7 9 00

PROBLEM 21.2B (continued) Pacific Corporation Balance Sheet December 31, 2013 Assets Current Assets Cash Accounts Receivable Less Allowance for Doubtful Accounts Merchandise Inventory Total Current Assets Property, Plant, and Equipment Land Buildings Less Accumulated Depreciation—Buildings Equipment Less Accumulated Depreciation—Equipment Total Property, Plant, and Equipment Total Assets Liabilities and Stockholders’ Equity Current Liabilities Accounts Payable Dividends Payable—Preferred Accrued Expenses Payable Income Tax Payable Total Current Liabilities Stockholders’ Equity Paid-in Capital Preferred Stock (10%, $100 par value, 10,000 shares authorized) Issued and Outstanding, 800 shares Paid-in Capital in Excess of Par Value Common Stock (no-par, stated value $100, 10,000 shares authorized) Issued and Outstanding, 800 shares Total Paid-in Capital

40 0 0 0 00 52 8 0 0 00 1 3 0 0 00

51 5 0 0 00 78 0 0 0 00 169 5 0 0 00 60 0 0 0 00

88 0 0 0 00 12 0 0 0 00 78 0 0 0 00 18 0 0 0 00

76 0 0 0 00 60 0 0 0 00 196 0 0 0 00 365 5 0 0 00

31 4 5 0 00 2 4 0 0 00 3 8 0 0 00 2 4 0 1 00 40 0 5 1 00

80 0 0 0 00 6 0 0 0 00

86 0 0 0 00

80 0 0 0 00 166 0 0 0 00

Chapter 21  743

PROBLEM 21.2B (continued) Pacific Corporation Balance Sheet (continued) December 31, 2013 Retained Earnings Balance, January 1, 2013 Add Net Income for Year

97 1 7 0 00 70 2 7 9 00 167 4 4 9 00

Deductions: Dividends on Preferred Stock Total Retained Earnings, December 31, 2013 Total Stockholders’ Equity, December 31, 2013 Total Liabilities and Stockholders’ Equity

744  Chapter 21

8 0 0 0 00 159 4 4 9 00 325 4 4 9 00 365 5 0 0 00

PROBLEM 21.2B (continued) PAGE

GENERAL JOURNAL

DATE

DESCRIPTION Adjusting Entries

POST. REF.

1 2 2013 (a) 3 Dec. 31 Income Summary 4 Inventory 5 6 31 Inventory 7 Income Summary 8 9 (b) 10 31 Selling Expenses Control 11 Allowance for Doubtful Accounts 12 13 (c) 14 31 Selling Expenses Control 15 General Expenses Control 16 Accumulated Depreciation—Buildings 17 18 (d) 19 31 Selling Expenses Control 20 General Expenses Control 21 Accumulated Depreciation—Equipment 22 23 (e) 24 31 Selling Expenses Control 25 General Expenses Control 26 Accrued Expenses Payable 27 28 (f) 29 31 Income Tax Expense 30 Income Tax Payable 31 32

DEBIT

74 9 2 0 00

78 0 0 0 00

6 0 0 00

3 6 0 0 00 4 0 0 00

2 0 0 0 00 4 0 0 0 00

1 2 0 0 00 2 6 0 0 00

2 4 0 1 00

CREDIT 1 2 3 74 9 2 0 00 4 5 6 78 0 0 0 00 7 8 9 10 6 0 0 00 11 12 13 14 15 4 0 0 0 00 16 17 18 19 20 6 0 0 0 00 21 22 23 24 25 3 8 0 0 00 26 27 28 29 2 4 0 1 00 30 31 32

Chapter 21  745

PROBLEM 21.2B (continued) PAGE

GENERAL JOURNAL

DATE

DESCRIPTION Closing Entries

POST. REF.

DEBIT

445 0 0 0 00

377 8 0 1 00

70 2 7 9 00

CREDIT 1 2 3 445 0 0 0 00 4 5 6 220 0 0 0 00 7 92 4 0 0 00 8 47 0 0 0 00 9 18 4 0 1 00 10 11 12 70 2 7 9 00 13 14 15

Analyze: 9.0% ($8,000 / $88,680 = 0.0902) was spent on dividends to stockholders.

746  Chapter 21

PROBLEM 21.3B PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37

DATE DESCRIPTION 2013 June 15 Retained Earnings Dividends Payable—Preferred Dividends Payable—Common Declared 5% dividend on preferred and $1.00 per share on common, payable July 15 to holders of record July 1

POST. REF. 381

DEBIT

1 2 5 0 00 5 0 0 0 00

Sept. 15 Retained Earnings 381 Common Stock Dividend Distributable Paid-in Capital in Excess of Stated Value—Common Declared 5% stock dividend; distributable October 12 to holders of record October 1

7 5 0 0 00

Oct. 12 Common Stock Dividend Distributable Common Stock Issued stock dividend

381

6 2 5 0 00

Dec. 15 Retained Earnings Dividends Payable—Preferred Dividends Payable—Common Declared 5% dividend on preferred and $0.50 per share on common, payable Jan. 15 to holders of record Dec. 31

381

6 2 5 0 00

6 2 5 0 00 1 2 5 0 00

6 2 5 0 00

3 8 7 5 00 1 2 5 0 00 2 6 2 5 00

15 Retained Earnings 381 Retained Earnings Appropriated for Equip. Acquisition Set up appropriation account Closing Entry 31 Retained Earnings Income Summary

CREDIT

6 2 5 0 00

July 15 Dividends Payable—Preferred Dividends Payable—Common Cash Paid dividends on preferred

381

5 0 0 0 00 5 0 0 0 00

6 0 0 0 00 6 0 0 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37

Chapter 21  747

PROBLEM 21.3B (continued) GENERAL LEDGER ACCOUNT Retained Earnings

DESCRIPTION DATE 2013 Jan. 1 Balance June 15 Sept. 15 Dec. 15 15 31

748  Chapter 21

ACCOUNT NO. POST. REF. ✔ J6 J6 J6 J6 J6

DEBIT

6 2 5 0 00 7 5 0 0 00 3 8 7 5 00 5 0 0 0 00 6 0 0 0 00

CREDIT

381

BALANCE DEBIT CREDIT 43 36 29 25 20 14

0 0 0 00 7 5 0 00 2 5 0 00 3 7 5 00 3 7 5 00 3 7 5 00

PROBLEM 21.3B (continued) Toy Hut Corporation Statement of Retained Earnings December 31, 2013 Unappropriated Retained Earnings Balance, January 1, 2013 Deductions: Net Loss for 2013 Cash Dividend on Common Stock Cash Dividend on Preferred Stock Stock Dividend on Common Stock Transfer to Appropriation for Equipment Acquisition Balance, Unappropriated Retained Earnings, Dec. 31, 2013

43 0 0 0 00 6 0 0 0 00 7 6 2 5 00 2 5 0 0 00 7 5 0 0 00 5 0 0 0 00

Appropriated Retained Earnings: Appropriated for Equipment Acquisition: Balance, January 1, 2013 Add Appropriation for the Year Balance, Retained Earnings Appropriated for Equipment Acquisition, December 31, 2013 Total Retained Earnings, December 31, 2013

28 6 2 5 00 14 3 7 5 00

─0─ 5 0 0 0 00 5 0 0 0 00 19 3 7 5 00

Analyze: The Dividends Payable—Preferred account should be $1,250.

Chapter 21  749

PROBLEM 21.4B PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 Feb. 1 Treasury Stock—Preferred 3 Cash 4 Repurchased 100 shares of preferred at 5 $55 per share 6 7 1 Retained Earnings 8 Retained Earnings Appropriated for Treasury Stock 9 Appropriated retained earnings for treasury 10 stock purchased 11 12 Mar. 1 On this date the board of directors declared a 2-for-1 13 stock split and reduced stated value of common to $12.50 14 per share. Total outstanding shares will be 7,200 shares. 15 16 April 1 On this date 3,600 additional shares of common stock 17 were issued to common shareholders as declared by 18 directors on March 1. 19 20 June 20 Retained Earnings 21 Dividends Payable—Preferred 22 Declared dividend of 5% on preferred stock, 23 payable July 10 to holders of record July 1 24 25 July 10 Dividends Payable—Preferred 26 Cash 27 Payment of dividends on preferred 28 29 Nov. 10 Treasury Stock—Preferred 30 Cash 31 Purchased 200 shares of preferred stock 32 as treasury stock at $53 per share 33 34 Nov. 10 Retained Earnings 35 Retained Earnings Appropriated for Treasury Stock 36 Appropriated retained earnings for treasury 37 stock purchased

750  Chapter 21

POST. REF. 372

381 382

381

372

381 382

DEBIT

CREDIT

1 2 5 5 0 0 00 3 4 5 6 5 5 0 0 00 7 5 5 0 0 00 8 9 10 11 12 13 14 15 16 17 18 19 4 7 5 0 00 20 4 7 5 0 00 21 22 23 24 4 7 5 0 00 25 4 7 5 0 00 26 27 28 10 6 0 0 00 29 10 6 0 0 00 30 31 32 33 10 6 0 0 00 34 10 6 0 0 00 35 36 37 5 5 0 0 00

PROBLEM 21.4B (continued) GENERAL JOURNAL

PAGE

POST. REF. DATE DESCRIPTION DEBIT CREDIT 1 2013 1 2 Dec. 17 Retained Earnings 381 4 2 5 0 00 2 3 Dividends Payable—Preferred 4 2 5 0 00 3 4 Declared 5% dividend on preferred stock, payable 4 5 January 8 to holders of record December 28 5 6 6 7 17 Retained Earnings 381 7 2 0 0 00 7 8 Dividends Payable—Common 7 2 0 0 00 8 9 Declared $1 per share dividend on common stock, 9 10 payable January 8 to holders of record 10 11 December 28 11 12 12 13 15 Land 75 0 0 0 00 13 14 Donated Capital 371 75 0 0 0 00 14 15 Donation of land for building site 15 16 16 Closing Entry 17 17 18 31 Income Summary 45 0 0 0 00 18 19 Retained Earnings 381 45 0 0 0 00 19 20 Close Income Summary 20 21 21 22 22

Chapter 21  751

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PROBLEM 21.4B (continued) GENERAL LEDGER ACCOUNT 10% Preferred Stock, $50 Par

DATE DESCRIPTION 2013 Jan. 1 Balance

POST. REF.

ACCOUNT NO.

DEBIT

CREDIT

100 0 0 0 00

POST. REF.

DEBIT

CREDIT

ACCOUNT NO.

3 5 0 0 00

POST. REF.

DEBIT

ACCOUNT NO.

CREDIT

90 0 0 0 00

✔

752  Chapter 21

POST. REF. ✔

311

BALANCE DEBIT CREDIT

ACCOUNT Paid-in Capital in Excess of Stated Value-Common Stock ACCOUNT NO.

DATE DESCRIPTION 2013 Jan. 1 Balance

305

BALANCE DEBIT CREDIT

✔

ACCOUNT Common Stock, No-Par, Stated Value, $25

DATE DESCRIPTION 2013 Jan. 1 Balance

BALANCE DEBIT CREDIT

✔

ACCOUNT Paid-in Capital in Excess of Par Value-Preferred

DATE DESCRIPTION 2013 Jan. 1 Balance

301

DEBIT

CREDIT

315

BALANCE DEBIT CREDIT 3 0 0 0 00

PROBLEM 21.4B (continued) ACCOUNT Donated Capital

DATE 2013 Dec. 24

DESCRIPTION

ACCOUNT NO. POST. REF.

DEBIT

CREDIT

DATE 2013 Feb. 1 Nov. 10

DESCRIPTION

POST. REF.

DEBIT

J1 J1

5 5 0 0 00 10 6 0 0 00

CREDIT

DESCRIPTION

BALANCE DEBIT CREDIT

ACCOUNT NO. POST. REF. ✔ J1 J1 J1 J2 J2 J2

DEBIT

POST. REF.

CREDIT

J1 J1

165 4 5 0 00 159 9 5 0 00 155 2 0 0 00 144 6 0 0 00 140 3 5 0 00 133 1 5 0 00 178 1 5 0 00

45 0 0 0 00

CREDIT 5 5 0 0 00 10 6 0 0 00

381

BALANCE DEBIT CREDIT

5 5 0 0 00 4 7 5 0 00 10 6 0 0 00 4 2 5 0 00 7 2 0 0 00

DEBIT

372

5 5 0 0 00 16 1 0 0 00

ACCOUNT Retained Earnings Appropriated for Treasury Stock

DATE 2013 Feb. 1 Nov. 10

75 0 0 0 00

ACCOUNT NO.

ACCOUNT Retained Earnings

DATE DESCRIPTION 2013 Jan. 1 Balance Feb. 1 June 20 Nov. 10 Dec. 17 Dec. 17 Dec. 31

BALANCE DEBIT CREDIT

75 0 0 0 00

ACCOUNT Treasury Stock—Preferred

371

ACCOUNT NO.

382

BALANCE DEBIT CREDIT 5 5 0 0 00 16 1 0 0 00

Chapter 21  753

PROBLEM 21.4B (continued) Houston Corporation Balance Sheet (Partial) December 31, 2013 Stockholders’ Equity Paid-in Capital Preferred Stock (10%, $50 par value, 20,000 shares authorized) Issued 2,000 shares (of which 300 shares are held as treasury stock) Paid-in Capital in Excess of Par Value—Preferred Common Stock (no-par, $12.50 stated value, 20,000 shares authorized) Issued and Outstanding, 7,200 shares Paid-in Capital in Excess of Stated Value Donated Capital Total Paid-in Capital Retained Earnings Appropriated for Treasury Stock Unappropriated Total Retained Earnings

100 0 0 0 00 3 5 0 0 00 103 5 0 0 00 90 0 0 0 00 3 0 0 0 00

93 0 0 0 00 75 0 0 0 00 271 5 0 0 00

16 1 0 0 00 178 1 5 0 00

Deduct Treasury Stock—Preferred Total Stockholders’ Equity

194 2 5 0 00 465 7 5 0 00 16 1 0 0 00 449 6 5 0 00

Analyze: 1.5% of authorized preferred stock is held in treasury (300/20,000 = 1.5%).

754  Chapter 21

CRITICAL THINKING PROBLEM 21.1 1.

1,500 shares: 1,800 shares issued ($90,000 ÷ $50 par) − Treasury Stock, 300 shares ($15,000 ÷ $50 par) = 1,500 shares

10,000 shares: ($750,000 − $500,000 ) ÷ $25 per share = 10,000 shares

300 shares: $15,000 cost ÷ $50 per share = 300 shares

500 shares: ($90,000 − $65,000) ÷ $50 per share = 500 shares

$51 per share: ($25,000 par value + $500 paid-in capital in excess of par) ÷ 500 shares = $51 per share

$7,500: 1,500 shares × $5.00 per share = $7,500

$90,000: 30,000 shares × $3 per share = $90,000 Analyze: The purchase of the Preferred Stock as Treasury Stock saved the company $5 per share times 300 shares, $1,500 in cash.

Chapter 21  755

CRITICAL THINKING PROBLEM 21.2 1.

A board of directors may decide to declare a stock dividend rather than a cash dividend if the corporation is (a) short of cash, (b) does not want to deplete its working capital, or (c) wishes to increase the permanent capital by converting retained earnings that may be distributed to shareholders into paid-in capital accounts.

The total book value is the same after the stock dividend as before. The book value per share decreased from $45 to $37.50. The book value before the stock dividend = Total Stockholders’ Equity ÷ Number of Shares = $9,000,000 ÷ 200,000 = $45 per share. The book value of Rosa’s shares = 12,000 × $45 = $540,000. The book value of Rosa’s shares after the stock dividend = $540,000 (Number of shares distributed, 200,000 × 0.20 = 40,000 shares. The total shares after stock dividend = 200,000 + 40,000 = 240,000 shares; $9,000,000 ÷ 240,000 shares = $37.50 per share. The number of shares received by Rosa in stock dividend = 12,000 shares × 0.20 = 2,400 shares. The book value of Rosa’s shares = 14,400 × $37.50 = $540,000).

The book value of each share is found by dividing total stockholders’ equity by the number of shares outstanding. Book value represents the amount of net assets associated with each share of stock. Market price represents the current price at which the stock may be bought or sold. The market price, which may be higher or lower than book value, reflects such things as the potential earnings of the corporation, demand for the corporation’s services or products, dividends paid, and general economic conditions. The two amounts are rarely the same.

Cash dividends at $1.60 = 12,000 shares × $1.60 = $19,200; cash dividends at $1.33 = 14,400 shares × $1.33 = $19,152. Rosa will receive only $48 less in cash dividends as she would have had the stock dividend not been declared.

The reduction in market price does not represent a loss because the total value of the investment remains the same: Value of Rosa’s shares prior to stock dividend = 12,000 shares × $60 per share = $720,000; value after stock dividend = 14,400 shares × $50 per share = $720,000. The market value per share of stock fell in proportion to the number of new shares issued. Since the stock dividend does not change total assets or total stockholders’ equity, the total market value should remain the same and the market price per share should decrease. In real life, stock prices rarely change directly in proportion to the change in book value because other factors influence market prices.

If Lowe Tech had maintained the same level of dividends per share ($1.60) while increasing the number of shares through the stock dividend, the market price probably would have increased. Investors would likely perceive the stock to be worth more because total dividends would be greater.

756  Chapter 21

SOLUTIONS TO BUSINESS CONNECTIONS Managerial Focus: 1. A regular corporation. Subchapter S, regular partnership, limited liability partnership, a limited liability company. 2. There is no relationship between cash and retained earnings. Retained earnings reflect profits and losses, cash dividends, stock dividends, and appropriations. 3. No, appropriated retained earnings merely indicates that even though the firm has an accumulation of earnings, the management has indicated that a portion of the retained earnings represented by the appropriations account is not available for dividends. 4. Issue a stock split. 5. Available cash, stock price is low, to distribute the shares to employees as a bonus or incentive. 6. A stock split would increase the number of shares outstanding, but would not increase paid-in capital because the par value or stated value of the stock is decreased proportionately. Ethical Dilemma: It is recorded as a credit to the capital account, Donated Capital, and a debit to the asset account, Land. Communities donate public lands to promote jobs and sales tax revenues in their community. As long as the community as a whole receives the benefit, not a few individuals, it is an ethical transaction. The Chamber of Commerce should be allowed to vote on this issue as it will affect the small businesses in the community. Financial Statement Analysis: a. The rate for FY 2009 is 34% ($1,362/$3,982) b. Yes, the balance sheet shows a liability for $108 million Income Tax Payable. Teamwork: Retaining a portion of the net income for the future expansion is advisable. Dividends should be declared but an incentive should be given to stockholders to select a stock dividend in place of cash dividends. This would improve the cash flow that might be needed for the future expansion. Internet Connection: For JC Penney, the 2006 dividends were 14% of the net income. The 2006 earnings per share is $4.96 and dividends per common share was $0.72. The strength of the retained earnings made it possible for the dividends to be paid.

Chapter 21  757

SOLUTIONS TO PRACTICE TEST Part A True-False 1. TRUE 9. 2. FALSE 10. 3. TRUE 11. 4. TRUE 12. 5. TRUE 13. 6. FALSE 14. 7. FALSE 15. 8. FALSE

FALSE TRUE FALSE TRUE FALSE FALSE FALSE

Part B Completion 1. f 2. g 3. c 4. b 5. e 6. a 7. d Part C Exercises 1. Book value before stock dividend: Stockholders’ equity, $750,000 ÷ 30,000 shares = $25.00 per share Book value after stock dividend: Stockholders’ equity, $750,000 ÷ 33,000 shares = $22.72 per share.

Entry to record dividend declaration: 2013 Dec. 15 Retained Earnings Preferred Stock Dividend Payable

4,000.00 4,000.00

To record dividends payable on cumulative preferred stock for 2012 and 2013. Payable on January 12, 2014 to holders of record on December 31, 2013.

758  Chapter 21

CHAPTER 22 LONG-TERM BONDS Chapter Opener: Thinking Critically Answers will vary. Students may suggest borrowing money from family or securing a loan from a lending institution. If the company were publicly traded, additional stock might be sold to raise capital. Depending on the financial condition of the company, a bond issue may be feasible. Fast Facts • Heinz is a $10 billion global company. • Heinz products enjoy #1 or #2 market share in more than 50 countries. • Heinz sells 650 million bottles of its iconic Ketchup every year. • Heinz employs approximately 32,500 people around the globe. • Heinz was founded in Sharpsburg (a suburb of Pittsburgh), Pennsylvania, in 1869 by entrepreneur Henry John Heinz. Managerial Implications: Thinking Critically • The firm’s ability to pay interest payments and repay principal. • The rate of return to be earned on the funds raised compared to the bond interest rate. Discussion Questions 1. A bond secured by collateral that is another company’s security. 2. Terms of the contract between the bond issuer and holder. 3. Long-term liability. 4. Yes, on the balance sheet in parentheses immediately following Bonds Payable, or as deduction from par value of the bonds issued. 5. Allows for clear audit trail; easy bank reconciliation. 6. The bond will sell at a premium (higher than face value) because investors will receive more interest on the 10% bond than they could get in other investments. 7. To comply with the matching principle. 8. Reversing entries make future journal entries easier for the accounting clerk. 9. Treated as an additional discount or a reduction of the premium. 10. Investment account that will generate a balance sufficient to pay off the bond principal when it matures. 11. Bond sinking fund: asset. Retained Earnings Appropriated account: dividends are being restricted for the payoff of the bonds. The two accounts are separate and are not required to have any relationship. 12. Any discount or premium on the bonds must be amortized up to date of retirement; face value of bonds and revised discount or premium accounts are removed; difference between cash paid and net book value of bonds is recorded as a gain or loss.

Chapter 22  759

EXERCISE 22.1 PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 April 1 Cash 3 Bonds Payable 4 Issued bonds at face value 5

POST. REF.

DEBIT

CREDIT

500 0 0 0 00 500 0 0 0 00

1 2 3 4 5

EXERCISE 22.2 PAGE

GENERAL JOURNAL

1 2 3 4 5

DATE DESCRIPTION 2013 Oct. 1 Bond Interest Expense Cash Paid bond interest for six months ($500,000 × 0.06 × 6 ÷ 12)

POST. REF.

DEBIT

CREDIT

15 0 0 0 00 15 0 0 0 00

1 2 3 4 5

EXERCISE 22.3 PAGE

GENERAL JOURNAL

1 2 3 4 5

DATE DESCRIPTION 2013 Dec. 31 Bond Interest Expense Bond Interest Payable Accrued interest for three months ($500,000 × 0.06 × 3 ÷ 12)

760  Chapter 22

POST. REF.

DEBIT

CREDIT

7 5 0 0 00 7 5 0 0 00

1 2 3 4 5

EXERCISE 22.4 PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 April 1 Cash 3 10% Bonds Payable, 2023 4 Premium on Bonds Payable 5 Issued bonds at 102 6

POST. REF.

DEBIT

CREDIT

102 0 0 0 00 100 0 0 0 00 2 0 0 0 00

1 2 3 4 5 6

EXERCISE 22.5 AGE

GENERAL JOURNAL

1 2 3 4 5 6

DATE DESCRIPTION 2013 Oct 1 Premium on Bonds Payable Bond Interest Expense Amortized premium for six months ($2,000 ÷ 10 years = $200/year × 1/2 = $100)

POST. REF.

DEBIT

CREDIT

1 0 0 00 1 0 0 00

1 2 3 4 5 6

EXERCISE 22.6 AGE

GENERAL JOURNAL

1 2 3 4 5 6 7

DATE DESCRIPTION 2013 Dec. 31 Bond Interest Expense Premium on Bonds Payable Bond Interest Payable Accrued interest and amortized premium for three months

POST. REF.

DEBIT

CREDIT

2 4 5 0 00 5 0 00 2 5 0 0 00

1 2 3 4 5 6 7

Chapter 22  761

EXERCISE 22.7 PAGE

GENERAL JOURNAL

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

DATE DESCRIPTION 2012 Dec. 31 Bond Sinking Fund Investment Cash Record 2012 contribution to sinking fund 2013 Dec. 31 Bond Sinking Fund Investment Income from Sinking Fund Investment Record the income earned during 2013

POST. REF.

DEBIT

CREDIT

1 2 25 0 0 0 00 3 4 5 2 0 0 0 00 6 2 0 0 0 00 7 8 9 23 0 0 0 00 10 23 0 0 0 00 11 12 13 25 0 0 0 00

31 Bond Sinking Fund Investment Cash Record 2013 contribution to sinking fund

EXERCISE 22.8 PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 Dec. 31 Retained Earnings 3 Retained Earnings Appropriated for Bond Retirement 4 Establish appropriation 5

POST. REF.

DEBIT

CREDIT

75 0 0 0 00 75 0 0 0 00

1 2 3 4 5

EXERCISE 22.9 PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2016 2 Aug. 1 8% Bonds Payable, 2023 3 Loss on Early Retirement of Bonds 4 Cash 5 Discount on Bonds Payable 6 Retirement of $60,000 bonds at 97 7

762  Chapter 22

POST. REF.

DEBIT

CREDIT

60 0 0 0 00 1 4 0 0 00 58 2 0 0 00 3 2 0 0 00

1 2 3 4 5 6 7

PROBLEM 22.1A PAGE

GENERAL JOURNAL

DATE DESCRIPTION 2013 Apr. 1 Cash 6% Bonds Payable, 2033 Issued bonds at face value Oct.

POST. REF.

1 Bond Interest Expense Cash Paid interest for six months

Dec. 31 Bond Interest Expense Bond Interest Payable Accrued interest expense for three months

2014 Jan.

Apr.

Oct.

DEBIT 200 0 0 0 00

200 0 0 0 00

6 0 0 0 00 6 0 0 0 00

3 0 0 0 00 3 0 0 0 00

31 Income Summary Bond Interest Expense Closed bond interest expense

9 0 0 0 00

1 Bond Interest Payable Bond Interest Expense Reversed adjusting entry

3 0 0 0 00

1 Cash 6% Bonds Payable, 2033 Issued bonds at face value

100 0 0 0 00

1 Bond Interest Expense Cash Paid interest for six months

6 0 0 0 00

1 Bond Interest Expense Cash Paid interest for six months ($300,000 × 0.06 × 6/12)

9 0 0 0 00

CREDIT

9 0 0 0 00

3 0 0 0 00

100 0 0 0 00

6 0 0 0 00

9 0 0 0 00

Chapter 22  763

PROBLEM 22.1A (continued) PAGE

GENERAL JOURNAL

DATE DESCRIPTION 2014 Dec. 31 Bond Interest Expense Bond Interest Payable Accrued interest for three months ($300,000 × 0.06 × 3/12) 31 Income Summary Bond Interest Expense Closed bond interest expense

POST. REF.

DEBIT

CREDIT

4 5 0 0 00 4 5 0 0 00

16 5 0 0 00 16 5 0 0 00

Analyze The balance of the Bonds Payable account on December 31, 2013, is $200,000.

764  Chapter 22

PROBLEM 22.2A PAGE

GENERAL JOURNAL

DATE DESCRIPTION 2013 Jun. 1 Cash Discount on Bonds Payable 6% Bonds Payable, 2033 Bond Interest Expense Issued bonds at 97.63 plus accrued interest Sept.

POST. REF.

1 Bond Interest Expense Cash Paid semiannual interest I = $400,000 × 0.06 × 6/12

DEBIT 396 5 2 0 00 9 4 8 0 00

400 0 0 0 00 6 0 0 0 00

12 0 0 0 00 12 0 0 0 00

1 Bond Interest Expense Discount on Bonds Payable Amortized discount ($9,480 ÷ 237 months) × 3 months

1 2 0 00

Dec. 31 Bond Interest Expense Discount on Bonds Payable Bond Interest Payable Adjusting for accrued interest for four months

8 1 6 0 00

2014 Jan.

Mar.

1 2 0 00

1 6 0 00 8 0 0 0 00

31 Income Summary Bond Interest Expense Closed bond interest expense

14 2 8 0 00

1 Discount on Bonds Payable Bond Interest Payable Bond Interest Expense Reversed adjusting entry

1 6 0 00 8 0 0 0 00

1 Bond Interest Expense Discount on Bonds Payable Cash Paid semiannual interest

12 2 4 0 00

CREDIT

14 2 8 0 00

8 1 6 0 00

2 4 0 00 12 0 0 0 00

Chapter 22  765

PROBLEM 22.2A (continued) 2.

Belmont, LLC Partial Balance Sheet December 31, 2013 Long Term Liabilities 6% Bonds Payable Less: Discount on Bonds Payable Net Liability

$400 0 0 0 00 (9 2 0 0 00) $390 8 0 0 00

Analyze: The balance in the Discount on Bonds Payable account on December 31, 2013, is $9,200.

766  Chapter 22

PROBLEM 22.3A PAGE

GENERAL JOURNAL

DATE DESCRIPTION 2013 Apr. 1 Cash Premium on Bonds Payable 10% Bonds Payable, 2023 Issued bonds at 101.2 Oct.

POST. REF.

1 Premium on Bonds Payable Bond Interest Expense Amortized premium for six months 1 Bond Interest Expense Cash Paid interest for six months

DEBIT 404 8 0 0 00

4 8 0 0 00 400 0 0 0 00

2 4 0 00 2 4 0 00

20 0 0 0 00 20 0 0 0 00

Dec. 31 Bond Interest Expense Premium on Bonds Payable Bond Interest Payable Accrued bond interest for three months

9 8 8 0 00 1 2 0 00

31 Income Summary Bond Interest Expense Closed bond interest expense

29 6 4 0 00

1 Bond Interest Payable Bond Interest Expense Premium on Bonds Payable Reversed adjusting entry

10 0 0 0 00

2014 Jan.

CREDIT

10 0 0 0 00

29 6 4 0 00

9 8 8 0 00 1 2 0 00

Chapter 22  767

PROBLEM 22.3A (continued) 2. Carolina Motor Shops, Inc. Partial Balance Sheet December 31, 2013 Long Term Liabilities 10% Bonds Payable Premium on Bonds Payable Net Liability

$400 0 0 0 00 4 4 4 0 00 $404 4 4 0 00

PAGE

Analyze:

DATE DESCRIPTION 2014 Apr. 1 Premium on Bonds Payable Bond Interest Payable Bond Interest Expense Cash

768  Chapter 22

POST. REF.

DEBIT

CREDIT

1 2 0 00 10 0 0 0 00 9 8 8 0 00 20 0 0 0 00

PROBLEM 22.4A PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

DATE 1. 2013 Jan. 1 Cash

DESCRIPTION

POST. REF.

DEBIT

400 0 0 0 00 10% Bonds Payable, 2033 Sold bonds at 100

2033 Jan.

CREDIT

400 0 0 0 00

1 Bond Sinking Fund Investment Cash Annual sinking fund investment

20 0 0 0 00

1 Retained Earnings Retained Earnings Appropriated for Bond Retirement Annual appropriation of retained earnings for retirement of 20 years bonds

20 0 0 0 00

1 10% Bonds Payable, 2033 Bond Sinking Fund Investment Retired bonds

400 0 0 0 00

1 Retained Earnings Appropriated for Bond Retirement Retained Earnings Removed appropriation of retained earnings for retirement of bonds

20 0 0 0 00

400 0 0 0 00

400 0 0 0 00 400 0 0 0 00

Chapter 22  769

PROBLEM 22.4A (continued) 2. Partial Balance Sheet New Computer Technology, Inc. December 31, 2017 Investments Bond Sinking Fund Investment

$100 0 0 0 00

Stockholders' Equity Retained Earnings Appropriation for Bond Retirement Unappropriated Retained Earnings

$100 0 0 0 00 310 2 1 0 00

Total Retained Earnings

Analyze:

$410 2 1 0 00

$100,000 ÷ $410,210 = 24.4%.

PROBLEM 22.5A PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7

DATE DESCRIPTION 2015 May 1 9% Bonds Payable, 2023 Loss on Early Retirement of Bonds Discount on Bonds Payable Cash Retirement of bonds repurchased at 99

Analyze:

POST. REF.

DEBIT

CREDIT

500 0 0 0 00 2 8 0 00 5 2 8 0 00 495 0 0 0 00

The total bond interest expense over the life of the bonds would be $456,600. (10 years × $45,000/year) + $6,600 = $456,600

770  Chapter 22

PROBLEM 22.1B PAGE

GENERAL JOURNAL

DATE 2013 Apr. 1 Cash

DESCRIPTION

POST. REF.

DEBIT

CREDIT

600 0 0 0 00 8% Bonds Payable, 2023 Issued bonds at face

Oct.

1 Bond Interest Expense Cash Paid interest for six months ($600,000 × 0.08 × 6/12)

Dec. 31 Bond Interest Expense Bond Interest Payable Accrue interest for three months ($600,000 × 0.08 × 3/12)

2014 Jan.

Apr.

Oct.

600 0 0 0 00

24 0 0 0 00 24 0 0 0 00

12 0 0 0 00 12 0 0 0 00

31 Income Summary Bond Interest Expense Closed bond interest expense

36 0 0 0 00

1 Bond Interest Payable Bond Interest Expense Reversed adjusting entry

12 0 0 0 00

1 Bond Interest Expense Cash Paid interest for six months ($600,000 × 0.08 × 6/12)

24 0 0 0 00

1 Bond Interest Expense Cash Paid interest for six months ($600,000 × 0.08 × 6/12)

24 0 0 0 00

1 Cash

400 0 0 0 00 8% Bonds Payable, 2023 Issued bonds at face

36 0 0 0 00

12 0 0 0 00

24 0 0 0 00

400 0 0 0 00

Chapter 22  771

PROBLEM 22.1B (continued) PAGE

GENERAL JOURNAL

DATE DESCRIPTION 2014 Dec. 31 Bond Interest Expense Bond Interest Payable Accrue interest expense for three months ($1,000,000 × 0.08 × 3/12) 31 Income Summary Bond Interest Expense Closed bond interest expense

POST. REF.

DEBIT

CREDIT

20 0 0 0 00 20 0 0 0 00

56 0 0 0 00 56 0 0 0 00

Analyze: $36,000 was reported in 2013 as Bond Interest Expense.

772  Chapter 22

PROBLEM 22.2B PAGE

GENERAL JOURNAL

DATE DESCRIPTION 2013 Jul. 1 Cash Discount on Bonds Payable 5% Bonds Payable, 2033 Bond Interest Expense Sold bonds at 97.68 plus accrued interest

POST. REF.

1 2 3 4 5 6 7 8 Sept. 1 Bond Interest Expense 9 Cash 10 Paid semiannual interest 11 12 1 Bond Interest Expense 13 Discount on Bonds Payable 14 Amortize discount ($11,600/116 mos) × 15 2 mos 16 17 Dec. 31 Bond Interest Expense 18 Discount on Bonds Payable 19 Bond Interest Payable 20 Adjusting for accrued interest for 4 mos 21 ($500,000 × 0.05 × 4/12) 22 23 Dec. 31 Income Summary 24 Bond Interest Expense 25 Closed bond interest expense 26 27 2014 28 Jan. 1 Discount on Bonds Payable 29 Bond Interest Payable 30 Bond Interest Expense 31 Reversed adjusting entry 32 33 Mar. 1 Bond Interest Expense 34 Discount on Bonds Payable 35 Cash 36 Paid semiannual interest

DEBIT

CREDIT

496 7 3 3 00 11 6 0 0 00 500 0 0 0 00 8 3 3 3 00

12 5 0 0 00 12 5 0 0 00

2 0 0 00 2 0 0 00

8 7 3 3

00 4 0 0 00 8 3 3 3 00

13 1 0 0

00 13 1 0 0 00

4 0 0 8 3 3 3

00 00 8 7 3 3 00

13 1 0 0

00 6 0 0 00 12 5 0 0 00

Chapter 22  773

PROBLEM 22.2B (continued) 2. ELI Corporation Partial Balance Sheet December 31, 2013 5% Bonds Payable Less Discount on Bonds Payable Net Liability

$500 0 0 0 00 (11 0 0 0 00) $489 0 0 0 00

Analyze: Prior to closing, the Bond Interest Expense account on December 31, 2013, was $13,100.

774  Chapter 22

PROBLEM 22.3B PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

DATE DESCRIPTION 2013 Feb. 1 Cash Premium on Bonds Payable 8% Bonds Payable, 2023 Issued bonds at 103 Aug.

Aug.

POST. REF.

1 Premium on Bonds Payable Bond Interest Expense Amortize premium for six months

DEBIT 515 0 0 0 00

15 0 0 0 00 500 0 0 0 00

7 5 0 00 7 5 0 00

1 Bond Interest Expense Cash Paid interest for six months

20 0 0 0 00

Dec. 31 Bond Interest Expense Premium on Bonds Payable Bond Interest Payable Accrue bond interest for five months ($500,000 × 0.08 × 5/12)

16 0 4 2 00 6 2 5 00

Dec. 31 Income Summary Bond Interest Expense Closed bond interest expense

35 2 9 2 00

2014 Jan.

1 Bond Interest Payable Bond Interest Expense Premium on Bonds Payable Reversed adjusting entry

CREDIT

20 0 0 0 00

16 6 6 7 00

35 2 9 2 00

16 6 6 7 00 16 0 4 2 00 6 2 5 00

Chapter 22  775

PROBLEM 22.3B (continued) 2. Roma Corporation Partial Balance Sheet December 31, 2013 Long Term Liabilities 8% Bonds Payable Premium on Bonds Payable Net Liability

$500 0 0 0 00 13 6 2 5 00 $513 6 2 5 00

Analyze:

1 2 3 4 5 6

DATE DESCRIPTION 2014 Feb. 1 Premium on Bonds Payable Bond Interest Payable Bond Interest Expense Cash

776  Chapter 22

POST. REF.

DEBIT

CREDIT

1 2 5 00 16 6 6 7 00 3 2 0 8 00 20 0 0 0 00

PROBLEM 22.4B PAGE

GENERAL JOURNAL

DATE DESCRIPTION 2013 Jan. 1 Cash 10% Bonds Payable, 2033 Sold bonds at 100

Dec.

POST. REF.

DEBIT 200 0 0 0 00

200 0 0 0 00

1 Bond Sinking Fund Investment Cash Annual sinking fund investment

18 0 0 0 00

31 Retained Earnings Retained Earnings Appropriated for Bond Retirement Annual appropriation of retained earnings for retirement of 10 years bonds

20 0 0 0 00

31 Bond Sinking Fund Investment Income From Sinking Fund Investment

1 2 0 0 00

CREDIT

18 0 0 0 00

20 0 0 0 00

1 2 0 0 00

Chapter 22  777

PROBLEM 22.4B (continued) 2. Mine Research, Inc. Partial Balance Sheet December 31, 2022 Investments Bond Sinking Fund Investment

200 0 0 0 00

Stockholders' Equity Retained Earnings Appropriated for Bond Retirement Unappropriated Total Retained Earnings

200 0 0 0 00 325 0 0 0 00 525 0 0 0 00

PAGE

GENERAL JOURNAL

DATE DESCRIPTION 2023 Jan. 1 Bonds Payable Bonds Sinking Fund Investment Retire 10 year bonds 1 Retained Earnings Appropriated for Bond Retirement Retained Earnings Remove appropriation upon payment of bonds

POST. REF.

DEBIT

CREDIT

200 0 0 0 00 200 0 0 0 00

Analyze: 38.1% of total retained earnings was allocated for bond retirement ($200,000/$525,000).

778  Chapter 22

PROBLEM 22.5B PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7

DATE DESCRIPTION 2016 Oct. 1 10% Bonds Payable, 2023 Gain on Early Retirement of Bonds Discount on Bonds Payable Cash Record early retirement of bonds retired at 98.5

POST. REF.

DEBIT

CREDIT

400 0 0 0 00 3 8 1 6 00 2 1 8 4 00 394 0 0 0 00

1 2 3 4 5 6 7

Analyze: The credit to the Cash account would be $400,000.

Chapter 22  779

CRITICAL THINKING PROBLEM 22.1 1.

Vol Express, Inc. will realize $100,000 by reissuing the outstanding bonds as calculated below. Annual interest payments @ 8% = $1,000,000 × 0.08 = $80,000 Annual interest payments @ 5% = $1,000,000 × 0.05 = $50,000 Annual savings $30,000 Times years to maturity × 3 years Savings over life of bonds $90,000

It would be advantageous to reissue the bonds at any time that the interest payments will be reduced by a total amount that exceeds any loss incurred by buying back the old bonds. The cost savings must be worth the effort required in reissuing the bonds.

780  Chapter 22

CRITICAL THINKING PROBLEM 22.2 Issuing Common Stock 1.

President’s estimated net income before interest and taxes = $400,000 a. Net income before interest and taxes b. Total bond interest Taxable income c. Total income tax d. Total income after tax e. Present income after tax f. Increase in net income

$400,000 50,000 350,000 122,500 227,500 130,000 97,500

g. Present EPS

$130,000 = $2.60 50,000 shares

$2.60

h. Proposed EPS

$260,000 = $3.71 70,000 shares

$227,500 = $4.55 50,000 shares

Financial VP’s estimate of net income before interest and taxes = $300,000 a. Net income before interest and taxes b. Total bond interest Taxable income c. Total income tax d. Total income after tax e. Present income after tax f. Increase in net income g. Present EPS h. Proposed EPS

$400,000 –0– 400,000 140,000 260,000 130,000 130,000

Issuing Bonds

$300,000 –0– 300,000 105,000 195,000 130,000 65,000 $130,000 = $2.60 50,000 shares $195,000 = $2.79 70,000 shares

$300,000 50,000 250,000 87,500 162,500 130,000 $32,500 $2.60 $162,500 = $3.25 50,000 shares

This analysis suggests building the new wing regardless of funding source. Borrowing will maximize the earnings per share, while issuing common stock will maximize net income. Since the president owns 60 percent of the company’s stock, the company will probably issue the bonds. There are obviously other factors to consider: future earnings prospects, product life cycle, the overall economic outlook for the industry. Analyze: There would be an increase in earnings per share from $2.60 per share to $3.25 per share.

Chapter 22  781

SOLUTIONS TO BUSINESS CONNECTIONS Managerial Focus: 1. If dollars generated from the sale of the bonds will help the company earn a rate of return greater than the rate of interest being paid to the bondholders. 2. General debenture, callable bond payable. 3. If the earnings of the company are poor. The issuance of common stock obligates the company for no required future cash outflows. 4. Whenever market rates of interest have declined below the issue rate of its bonds. 5. The 101.6 is a percentage of the face amount of the bonds. This provision allows the company to buy back the bonds in order to not have future interest expense payments. Ethical Dilemma: If Lawrence is the sole decision-maker, this would be a conflict of interest. However, if Lawrence is simply making a suggestion for a group decision, it would not be a conflict of interest. The conflict of interest would be minimized if the group understood the resulting increase in Lawrence’s income. Financial Statement Analysis: 1. The long term debt-to-equity ratio for FY 2009 is 44.7%. 2. This is the lowest rate since 2006 and the lower rate puts the company in a more attractive situation. Teamwork: Because Nowhere Man’s liabilities are minimal, it would be best to sell bonds and retain control of its business. The bonds should be sold at a discount due to the popularity of the business. Callable and convertible features would give flexibility should Nowhere Man have cash flow problems in the future. Serial bonds would be best to take advantage of the present popularity of the business. Internet Connection: At bondsonline.com each bond type is defined and the current market yield is given. STRIPS are a way to buy Treasury notes and bonds indirectly through investment vehicles. All others are defined in the textbook.

782  Chapter 22

MINI-PRACTICE SET 3: CORPORATION ACCOUNTING CYCLE The Kansas Company PAGE

GENERAL JOURNAL

DATE 1 2013 2

Jan.

DESCRIPTION 5 Cash

POST. REF.

DEBIT

101

101 0 0 0 00

CREDIT

Preferred Stock

301

100 0 0 0 00

Paid-in Capital—Preferred Stock

302

1 0 0 0 00

Sold 1,000 shares of PS @ $101

6 7

15 Estimated Income Taxes Payable

Cash

205

17 0 0 0 00

101

17 0 0 0 00

Paid accrued income taxes

10 11 April

1 Interest Payable

203

2 5 0 0 00

Interest Expense

751

2 4 2 5 00

Premium on Bonds Payable

212

7 5 00

Cash

101

5 0 0 0 00

Paid 6 months bond interest

16 17

July

1 Retained Earnings—Unappropriated Dividends Payable—Common Stock

312

2 0 0 0 00

207

2 0 0 0 00

Declared common stock dividend of $0.10 per share

20 21

26 Dividends Payable—Common Stock

Cash

207

2 0 0 0 00

101

2 0 0 0 00

Paid common stock dividend

24 25

Aug.

12 Treasury Stock—Preferred Cash

343

61 2 0 0 00

101

61 2 0 0 00

Repurchased 600 shares of PS @ $102

28 29 30 31 32

Oct.

1 Interest Expense Premium on Bonds Payable Cash

751

4 8 5 0 00

212

1 5 0 00

101

5 0 0 0 00

Paid 6 months bond interest

Chapter 22  783

MINI-PRACTICE SET 3 (continued)

Name PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

DATE DESCRIPTION 2013 Dec. 1 Interest Expense Premium on Bonds Payable (2 months × $5/month) Interest Payable Record accrued interest for 2 months on bonds being retired

POST. REF.

DEBIT

751 212 203

3 2 3 00 1 0 00

1 Premium on Bonds Payable Bonds Payable Interest Payable Cash Gain on Early Retirement of B/P Retirement of $20,000 @ 98 plus interest

212 211 203 101 711

4 7 0 00 20 0 0 0 00 3 3 3 00

15 Retained Earnings—Unappropriated Dividends Payable—Preferred Stock Dividend declared on 1,400 shares

312 306

7 0 0 0 00

15 Retained Earnings—Unappropriated Common Stock Dividends Distributable Paid-in Capital—Common Stock Declared 10% CS stock dividend

312 306 304

30 0 0 0 00

30 Subscriptions Receivable—Common Stock Cash Common Stock Subscribed Paid-in Capital—Common Stock Stock subscription for 500 shares @ $12/share, balance due January 15, 2014

105 101 305 304

3 0 0 0 00 3 0 0 0 00

784  Chapter 22

CREDIT

3 3 3 00

19 9 3 3 00 8 7 0 00

7 0 0 0 00

20 0 0 0 00 10 0 0 0 00

5 0 0 0 00 1 0 0 0 00

MINI-PRACTICE SET 3 (continued)

Name PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

DATE DESCRIPTION 2013 Dec. 30 Retained Earnings—Unappropriated Retained Earnings—Appropriated Appropriated for plant expansion

POST. REF.

DEBIT

312 311

100 0 0 0 00

31 Accounts Receivable Sales Sales on account for year

103 401

2,800 0 0 0 00

31 Cash Accounts Receivable Collections of accounts for year

101 103

2,810 0 0 0 00

31 Purchases Accounts Payable Purchase of merchandise inventory for year

501 202

1,880 0 0 0 00

31 Operating Expenses Accounts Payable Operating expenses incurred on credit

601 202

650 0 0 0 00

31 Accounts Payable Cash Payments on account for year

202 201

2,335 0 0 0 00

31 Allowance for Doubtful Accounts Accounts Receivable Write-off of uncollectible accounts

104 103

10 0 0 0 00

CREDIT

100 0 0 0 00

2,800 0 0 0 00

2,810 0 0 0 00

1,880 0 0 0 00

650 0 0 0 00

2,335 0 0 0 00

10 0 0 0 00

Chapter 22  785

MINI-PRACTICE SET 3 (continued)

Name PAGE

GENERAL JOURNAL

DATE DESCRIPTION 1 2013 Adjusting Entries 2 Dec. 31 Operating Expenses 3 Allowance for Doubtful Accounts 4 5 31 Operating Expenses 6 Accumulated Depreciation—Bldg 7 8 31 Operating Expenses 9 Accumulated Depreciation—Furn and Equip 10 11 31 Interest Expense 12 Premium on Bonds Payable 13 Interest Payable 14 15 31 Amortization of Organization Costs 16 Organization Costs 17 18 31 Income Summary 19 Merchandise Inventory 20 21 31 Merchandise Inventory 22 Income Summary 23 24 31 Income Tax Expense 25 Estimated Income Tax Payable 26

786  Chapter 22

POST. REF.

DEBIT

601 104

9 5 0 0 00

601 152

11 2 5 0 00

601 162

7 0 0 0 00

751 212 203

1 9 4 0 00 6 0 00

753 181

2 0 0 0 00

399 131

150 0 0 0 00

131 399

130 0 0 0 00

801 205

65 7 6 7 00

CREDIT

9 5 0 0 00

11 2 5 0 00

7 0 0 0 00

2 0 0 0 00

150 0 0 0 00

130 0 0 0 00

65 7 6 7 00

MINI-PRACTICE SET 3 (continued)

Name PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

DATE DESCRIPTION 2013 Closing Entries Dec. 31 Sales Gain on Early Retirement of Bonds Payable Income Summary

POST. REF.

DEBIT

401 711 399

2,800 0 0 0 00 8 7 0 00

31 Income Summary Purchases Operating Expenses Interest Expense Amortization of Organization Costs Income Tax Expense

399 501 601 751 753 801

2,635 0 5 5 00

31 Income Summary Retained Earnings—Unappropriated

399 312

145 8 1 5 00

CREDIT

2,800 8 7 0 00

1,880 0 0 0 677 7 5 0 9 5 3 8 2 0 0 0 65 7 6 7

00 00 00 00 00

145 8 1 5 00

Chapter 22  787

MINI-PRACTICE SET 3 (continued) GENERAL LEDGER ACCOUNT Cash

DATE DESCRIPTION 2013 Jan. 1 Balance 5 15 April 1 July 26 Aug. 12 Oct. 1 Dec. 1 30 31 31

ACCOUNT NO. POST. REF.

DEBIT

CREDIT

101 0 0 0 00

ACCOUNT NO.

POST. REF.

DEBIT

CREDIT

POST. DESCRIPTION REF.

788  Chapter 22

✔ J3 J4

103

BALANCE DEBIT CREDIT

170 0 0 0 00 2,800 0 0 0 00 2,970 0 0 0 00 2,810 0 0 0 00 160 0 0 0 00 10 0 0 0 00 150 0 0 0 00

✔ J3 J3 J3

ACCOUNT Allowance for Doubtful Accounts

DATE 2013 Jan. 1 Balance Dec. 31 31 Adjusting

BALANCE DEBIT CREDIT

176 0 0 0 00 277 0 0 0 00 17 0 0 0 00 260 0 0 0 00 5 0 0 0 00 255 0 0 0 00 2 0 0 0 00 253 0 0 0 00 61 2 0 0 00 191 8 0 0 00 5 0 0 0 00 186 8 0 0 00 19 9 3 3 00 166 8 6 7 00 3 0 0 0 00 169 8 6 7 00 2,810 0 0 0 00 2,979 8 6 7 00 2,335 0 0 0 00 644 8 6 7 00

✔ J1 J1 J1 J1 J1 J1 J2 J2 J3 J3

ACCOUNT Accounts Receivable

DATE DESCRIPTION 2013 Jan. 1 Balance Dec. 31 31 31

101

DEBIT

ACCOUNT NO.

CREDIT

10 0 0 0 00

104

BALANCE DEBIT CREDIT 5

0 0 0 00

5 0 0 00

5 0 0 0 00 9 5 0 0 00

MINI-PRACTICE SET 3 (continued) ACCOUNT Subscriptions Receivable—Common Stock

DATE 2013 Dec. 30

POST. DESCRIPTION REF. J2

DEBIT

ACCOUNT NO.

CREDIT

3 0 0 0 00

DATE

ACCOUNT NO.

DEBIT

CREDIT

ACCOUNT Merchandise Inventory POST. DESCRIPTION REF.

DATE 2013 Jan. 1 Balance Dec. 31 Adjusting 31 Adjusting

✔ J4 J4

DEBIT

CREDIT

150 0 0 0 00 130 0 0 0 00

DEBIT

CREDIT

✔

131

BALANCE DEBIT CREDIT 150 0 0 0 00 − 0− 130 0 0 0 00

ACCOUNT NO.

POST. DESCRIPTION REF.

121

BALANCE DEBIT CREDIT

ACCOUNT NO.

ACCOUNT Land

DATE 2013 Jan. 1 Balance

BALANCE DEBIT CREDIT 3 0 0 0 00

ACCOUNT Interest Receivable POST. DESCRIPTION REF.

105

141

BALANCE DEBIT CREDIT 85 0 0 0 00

Chapter 22  789

MINI-PRACTICE SET 3 (continued) ACCOUNT Buildings

ACCOUNT NO.

POST. DESCRIPTION REF.

DATE 2013 Jan. 1 Balance

DEBIT

CREDIT

ACCOUNT Accumulated Depreciation—Buildings

DATE 2013 Jan. 1 Balance Dec. 31 Adjusting

DEBIT

✔ J4

ACCOUNT NO.

CREDIT

DATE 2013 Jan. 1 Balance

CREDIT

790  Chapter 22

POST. REF. ✔ J4

161

BALANCE DEBIT CREDIT 70 0 0 0 00

✔

ACCOUNT Accumulated Depreciation—Furniture and Equipment

DATE DESCRIPTION 2013 Jan. 1 Balance Dec. 31 Adjusting

22 5 0 0 00 33 7 5 0 00

ACCOUNT NO.

DEBIT

152

BALANCE DEBIT CREDIT

11 2 5 0 00

ACCOUNT Furniture and Equipment POST. DESCRIPTION REF.

BALANCE DEBIT CREDIT 225 0 0 0 00

✔

POST. DESCRIPTION REF.

151

DEBIT

CREDIT

7 0 0 0 00

ACCOUNT NO.

162

BALANCE DEBIT CREDIT 14 0 0 0 00 21 0 0 0 00

MINI-PRACTICE SET 3 (continued) ACCOUNT Organization Costs

DATE DESCRIPTION 2013 Jan. 1 Balance Dec. 31 Adjusting

ACCOUNT NO.

POST. REF.

DEBIT

✔ J4

CREDIT

2 0 0 0 00

ACCOUNT Accounts Payable

DATE DESCRIPTION 2013 Jan. 1 Balance Dec. 31 31 31

✔ J3 J3 J3

DEBIT

CREDIT

15 31 Adjusting

75 0 0 0 00 1,955 0 0 0 00 2,605 0 0 0 00 270 0 0 0 00

ACCOUNT NO. POST. REF. ✔ J1 J2 J2 J4

DEBIT

CREDIT

POST. REF.

− 0− 2 0 0 0 00

2 0 0 0 00

ACCOUNT NO.

CREDIT

205

BALANCE DEBIT CREDIT 17 0 0 0 00

✔ J1 J4

2 5 0 0 00 − 0− 3 3 3 00

3 3 3 00

DEBIT

203

BALANCE DEBIT CREDIT

2 5 0 0 00 3 3 3 00

202

BALANCE DEBIT CREDIT

2,335 0 0 0 00

ACCOUNT Estimated Income Taxes Payab

DATE DESCRIPTION 2013 Jan. 1 Balance

6 0 0 0 00 4 0 0 0 00

1,880 0 0 0 00 650 0 0 0 00

ACCOUNT Interest Payable

DATE DESCRIPTION 2013 Jan. 1 Balance April 1 Dec. 1 Dec. 1 Dec. 31 Adjusting

BALANCE DEBIT CREDIT

ACCOUNT NO.

POST. REF.

181

17 0 0 0 00 65 7 6 7 00

− 0− 65 7 6 7 00

Chapter 22  791

MINI-PRACTICE SET 3 (continued) ACCOUNT Dividends Payable—Preferred Stock

DATE 2013 Dec. 15

POST. DESCRIPTION REF.

DEBIT

ACCOUNT NO.

CREDIT 7 0 0 0 00

ACCOUNT Dividends Payable—Common Stock

DATE 2013 July 1 26

POST. DESCRIPTION REF.

DEBIT

J1 J1

2 0 0 0 00 2 0 0 0 00

ACCOUNT 10-Year, 10% Bonds Payable POST. DESCRIPTION REF.

DATE 2013 Jan. 1 Balance Dec. 1

✔ J2

DATE 2013 Jan. 1 Balance April 1 Oct. 1 Dec. 1 1 Dec. 31 Adjusting

DEBIT

CREDIT

792  Chapter 22

207

BALANCE DEBIT CREDIT 2 0 0 0 00 − 0−

211

BALANCE DEBIT CREDIT 100 0 0 0 00 80 0 0 0 00

20 0 0 0 00

212

DEBIT

✔

7 0 0 0 00

ACCOUNT NO.

ACCOUNT Premium on Bonds Payable POST. DESCRIPTION REF.

BALANCE DEBIT CREDIT

ACCOUNT NO.

CREDIT

206

7 5 00 1 5 0 00 1 0 00 4 7 0 00 6 0 00

CREDIT

BALANCE DEBIT CREDIT 2 6 2 5 00 2 5 5 0 00 2 4 0 0 00 2 3 9 0 00 1 9 2 0 00 1 8 6 0 00

MINI-PRACTICE SET 3 (continued) ACCOUNT 5% Preferred Stock ($100 par, 10,000 shares authorized)

DATE DESCRIPTION 2013 Jan. 1 Balance 5

POST. REF.

DEBIT

CREDIT

✔ 100 0 0 0 00

ACCOUNT Paid-in Capital in Excess of Par—Preferred Stock POST. DESCRIPTION REF.

DATE 2013 Jan. 1 Balance 5

DEBIT

CREDIT

✔ 1 0 0 0 00

ACCOUNT Common Stock ($10 par, 100,000 shares authorized) POST. DESCRIPTION REF.

DATE 2013 Jan. 1 Balance

DEBIT

CREDIT

ACCOUNT Paid-in Capital in Excess of Par—Common Stock

DATE 2013 Jan. 1 Balance Dec. 15 30

✔ J2 J2

301

BALANCE DEBIT CREDIT 100 0 0 0 00 200 0 0 0 00

ACCOUNT NO.

302

BALANCE DEBIT CREDIT 10 0 0 0 00 11 0 0 0 00

ACCOUNT NO.

303

BALANCE DEBIT CREDIT 200 0 0 0 00

✔

POST. DESCRIPTION REF.

ACCOUNT NO.

DEBIT

CREDIT

10 0 0 0 00 1 0 0 0 00

ACCOUNT NO.

304

BALANCE DEBIT CREDIT 25 0 0 0 00 35 0 0 0 00 36 0 0 0 00

Chapter 22  793

MINI-PRACTICE SET 3 (continued) ACCOUNT Common Stock Subscribed

DATE DESCRIPTION 2013 Dec. 30

POST. REF.

ACCOUNT NO.

DEBIT

CREDIT 5 0 0 0 00

ACCOUNT Common Stock Dividend Distributable

DATE 2013 Dec. 15

POST. DESCRIPTION REF.

DEBIT

20 0 0 0 00

DATE 2013 Jan. 1 Balance Dec. 30

DEBIT

✔ J3

CREDIT

100 0 0 0 00

ACCOUNT Retained Earnings Unappropriated

DATE DESCRIPTION 2013 Jan. 1 Balance July 1 Dec. 15 15 30 31 Closing

794  Chapter 22

POST. REF. ✔ J1 J2 J2 J3 J5

DEBIT

5 0 0 0 00

20 0 0 0 00

2 0 0 0 00 7 0 0 0 00 30 0 0 0 00 100 0 0 0 00 145 8 1 5 00

311

BALANCE DEBIT CREDIT 100 0 0 0 00 200 0 0 0 00

ACCOUNT NO.

CREDIT

306

BALANCE DEBIT CREDIT

ACCOUNT NO.

ACCOUNT Retained Earnings Appropriate POST. DESCRIPTION REF.

BALANCE DEBIT CREDIT

ACCOUNT NO.

CREDIT

305

312

BALANCE DEBIT CREDIT 208 3 7 5 00 206 3 7 5 00 199 3 7 5 00 169 3 7 5 00 69 3 7 5 00 215 1 9 0 00

MINI-PRACTICE SET 3 (continued) ACCOUNT Treasury Stock—Preferred

DATE 2013 Aug.

DESCRIPTION

POST. REF.

ACCOUNT NO. BALANCE DEBIT

CREDIT

61 2 0 0 00

Dec.

31 Adjusting

150 0 0 0 00

31 Adjusting

31 Closing

2,635 0 5 5 00

31 Closing

145 8 1 5 00

CREDIT

Dec.

DESCRIPTION

31 Closing

130 0 0 0 00

Dec.

20 0 0 0 00

2,800 8 7 0 00

2,780 8 7 0 00 145 8 1 5 00 − 0−

− 0−

401

BALANCE DEBIT

CREDIT

DEBIT

CREDIT

2,800 0 0 0 00

− 0−

ACCOUNT Purchases

ACCOUNT NO.

501

BALANCE

POST. REF.

DEBIT

1,880 0 0 0 00

31 Closing

DESCRIPTION

CREDIT

ACCOUNT NO.

DATE 2013

DEBIT 150 0 0 0 00

ACCOUNT Sales POST. REF.

399

BALANCE DEBIT

DATE 2013

CREDIT

ACCOUNT NO.

POST. REF.

DESCRIPTION

DEBIT 61 2 0 0 00

ACCOUNT Income Summary

DATE 2013

343

CREDIT

DEBIT

CREDIT

1,880 0 0 0 00 1,880 0 0 0 00

− 0−

Chapter 22  795

MINI-PRACTICE SET 3 (continued) ACCOUNT

DATE DESCRIPTION 2013 Dec. 31 31 Adjusting 31 Adjusting 31 Adjusting 31 Closing

ACCOUNT

Interest Income

DATE

DESCRIPTION

ACCOUNT

POST. REF. J3 J4 J4 J4 J5

DEBIT

677 7 5 0 00

650 0 0 0 00 659 5 0 0 00 670 7 5 0 00 677 7 5 0 00 − 0−

650 0 0 0 00 9 5 0 0 00 11 2 5 0 00 7 0 0 0 00

ACCOUNT NO. POST. REF.

DEBIT

CREDIT

POST. REF. J2 J5

DEBIT

796  Chapter 22

DEBIT

CREDIT

701

BALANCE CREDIT

ACCOUNT NO.

711

BALANCE DEBIT CREDIT

8 7 0 00

8 7 0 00 − 0−

8 7 0 00

ACCOUNT NO.

Interest Expense

DATE DESCRIPTION 2013 April 1 Oct. 1 Dec. 1 31 Adjusting 31 Closing

BALANCE CREDIT

CREDIT

Gain on Early Retirement of Bonds Payable

DATE DESCRIPTION 2013 Dec. 1 31 Closing

ACCOUNT

601

Operating Expenses

POST. REF. J1 J1 J2 J4 J5

DEBIT

CREDIT

BALANCE DEBIT CREDIT

9 5 3 8 00

2 4 2 5 00 7 2 7 5 00 7 5 9 8 00 9 5 3 8 00 − 0−

2 4 2 5 00 4 8 5 0 00 3 2 3 00 1 9 4 0 00

751

MINI-PRACTICE SET 3 (continued) ACCOUNT Amortization of Organization Costs

DATE DESCRIPTION 2013 Dec. 31 Adjusting 31 Closing

POST. REF. J4 J5

DEBIT

ACCOUNT NO.

CREDIT

BALANCE DEBIT CREDIT

2 0 0 0 00

2 0 0 0 00 − 0−

2 0 0 0 00

ACCOUNT Income Tax Expense

DATE DESCRIPTION 2013 Dec. 31 Adjusting 31 Closing

POST. REF. J4 J5

ACCOUNT NO.

DEBIT

753

CREDIT

65 7 6 7 00 65 7 6 7 00

801

BALANCE DEBIT CREDIT 65 7 6 7 00 − 0−

Chapter 22  797

MINI-PRACTICE SET 3 (continued)

Name The Kansas Company Worksheet Year Ending December 31, 2013 TRIAL BALANCE

1 Cash

ACCOUNT NAME

DEBIT 644 8 6 7 00

2 Accounts Receivable

150 0 0 0 00

3 Allowance for Doubtful Accounts

5 0 0 0 00

4 Subscriptions Receivable—Common Stock

3 0 0 0 00

5 Merchandise Inventory

85 0 0 0 00

7 Buildings

225 0 0 0 00

8 Accumulated Depreciation—Bldg

CREDIT

130 0 0 0 00

150 0 0 0 00

22 5 0 0 00

11 2 5 0 00

14 0 0 0 00

7 0 0 0 00

70 0 0 0 00

10 Accum. Depreciation—Furn. and Equip. 11 Organization Costs

DEBIT

9 5 0 0 00

150 0 0 0 00

6 Land

9 Furniture and Equipment

CREDIT

ADJUSTMENTS

6 0 0 0 00

12 Accounts Payable

2 0 0 0 00 270 0 0 0 00

13 Interest Payable

2 0 0 0 00

14 Estimated Income Tax Payable

65 7 6 7 00

15 Dividends Payable—Preferred Stock

7 0 0 0 00

16 Dividends Payable—Common Stock 17 10-Year, 10% Bonds Payable

80 0 0 0 00

18 Premium on Bonds Payable

1 9 2 0 00

19 8% Preferred Stock

200 0 0 0 00

20 Paid-in Cap. in Excess of Par—Pref. Stock

11 0 0 0 00

21 Common Stock

200 0 0 0 00

22 Paid-in Cap. in Excess of Par—Com. Stock

36 0 0 0 00

23 Common Stock Subscribed

5 0 0 0 00

24 Common Stock Dividend Distrib.

20 0 0 0 00

25 Retained Earnings Appropriated

200 0 0 0 00

26 Retained Earnings Unappropriated

69 3 7 5 00

27 Treasury Stock—Preferred

61 2 0 0 00

28 Income Summary

150 0 0 0 00

29 Sales 30 Purchases 31 Operating Expenses

6 0 00

1,880 0 0 0 00 650 0 0 0 00

9 5 0 0 00

11 2 5 0 00

7 0 0 0 00

34 Totals Carried Forward

130 0 0 0 00

2,800 0 0 0 00

3,930 0 6 7 00

3,936 7 9 5 00

307 8 1 0 00

377 5 1 7 00

798  Chapter 22

MINI-PRACTICE SET 3 (continued)

ADJUSTED TRIAL BALANCE DEBIT CREDIT 644 8 6 7 00 150 0 0 0 00 4 5 0 0 00 3 0 0 0 00 130 0 0 0 00 85 0 0 0 00 225 0 0 0 00 33 7 5 0 00 70 0 0 0 00 21 0 0 0 00 4 0 0 0 00 270 0 0 0 00 2 0 0 0 00 65 7 6 7 00 7 0 0 0 00 0 00 80 0 0 0 00 1 8 6 0 00 200 0 0 0 00 11 0 0 0 00 200 0 0 0 00 36 0 0 0 00 5 0 0 0 00 20 0 0 0 00 200 0 0 0 00 69 3 7 5 00 61 2 0 0 00 150 0 0 0 00 130 0 0 0 00 2,800 0 0 0 00 1,880 0 0 0 00 677 7 5 0 00

1,880 0 0 0 00 677 7 5 0 00

4,080 8 1 7 00

2,707 7 5 0 00

4,157 2 5 2 00

INCOME STATEMENT DEBIT CREDIT

150 0 0 0 00

BALANCE SHEET DEBIT CREDIT 644 8 6 7 00 150 0 0 0 00 4 5 0 0 00 3 0 0 0 00 130 0 0 0 00 85 0 0 0 00 225 0 0 0 00 33 7 5 0 00 70 0 0 0 00 21 0 0 0 00 4 0 0 0 00 270 0 0 0 00 2 0 0 0 00 65 7 6 7 00 7 0 0 0 00 0 00 80 0 0 0 00 1 8 6 0 00 200 0 0 0 00 11 0 0 0 00 200 0 0 0 00 36 0 0 0 00 5 0 0 0 00 20 0 0 0 00 200 0 0 0 00 69 3 7 5 00 61 2 0 0 00

130 0 0 0 00 2,800 0 0 0 00

2,930 0 0 0 00

1,373 0 6 7 00

1,227 2 5 2 00

Chapter 22  799

MINI-PRACTICE SET 3 (continued)

Name The Kansas Company Worksheet (continued) Year Ending December 31, 2013 TRIAL BALANCE

ACCOUNT NAME 1 Totals Brought Forward

DEBIT 3,930 0 6 7 00

2 Gain on Early Retirement of Bonds Payable 3 Interest Expense

CREDIT 3,936 7 9 5 00

ADJUSTMENTS DEBIT 307 8 1 0 00

8 7 0 00 7 5 9 8 00

1 9 4 0 00

4 Amortization of Organization Costs

2 0 0 0 00

5 Income Tax Expense

65 7 6 7 00

6 Totals

CREDIT 377 5 1 7 00

3,937 6 6 5 00

377 5 1 7 00

7 Net Income After Tax 8 Totals 9 10 11

800  Chapter 22

MINI-PRACTICE SET 3 (continued)

ADJUSTED TRIAL BALANCE DEBIT CREDIT 4,080 8 1 7 00 4,157 2 5 2 00 8 7 0 00 9 5 3 8 00 2 0 0 0 00 65 7 6 7 00 4,158 1 2 2 00 4,158 1 2 2 00

INCOME STATEMENT DEBIT CREDIT 2,707 7 5 0 00 2,930 0 0 0 00 8 7 0 00 9 5 3 8 00 2 0 0 0 00 65 7 6 7 00 2,785 0 5 5 00 2,930 8 7 0 00 145 8 1 5 00 2,930 8 7 0 00 2,930 8 7 0 00

BALANCE SHEET DEBIT CREDIT 1,373 0 6 7 00 1,227 2 5 2 00

1,373 0 6 7 00 1,373 0 6 7 00

1,227 2 5 2 00 145 8 1 5 00 1,373 0 6 7 00

Chapter 22  801

MINI-PRACTICE SET 3 (continued)

Name

The Kansas Company Summary Income Statement Year Ended December 31, 2013 Net Sales Cost of Goods Sold Merchandise Inventory, January 1 Purchases Cost of Goods Available for Sale Less Merchandise Inventory, December 31 Cost of Goods Sold Gross Profit Operating Expenses Net Income from Operations Other Income/Expenses Gain on Early Retirement of Bonds Payable Interest Expense Amortization of Organization Costs Total Other Expenses Net Income Before Income Taxes Federal Income Tax Expense Net Income After Taxes

2,800 0 0 0 00 150 0 0 0 00 1,880 0 0 0 00 2,030 0 0 0 00 130 0 0 0 00 1,900 0 0 0 00 900 0 0 0 00 677 7 5 0 00 222 2 5 0 00 8 7 0 00 9 5 3 8 00 2 0 0 0 00 10 6 6 8 00 211 5 8 2 00 65 7 6 7 00 145 8 1 5 00

The Kansas Company Statement of Retained Earnings Year Ended December 31, 2013 Unappropriated Retained Earnings Balance, January 1 Add: Net Income Deductions: Cash Dividend on Common Stock Cash Dividend on Preferred Stock Stock Dividend on Common Stock Appropriated for Expansion Unappropriated Retained Earnings Appropriated Retained Earnings Total Retained Earnings

802  Chapter 22

208 3 7 5 00 145 8 1 5 00 354 1 9 0 00 2 0 0 0 00 7 0 0 0 00 30 0 0 0 00 100 0 0 0 00

139 0 0 0 00 215 1 9 0 00 200 0 0 0 00 415 1 9 0 00

MINI-PRACTICE SET 3 (continued)

Name The Kansas Company Balance Sheet December 31, 2013

Assets Current Assets Cash Accounts Receivable Less Allowance for Doubtful Accounts Subscriptions Receivable—Common Stock Merchandise Inventory Total Current Assets Property, Plant, and Equipment Land Building Accumulated Depreciation—Buildings Furniture and Equipment Accumulated Depreciation—Furniture and Equipment Total Property, Plant, and Equipment Other Assets Organization Costs Total Assets Liabilities and Stockholders’ Equity Current Liabilities Accounts Payable Interest Payable Estimated Income Taxes Payable Dividends Payable—Preferred Stock Total Current Liabilities Long-Term Liabilities 10-Year, 10% Bonds Payable Premium on Bonds Payable Total Long-Term Liabilities Total Liabilities

644 8 6 7 00 150 0 0 0 00 (4 5 0 0 00) 145 5 0 0 00 3 0 0 0 00 130 0 0 0 00 923 3 6 7 00 85 0 0 0 00 225 0 0 0 00 (33 7 5 0 00) 191 2 5 0 00 70 0 0 0 00 (21 0 0 0 00) 49 0 0 0 00 325 2 5 0 00 4 0 0 0 00 1,252 6 1 7 00

270 0 0 0 00 2 0 0 0 00 65 7 6 7 00 7 0 0 0 00 344 7 6 7 00 80 0 0 0 00 1 8 6 0 00

81 8 6 0 00 426 6 2 7 00

Chapter 22  803

MINI-PRACTICE SET 3 (continued)

Name The Kansas Company Balance Sheet (continued) December 31, 2013

Stockholders’ Equity Paid-in-Capital 8% Preferred Stock, $100 par, 10,000 shares authorized, 1,500 shares outstanding Paid-in Capital in Excess of Par—Preferred Stock Common Stock ($10 par, 100,000 authorized, 20,000 outstanding) Paid-in Capital in Excess of Par—Common Stock Common Stock Subscribed Common Stock Dividends Distributable Total Paid-in Capital Retained Earnings Appropriated Unappropriated Total Retained Earnings Treasury Stock—Preferred Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity

804  Chapter 22

200 0 0 0 00 11 0 0 0 00 200 0 0 0 00 36 0 0 0 00 5 0 0 0 00 20 0 0 0 00

211 0 0 0 00

261 0 0 0 00 472 0 0 0 00

200 0 0 0 00 215 1 9 0 00 415 1 9 0 00 (61 2 0 0 00) 825 9 9 0 00 1,252 6 1 7 00

SOLUTIONS TO PRACTICE TEST Part A True-False 1. FALSE 2. FALSE 3. TRUE 4. FALSE 5. TRUE 6. TRUE 7. TRUE 8. FALSE

9. 10. 11. 12. 13. 14. 15.

TRUE TRUE TRUE FALSE TRUE FALSE TRUE

Part B Matching 1. j 2. g 3. d 4. c 5. f 6. b 7. a 8. e 9. i 10. h 11. k

Chapter 22  805

CHAPTER 23 FINANCIAL STATEMENT ANALYSIS Chapter Opener: Thinking Critically Answers will vary, though should include references to the price to earnings ratio and the current ratio as key financial ratios that indicate a company’s financial health. Fast Facts • Teva Pharmaceutical is among the top 15 pharmaceutical companies in the world and the leader in generic pharmaceuticals. • •

Teva currently operates in over 60 countries with some 40,000 employees worldwide. Teva Research Development focuses on therapies for the central nervous system (with emphasis on multiple sclerosis), autoimmune diseases, and oncology.

•

The company reported net income of $3 billion in 2009.

Managerial Implications: Thinking Critically • Trend analysis. Analyze net income, cost of goods sold, and gross profit. Compare the percentage of gross profit to sales for the five-year period. Discussion Questions These questions are designed to check students’ understanding of new terms, concepts, and procedures presented in the chapter. 1. 2. 3.

Comparison of each Income Statement item with net sales for the period. They may become a long-term creditor. Yes. Increasing both figures by 12 percent will cause gross profit to also increase by 12 percent, the same percentage increase as sales.

Statements in which each item is expressed as a percentage of a base amount: Net Sales for the Income Statement and Total Assets for the Balance Sheet.

5. 6.

Total assets (or total equities). Generally, the analyst is concerned with percentage changes. In the case of very small items on the financial statements, a large percentage change might be insignificant.

7. 8.

Measures profitability of stockholders’ investment in the company. Subtract preferred stock dividend requirement from net income after taxes; divide the result by the average number of shares of common stock for year.

Acid test ratio uses only cash and near cash items as the numerator, whereas current ratio uses all current assets.

10. 11. 12.

Divide cost of goods sold by the average inventory. Measures effectiveness of the credit and collection function. 2 to 1: but may vary depending on the industry.

806  Chapter 23

EXERCISE 23.1 Sales Less Sales Returns and Allowances Net Sales Cost of Goods Sold Gross Profit on Sales

2013 2012 1,550,000 105.1% 1,400,000 104.9% 75,000 5.1% 65,000 4.9% 1,475,000 100.0% 1,335,000 100.0% 961,000 65.2% 868,000 65.0% 514,000 34.8% 467,000 35.0%

EXERCISE 23.2 Orlando, Inc. Comparative Balance Sheet December 31, 2013 and 2012 2013

2012

Assets Current Assets Cash Accounts Receivable (Net) Inventory Total Current Assets Property, Plant, and Equipment Buildings (Net) Equipment (Net) Land Total Property, Plant, and Equipment Total Assets

165,300 194,000 120,000 479,300

20.1% 23.5% 14.6% 58.1%

160,000 175,000 90,000 425,000

20.4% 22.3% 11.5% 54.1%

190,000 85,000 70,000 345,000 824,300

23.0% 10.3% 8.5% 41.9% 100.0%

200,000 90,000 70,000 360,000 785,000

25.5% 11.5% 8.9% 45.9% 100.0%

Change 150,000 10,000 140,000 93,000 47,000 10,000 20,000 30,000 17,000 5,100 11,900

Percent 10.7% 15.4% 10.5% 10.7% 10.1% 5.1% 11.1% 8.0% 18.5% 18.5% 18.5%

EXERCISE 23.3 Sales Less Sales Returns and Allowances Net Sales Cost of Goods Sold Gross Profit on Sales Selling Expenses General Expenses Total Expenses Net Income Before Income Taxes Income Tax Expense Net Income After Income Taxes

2013 2012 1,550,000 1,400,000 75,000 65,000 1,475,000 1,335,000 961,000 868,000 514,000 467,000 205,000 195,000 200,000 180,000 405,000 375,000 109,000 92,000 32,700 27,600 76,300 64,400

Chapter 23  807

EXERCISE 23.4 Orlando, Inc. Comparative Balance Sheet December 31, 2013 and 2012 2013

2012

Difference

Percent

165,300 194,000 120,000 479,300

160,000 175,000 90,000 425,000

5,300 19,000 30,000 54,300

3.3% 10.9% 33.3% 12.8%

Property, Plant, and Equipment Buildings (Net) Equipment (Net) Land Total Property, Plant, and Equipment Total Assets

190,000 85,000 70,000 345,000 824,300

200,000 90,000 70,000 360,000 785,000

(10,000) (5,000) –0– (15,000) 39,300

-5.0% -5.6% 0.0% -4.2% 5.0%

Liabilities and Stockholders’ Equity Liabilities Current Liabilities Accounts Payable Other Current Liabilities Total Current Liabilities

140,000 30,000 170,000

165,000 42,000 207,000

(25,000) (12,000) (37,000)

-15.2% -28.6% -17.9%

Long-Term Liabilities Bonds Payable Total Long-Term Liabilities Total Liabilities

100,000 100,000 270,000

100,000 100,000 307,000

–0– –0– (37,000)

0.0% 0.0% -12.1%

Stockholders’ Equity Common Stock ($1 par) Retained Earnings Total Stockholders’ Equity

200,000 354,300 554,300

200,000 278,000 478,000

–0– 76,300 76,300

0.0% 27.4% 16.0%

Total Liabilities and Stockholders’ Equity

824,300

785,000

39,300

5.0%

Assets Current Assets Cash Accounts Receivable (Net) Inventory Total Current Assets

808  Chapter 23

EXERCISE 23.5

Rate of Return on Sales =

Net Income After Taxes Net Sales

= =

2013

2012

$76,300 $1,475,000 5.2%

$64,400 $1,335,000 4.8%

2013

2012

$76,300 $516,150 14.8%

$64,400 $439,000 14.7%

2013

2012

$109,000 $824,300 13.2%

$92,000 $785,000 11.7%

2013

2012

$76,300 200,000 $0.38

$64,400 200,000 $0.32

2013

2012

$1.50 $0.38 3.95:1

$1.10 $0.32 3.44:1

EXERCISE 23.6

Rate of return on stockholders’ equity

Net Income After Taxes Average SE

= =

EXERCISE 23.7

Rate of return on assets =

Income Before Taxes Total Assets

= =

EXERCISE 23.8

Earnings per share

Net Income After Tax No. of share CS

= =

EXERCISE 23.9

Price-earnings ratio

Market Price of CS EPS of CS

= =

Chapter 23  809

EXERCISE 23.10

Current ratio

Current Assets Current Liabilities

= =

2013

2012

$479,300 $170,000 2.8:1

$425,000 $207,000 2.1:1

2013

2012

$961,000 $105,000 9.2 times

$868,000 $89,000 9.8 times

EXERCISE 23.11

Inventory turnover

Cost of goods sold Average merch inventory

= =

EXERCISE 23.12 2013 Accounts receivable turnover

Net credit sales Average A/R

= =

810  Chapter 23

$1,475,000 $184,500 8.0 times

8 4 0 0 3 0 6 0 0 3 9 0 0 0 8 6 0 0 3 0 4 0 0 5 8 6 0 0 0

8 7 0 0 8 7 0 2 5 2 0 1 2 0 9 0

Cost of Goods Sold Merchandise Inventory, January 1 Net Purchases Total Merchandise Available for Sale Less Merchandise Inventory, December 31 Cost of Goods Sold

Gross Profit on Sales

Operating Expenses Selling Expenses Sales Salaries Expense Payroll Tax Expense—Selling Other Selling Expenses Total Selling Expenses

0 0 0 0

0 0 0 0 0

9 0 5 0 0 0 1 5 0 0 0 8 9 0 0 0 0

2013

AMOUNTS

8 0 0 00 8 0 00 1 5 2 00 1 0 3 2 00

4 9 8 0 00

8 0 0 00 2 6 2 0 00 3 4 2 0 00 8 4 0 00 2 5 8 0 00

7 6 5 0 00 9 0 00 7 5 6 0 00

2012

9.8% 1.0% 2.8% 13.6%

65.8%

9.4% 34.4% 43.8% 9.7% 34.2%

101.7% 1.7% 100.0%

2013

10.6% 1.1% 2.0% 13.7%

65.9%

10.6% 34.7% 45.2% 11.1% 34.1%

101.2% 1.2% 100.0%

2012

PERCENT OF NET SALES

The LACAL Company Comparative Income Statement For Years Ended December 31, 2013 and 2012

ACCOUNT NAME Revenue Sales Less Sales Returns and Allowances Net Sales

PROBLEM 23.1A

7 0 0 0 7 0 0 1 0 0 0 0 1 7 7 0 0

8 8 0 0 0

4 0 0 0 4 4 0 0 0 4 8 0 0 0 2 0 0 0 4 6 0 0 0

1 4 0 0 0 0 6 0 0 0 1 3 4 0 0 0

AMOUNT

8.8% 8.8% 65.8% 17.2%

17.7%

5.0% 16.8% 14.0% 2.4% 17.8%

18.3% 66.7% 17.7%

PERCENT

INCREASE OR (DECREASE)

2 8 1 6 0 0 3 0 4 4 0 0 9 1 3 2 0 2 1 3 0 8 0

Total Operating Expenses

Net Income Before Income Taxes Income Tax Expense Net Income After Income Taxes

0 0 0 0 0

1 3 0 0 0 1 3 0 0 8 2 5 9 4 5 1 6 0 7 0

2013

AMOUNTS

2 5 8 5 50 7 7 5 65 1 8 0 9 85

2 3 9 4 50

1 1 0 0 00 1 1 0 00 8 2 50 7 0 00 1 3 6 2 50

2012

34.2% 10.3% 23.9%

31.6%

14.6% 1.5% 0.9% 1.1% 18.1%

2013

34.2% 10.3% 23.9%

31.7%

14.6% 1.5% 1.1% 0.9% 18.0%

2012

PERCENT OF NET SALES

The LACAL Company Comparative Income Statement (continued) For Years Ended December 31, 2013 and 2012

ACCOUNT NAME General and Administrative Expenses Officers Salaries Expense Payroll Tax Expense—Administrative Depreciation Expense Other General and Administrative Expenses Total General and Administrative Expenses

PROBLEM 23.1A (continued)

4 5 8 5 0 1 3 7 5 5 3 2 0 9 5

4 2 1 5 0

2 0 0 0 0 2 0 0 0 − 0− 2 4 5 0 2 4 4 5 0

AMOUNT

17.7% 17.7% 17.7%

17.6%

18.2% 18.2% 0.0% 35.0% 17.9%

PERCENT

INCREASE OR (DECREASE)

1 1 1 0 22 9 5 0 00 8 6 0 00 9 5 00 1 2 00 3 0 2 7 22

7 5 0 00 8 2 5 00 (3 3 0 0 0) 4 9 5 00 1 2 4 5 00 4 2 7 2 22

Property, Plant, and Equipment Land Building and Equipment Less Accumulated Depreciation Net Book Value—Building and Equipment Total Property, Plant, and Equipment

Total Assets

2013

AMOUNTS

3 5 6 0 25

7 5 0 00 8 2 5 00 (2 4 7 5 0) 5 7 7 50 1 3 2 7 50

4 6 2 75 8 7 5 00 8 4 0 00 5 0 00 5 00 2 2 3 2 75

2012

THE LACAL COMPANY Comparative Balance Sheet December 31, 2013 and 2012

Assets Current Assets Cash Accounts Receivable Merchandise Inventory Prepaid Expenses Supplies Total Current Assets

PROBLEM 23.1A (continued)

21.1% 23.2% (7.0)% 16.2% 37.3%

13.0% 24.6% 23.6% 1.4% 0.1% 62.7%

2012

100.0% 100.0%

17.6% 19.3% (7.7)% 11.6% 29.1%

26.0% 22.2% 20.1% 2.2% 0.3% 70.9%

2013

PERCENT OF TOTAL ASSETS

7 0 0 0 0 7

7 1 1 9 7

− 0− − 0− 8 2 50 (8 2 5 0) (8 2 5 0)

6 4 7 4 7 5 0 2 0 0 4 5 0 7 0 7 9 4 4

AMOUNT

(20)%

0.0% 0.0% 33.3% (14.3)% (6.2)%

139.9% 8.6% 2.4% 90.0% 140.0% 35.6%

PERCENT

INCREASE OR (DECREASE)

0 0 0 0 2

1 0 0 00 1 0 0 00 2 2 5 0 00 2 4 5 0 00 3 5 6 0 25

1 1 1 0 25

4 5 0 00 4 5 0 00

5 7 0 00 3 0 00 1 0 25 5 0 00 6 6 0 25

2012

31.2%

12.6% 12.6%

16.0% 0.8% 0.3% 1.4% 18.5%

2012

2.3% 2.8% 2.3% 2.8% 79.1% 63.2% 83.8% 68.8% 100.0% 100.0%

16.2%

9.1% 9.1%

6.3% 0.2% 0.3% 0.2% 7.1%

2013

PERCENT OF TOTAL ASSETS

Analyze: Other Selling Expenses increased by 65.8%.

1 8 8 3)

− 0− − 0− 1 1 3 0 8 0 1 1 3 0 8 0 7 1 1 9 7

(6 0 0 0) (6 0 0 0)

0 0 0 0) (2 0 0 0) 1 1 7 (4 0 0 0) (3 5 8 8 3)

AMOUNT

0.0% 0.0% 50.3% 46.2% 20.0%

(37.7)%

(13.3)% (13.3)%

(52.6)% (66.7)% 11.4% (80.0)% (54.3)%

PERCENT

INCREASE OR (DECREASE)

2. The large increase in cash should be investigated, along with the increase in Accounts Receivable. Other Selling Expense increase of more than 69% should be explored.

1 0 0 0 1 0 0 0 3 3 8 0 8 3 5 8 0 8 4 2 7 2 2

6 9 1 4 2

Total Liabilities

Stockholders’ Equity Common Stock ($1 par, 10,000 shares authorized 10,000 shares issued and outstanding) Paid-in Capital—Common Stock Retained Earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity

3 9 0 0 0 3 9 0 0 0

Long-Term Liabilities Mortgage Payable Total Long-Term Liabilities

0 0 2 0 2

2 7 0 0 1 0 0 1 1 4 1 0 0 3 0 1 4

2013

AMOUNTS

THE LACAL COMPANY Comparative Balance Sheet (continued) December 31, 2013 and 2012

Liabilities and Stockholders’ Equity Current Liabilities Accounts Payable Sales Tax Payable Payroll Taxes Payable Income Taxes Payable Total Current Liabilities

PROBLEM 23.1A (continued)

Return on total assets

Ratio of stockholders’ equity l i d

Rate of return on stockholders’ equity

Asset turnover

10.

$213,080 $358,080 $890,000 $427,222

Net income Stockholders’ equity Net sales Total assets

$358,080 $427,222

Stockholders’ equity Total equities

$358,080 10,000 $304,400 $427,222

$213,080 10,000

2.1:1

59.5%

83.8%

71.3%

$35.81

$21.31 per share

23.9%

$213,080 $890,000

$46,275 + $87,500 $66,025

6.8:1

$756,000 $356,025

$180,985 $245,000

$245,000 $356,025

$258,550 $356,025

$245,000 10,000

$180,985 10,000

$180,985 $756,000

$258,000 ($80,000 + $84,000) ÷ 2

$223,275 $66,025

2012 10.0:1

3.6

$304,000 ($84,000 + $86,000) ÷ 2

2013

$111,022 + $95,000 $30,142

$302,722 $30,142

Net Income before interest and taxes Total assets

Total stockholders’ equity - equity of preferred stock Number of common stock shares outstanding

Net income after taxes - preferred dividend requirement Average number of shares of common stock

Net income after taxes Net sales

Cost of goods sold Average merchandise inventory

Cash + Receivables + Marketable securities Current liabilities

Current assets Current liabilities

Return on sales

6. Book value per share of common stock

Inventory turnover

Acid-test ratio

5. Earnings per share of common stock

Current ratio

PART I

PROBLEM 23.2A

2.1:1

73.9%

68.8%

72.6%

$24.50 per share

$18.10 per share

23.9%

3.1

2.0:1

3.4:1

PROBLEM 23.2A (continued) PART II 1. The 2012 and 2013 ratios of 73.9% and 59.5% are both much better than average. The decrease in the return from 2013 should be monitered. 2. The company bettered its ratio in 2013 from 68.8% (slightly better than the industry average) to 83.8%. The 2013 ratio is much better than industry average. 3. The company is below the industry average of 2.5 to 1. 4. Inventory turnover for this company is well below the industry average. Management may want to weigh the costs of having more inventory on hand. Analyze: Sales would rise to $934,500 while net income would be approximately $223,734. The return on sales would be $223,734/$934,500 or 23.9%.

816  Chapter 23

Book value per share of common stock

Stockholders’ equity Number of shares common stock

Net sales Total assets

Asset turnover

f. Current assets Current liabilities

Stockholders’ equity to total equities

Net income after taxes Number of shares of common stock

Earnings per share

Net income after taxes Stockholder’s equity

Current ratio

Rate of return on stockholders’ equity

Net income before taxes and interest Total assets

Stockholders’ equity Total equities

Rate of return on total assets

Net income after taxes Sales

a. Rate of return on net sales

PROBLEM 23.3A

$151,500 2,000

$795,000 $350,000

$125,000 $98,500

$151,500 $350,000

$82,875 2,000

$82,875 $151,500

$120,500 $350,000

$82,875 $795,000

$75.75 per share

2.27 times

1.3:1

43.29%

$41.44 per share

54.70%

34.43%

$221,100 2,000

$650,000 $300,900

$104,900 $79,800

$221,100 $300,900

$131,250 2,000

$131,250 $221,100

$175,000 $300,900

$131,250 $650,000

10.42%

Six Inc.

Five Inc.

$110.55 per share

2.16 times

1.3:1

73.48%

$65.63 per share

59.36%

58.16%

20.19%

PROBLEM 23.3A (continued) 2.

Six Inc. has better rate of return on sales and also a better balance sheet due to the lack of any longterm debt. Both companies are profitable. The current ratio and asset turnover ratios were the only similar ratios.

The long-term debt of Five Inc. could be a negative from an investment point of view. Six Inc. has more net income on a smaller sales amount.

Based on current performance, both companies could probably handle the debt service that would be required. It should be noted that Five Inc. already has $100,000 of Bonds Payable, which might concern investors and bankers should additional debt be assumed.

Analyze: Sales Cost of Goods Sold Gross Profit Operating Expenses Net Income from Operations Interest Expense Net Income Before Income Tax Income Tax Net Income After Income Tax

$650,000 332,500 $317,500 125,000 $192,500 0 $192,500 48,125 $144,375

The reduction of 5% in Cost of Goods Sold will result in a 10 % increase in return on sales (from 20.2 to 22.2) and also on the EPS (from $65.63 to $72.19). This would be good news for investors.

818  Chapter 23

3 6 0 0 0 2 7 5 0 0 0 3 1 1 0 0 0 3 6 0 0 0 2 7 5 0 0 0 2 9 5 0 0 0

8 7 0 0 0 8 7 0 0 2 4 0 0 0 1 1 9 7 0 0

Cost of Goods Sold Merchandise Inventory, January 1 Net Purchases Total Merchandise Available for Sale Less Merchandise Inventory, December 31 Cost of Goods Sold

Gross Profit on Sales

Operating Expenses Selling Expenses Sales Salaries Expense Payroll Tax Expense—Selling Other Selling Expenses Total Selling Expenses

*Rounded

5 7 3 5 0 0 3 5 0 0 5 7 0 0 0 0

2013

AMOUNTS

8 0 0 00 8 0 00 1 8 0 00 1 0 6 0 00

2 6 3 0 00

3 4 0 00 1 6 2 0 00 1 9 6 0 00 3 6 0 00 1 6 0 0 00

4 2 5 5 00 2 5 00 4 2 3 0 00

2012 2012

15.3% 1.5% 4.2% 21.0%

51.8%

6.3% 48.2% 54.6% 6.3% 48.2%

18.9% 1.9% 4.3% 25.1%

62.2%

8.0% 38.3% 46.3% 8.5% 37.8%

100.6% 100.6% 0.6% 0.6% 100.0% 100.0%

2013

PERCENT OF NET SALES*

Best Sales, Inc. Comparative Income Statement For Years Ended December 31, 2013 and 2012

Revenue Sales Less Sales Returns and Allowances Net Sales

PROBLEM 23.1B

7 0 0 7 0 6 0 0 1 3 7 0

0 0 0 0

3 2 0 0 0

2 0 0 0 1 1 3 0 0 0 1 1 5 0 0 0 0 1 1 5 0 0 0

1 4 8 0 0 0 1 0 0 0 1 4 7 0 0 0

AMOUNT

8.8% 8.8% 33.3% 12.9%

12.2%

5.9% 69.8% 58.7% 0.0% 71.9%

34.8% 40.0% 34.8%

PERCENT*

INCREASE OR (DECREASE)

Net Income Before Income Taxes Income Tax Expense Net Income After Income Taxes

Total Operating Expenses

PROBLEM 23.1B (continued)

8 2 3 0 0 2 0 5 7 5 6 1 7 2 5

9 3 0 00 2 3 2 50 6 9 7 50

1 7 0 0 00

5 0 0 00 5 0 00 7 0 00 2 0 00 6 4 0 00

7 5 0 0 0 7 5 0 0 7 0 0 0 3 5 0 0 9 3 0 0 0 2 1 2 7 0 0

2012

2013

AMOUNTS

14.4% 3.6% 10.8%

37.3%

13.2% 1.3% 1.2% 0.6% 16.3%

2013

22.0% 5.5% 16.5%

40.2%

11.8% 1.2% 1.7% 0.5% 15.1%

2012

PERCENT OF NET SALES*

Best Sales, Inc. Comparative Income Statement (continued) For Years Ended December 31, 2013 and 2012

0 7 0 0) (2 6 7 5) (8 0 2 5)

4 2 7 0 0

2 5 0 0 0 2 5 0 0 − 0− 1 5 0 0 2 9 0 0 0

AMOUNT

-11.5% -11.5% -11.5%

25.1%

50.0% 50.0% 0.0% 75.0% 45.3%

PERCENT

INCREASE OR (DECREASE)

2 9 8 8 00

00 00 0 0) 00 00

Total Assets

0 5 0 5 5

4 8 (1 6 1 0

Property, Plant, and Equipment Land Building and Equipment Less Accumulated Depreciation Net Book Value—Building and Equipment Total Property, Plant, and Equipment 0 2 4 8 8

8 8 3 75 6 3 9 25 3 6 0 00 1 5 00 5 00 1 9 0 3 00

2013

AMOUNTS

0 5 0 5 5

00 00 0 0) 00 00

79 00 00 00 34 13

2 4 4 5 13

4 0 8 2 (7 7 5 1 1 5

5 0 0 0 4 1 2 9 0

5 6 3 5 3 6 1

2012

Best Sales, Inc. Comparative Balance Sheet For Years Ended December 31, 2013 and 2012

Current Assets Cash Accounts Receivable Merchandise Inventory Prepaid Expenses Supplies Total Current Assets

Assets

PROBLEM 23.1B (continued)

100.0%

13.4% 27.6% -4.7% 22.9% 36.3%

29.6% 21.4% 12.0% 0.5% 0.2% 63.7%

2013

100.0%

16.4% 33.7% -2.9% 30.9% 47.2%

23.1% 14.3% 14.7% 0.4% 0.2% 52.8%

2012

PERCENT OF TOTAL ASSETS*

5 4 2 8 7

− 0− − 0− (7 0 0 0) (7 0 0 0) (7 0 0 0)

3 1 7 9 6 2 8 9 2 5 0 5 0 0 6 6 6 1 2 8 7

AMOUNT

22.2%

0.0% 0.0% 100.0% (9.3)% (6.1)%

56.2% 82.6% 0.0% 50.0% 15.2% 47.5%

PERCENT

INCREASE OR (DECREASE)

2 0 5 9 5 1 2 0 2 4 4

0 0 2 2 5

00 00 50 50 13

1 2 4 2 63

7 5 0 00 7 5 0 00

4 5 0 00 2 5 00 1 0 00 7 63 4 9 2 63

2012

6.7% 1.7% 52.4% 60.7% 100.0%

39.3%

24.8% 24.8%

12.7% 0.7% 0.4% 0.7% 14.5%

2013

8.2% 2.0% 39.0% 49.2% 100.0%

50.8%

30.7% 30.7%

18.4% 1.0% 0.4% 0.3% 20.1%

2012

− 0− − 0− 6 1 2 2 5 6 1 2 2 5 5 4 2 8 7

(6 9 3 8)

(1 0 0 0) (1 0 0 0)

(7 0 0 0) (5 0 0) 2 0 0 1 3 6 2 (5 9 3 8)

AMOUNT

0.0% 0.0% 64.3% 50.9% 22.2%

(5.6)%

(1.3)% (1.3)%

(15.6)% (20.0)% 20.0% 178.5% (12.1)%

PERCENT*

PERCENT OF NET ASSETS* INCREASE OR (DECREASE)

2. From the Balance Sheet, you should be concerned about the large increase in Accounts Receivable. From the Income Statement, you should investigate the large increase of Net Purchases. Analyze: $570,000 (1.348) = $768,360

*Rounded

00 00 75 75 00

2 0 5 1 5 6 1 8 1 2 9 8

Stockholders’ Equity Common Stock ($1 par, 20,000 shares authorized 20,000 shares issued and outstanding) Paid-in Capital—Common Stock Retained Earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity 0 0 4 4 8

1 1 7 3 25

Total Liabilities

7 4 0 00 7 4 0 00

00 00 00 25 25

Long-Term Liabilities Mortgage Payable Total Long-Term Liabilities

0 0 2 1 3

3 8 2 1 2 4 3

2013

AMOUNTS

Best Sales, Inc. Comparative Balance Sheet (continued) December 31, 2013 and 2012

Liabilities and Stockholders’ Equity Current Liabilities Accounts Payable Sales Tax Payable Payroll Taxes Payable Income Taxes Payable Total Current Liabilities

PROBLEM 23.1B (continued)

= =

Inventory turnover

Return on sales

Net income after taxes Net sales

Cost of goods sold Average merchandise inventory

Cash + Receivables + Marketable securities Current liabilities

Current assets Current liabilities

= =

Ratio of return on ending stockholders’ equity

Yield on common stock

11.

Dividend paid Market value

Net income after taxes Ending stockholders’ equity

Stockholders’ equity Liabilities

9. Ratio of stockholders’ equity to liabilities

10.

Stockholders’ equity Total equities

Income before interest and taxes Total assets

Return on total assets

Total stockholders’ equity - equity of preferred stock Number of common stock shares outstanding

8. Ratio of stockholders’ equity to total equities

Book value per share of common stock

5. Earnings per share of common = Net income after taxes - preferred dividend requirement Average number of shares of common stock stock

Acid-test ratio

Current ratio

PART I

PROBLEM 23.2B

$1.00 $2.50

$61,725 $181,475

$181,475 $117,325

$181,475 $298,800

$82,300 $298,800

$181,475 20,000

$61,725 20,000

$61,725 $570,000

10.8%

7.6

3.5:1

4.4:1

60.7%

40.0%

34.0%

= 154.7%

$0.50 $1.50

$69,750 $120,250

$120,250 $124,263

$120,250 $244,513

$93,000 $244,513

$69,750 20,000

$69,750 $423,000

$120,250 20,000 27.5%

16.5%

4.6

1.9:1

2.6:1

33.3%

58.0%

96.8%

49.2%

38.0%

= $6.01 per share

= $3.49 per share

$160,000 = ($34,000 + $36,000) ÷ 2

$56,579 + $35,000 $49,263

$129,013 $49,263

2012

= $9.07 per share

= $3.09 per share

$275,000 = ($36,000 + $36,000) ÷ 2

$88,375 + $63,925 $43,325

$190,300 $43,325

2013

PROBLEM 23.2B (continued) PART II 1. 2. 3. 4.

Even though the rate of return decreased in 2013 it remains above the industry average. The company is significantly above the industry average. The company made significant improvement in 2013 to exceed the industry average. In 2013, Best Sales Inc. has a current ratio significantly above the industry average. It appears to be an excellent company. Analyze:

The increasing sales rate and solid financial ratios indicate a good investment and one might anticipate a rise in the price of its common stock. The cost of inventory should be watched closely.

824  Chapter 23

Rate of return on sales

Rate of return on total assets

Rate of return on stockholders’ equity

Earnings per share

Stockholders’ equity to total equities

Current ratio

Asset turnover

Book value per share of common stock

1. a.

PROBLEM 23.3B

Stockholders’ equity Number of shares common stock

Net sales Total assets

Current assets Current liabilities

Stockholders’ equity Total equities

Net income after taxes Number of shares of common stock

Net income after taxes Stockholder’s equity

Net income before taxes and interest Total assets

Net income after taxes Sales

$810,630 50,000

$2,500,000 $1,375,630

$558,630 $315,000

$810,630 $1,375,630

$147,576 50,000

$147,576 $810,630

$248,600 $1,375,630

$147,576 $2,500,000

= $16.21 per share

= 1.82 times

= 1.8:1

= 58.93%

= $2.95 per share

= 18.21%

= 18.07%

= 5.90%

ABC Corp.

$921,100 50,000

$2,350,000 $1,276,600

$526,600 $205,500

$921,100 $1,276,600

$160,677 50,000

$160,677 $921,100

$268,450 $1,276,600

$160,677 $2,350,000

= $18.42 per share

= 1.84 times

= 2.6:1

= 72.15%

= $3.21 per share

= 17.44%

= 21.03%

= 6.84%

XYZ Corp.

PROBLEM 23.3B (continued) 2. Both companies have similar current earnings records. The XYZ Corp. has a slightly better balance sheet with a lower long term debt amount, giving it a better current ratio and stockholders’ equity to total equity ratio. The other ratios are very similar. 3. XYZ Corp. has slightly better ratios than ABC Corp., although both companies appear to be financially sound. ABC’s debt might make it slightly more risky than XYZ. 4. Based on current performance, both companies could probably handle the debt service that would be required. XYZ Corp. is probably a little better able to handle the additional debt.

Analyze:

Sales Operating Expenses

826  Chapter 23

ABC Corp. $2,500,000 $776,400

31.10%

XYZ Corp. $2,350,000 $859,550

36.60%

CRITICAL THINKING PROBLEM 23.1 Produce Sales Company Comparative Income Statement For Years Ending December 31, 2013 and 2012 AMOUNTS 2013 Net Sales Less: Cost of Goods Sold Gross Profit Operating Expenses Selling Expenses General and Administrative Expenses Total Operating Expenses Net Income Before Income Tax Income Tax Expense Net Income After Income Tax

2012

1 5 0 0 0 0 0 5 5 5 0 0 0 9 4 5 0 0 0

1 1 6 1 5 0 0 5 0 0 0 0 0 6 6 1 5 0 0

4 0 5 0 0 0 3 4 5 0 0 0 7 5 0 0 0 0 1 9 5 0 0 0 4 8 7 5 0 1 4 6 2 5 0

2 9 2 0 0 0 2 4 0 0 0 0 5 3 2 0 0 0 1 2 9 5 0 0 3 2 3 7 5 9 7 1 2 5

Chapter 23  827

CRITICAL THINKING PROBLEM 23.1 (continued) Produce Sales Company Comparative Balance Sheet December 31, 2013 and 2012 AMOUNTS 2013

2012

Assets Current Assets Cash Accounts Receivable Merchandise Inventory Total Current Assets

1 7 5 0 0 0 1 2 0 0 0 0 1 1 0 0 0 0 4 0 5 0 0 0

9 0 0 0 0 1 0 0 0 0 0 7 5 0 0 0 2 6 5 0 0 0

Property, Plant, and Equipment Land Property, Plant, and Equipment Less: Accumulated Depreciation Total Property, Plant, and Equipment

6 0 0 0 0 2 0 0 0 0 0 (4 0 0 0 0) 2 2 0 0 0 0

6 0 0 0 0 2 0 0 0 0 0 (2 0 0 0 0) 2 4 0 0 0 0

Total Assets

6 2 5 0 0 0

5 0 5 0 0 0

Liabilities and Stockholders’ Equity Current Liabilities Accounts Payable Accrued Expenses Total Current Liabilities

1 2 1 0 0 0 3 7 7 5 0 1 5 8 7 5 0

1 1 0 0 0 0 2 5 0 0 0 1 3 5 0 0 0

Stockholders’ Equity Common Stock ($10 par, 10,000 shares authorized) Paid in Capital in Excess of Par—Common Stock Retained Earnings Total Stockholders’ Equity

5 0 0 0 0 1 0 0 0 0 0 3 1 6 2 5 0 4 6 6 2 5 0

5 0 0 0 0 1 0 0 0 0 0 2 2 0 0 00 3 7 0 0 0 0

Total Liabilities and Stockholders’ Equity

6 2 5 0 0 0

5 0 5 0 0 0

Analyze: The company's current ratio increased from 1.96 to 2.55 from 2012 to 2013. This is a 30.1 percent increase in the ratio, an improvement that should be applauded by the board of directors.

828  Chapter 23

CRITICAL THINKING PROBLEM 23.2 Safety Incorporated Condensed Income Statement For the Year Ended December 31, 2013 Net Sales Cost of Goods Sold Gross Profit Operating Expenses Selling Expenses Administrative Expenses Total Operating Expenses Operating Income Income Tax Net Income

1 3 5 0 0 0 0 8 1 0 0 0 0 5 4 0 0 0 0

100.0% 60.0% 40.0%

1 9 5 0 0 0 1 9 5 0 0 0 3 9 0 0 0 0 1 5 0 0 0 0 4 2 0 0 0 1 0 8 0 0 0

14.4% 14.4% 28.9% 11.1% 3.1% 8.0%

Net Income is 8 percent of net sales; therefore sales is $1,350,000 ($108,000 ÷ 0.08). Gross profit is 40 percent of net sales or $540,000 (0.40 × $1,350,000). If gross profit is $540,000; cost of goods sold must be $810,000 ($1,350,000 − $540,000). Since the income tax rate is 28 percent, net income after income taxes will be 72 percent of net income before income taxes. Thus, net income before income taxes will be $150,000 ($108,000 ÷ 0.72). Total operating expenses must be $390,000 ($540,000 − $150,000). Since selling and administrative expenses are equal, they each must be $195,000 ($390,000 ÷ 2).

Chapter 23  829

SOLUTIONS TO BUSINESS CONNECTIONS Managerial Focus: 1. Use to compare to previous years' percentages and industry averages. 2. The trend indicates that more is being paid for cost of goods. Investigate supplier prices and evaluate whether increases are being passed along to customers. The safeguarding of the inventory should also be investigated to insure that the inventory is properly accounted for and being used only for business purposes. 3. Evaluate collection policies, credit-granting procedures, and sales activity. 4. Possibilities: rapid expansion of business; using payables as a source of financing: inadequate profits; high dividend payments. 5. Comparison of item percentages with industry averages, examine pricing policies and purchasing procedures, analysis of operating expenses. 6. A percentage increase in selling expenses greater than the increase in sales is unfavorable because it leads to lower profits. However, some increases in selling costs might be necessary to generate the large sales volume increase. Ethical Dilemma: This is definitely not ethical. Adjusting entries should be made on a timely basis without regard to any analysis. Without this adjusting entry, the financial information is misleading. The company should have considered this entry when making other business decisions. Financial Statement Analysis: 1. 66.1% ($43,764/$66,176). Since Home Depot’s cost of goods sold is almost 4 percentage points lower than the industry average, that puts the company performing above the industry average. The lower cost of goods sold contributes to the company paying all other expenses. 2. Total assets have decreased by $287 million or -0.7 percent. Teamwork: Although Ling is more profitable (28.5% Income to Sales), Javier has more liquidity. Ling has higher debt than Javier. Javier would be more likely to pay off the loan than Ling. Internet Connection: If the student finds the gross profit to net sales increasing over the five years, it is a good indication that the company will offer advancements and it will be offering dividends. If the ratio is decreasing, it would not be a good company to invest in or accept employment from.

830  Chapter 23

SOLUTIONS TO PRACTICE TEST Part A True-False 1. FALSE 2. TRUE 3. FALSE 4. TRUE 5. FALSE 6. FALSE 7. TRUE 8. FALSE 9. FALSE 10. FALSE 11. TRUE 12. FALSE 13. TRUE 14. TRUE 15. FALSE Part B Matching 1. b, d 2. b, d, h 3. i, j 4. b, d, h 5. i 6. a, c

Chapter 23  831

CHAPTER 24 THE STATEMENT OF CASH FLOWS Chapter Opener: Thinking Critically Students’ responses will vary. Companies track and report cash flows so that they can meet their operating expenses and pay debts on time. Preparing a statement of cash flows helps managers forecast cash needs. Understanding the sources of cash can help companies identify segments of the operation that are solvent and those that are not. Fast Facts • In 2009, Apple had approximately 34,300 full-time equivalent employees and an additional 2,500 full-time equivalent temporary employees and contractors. • • •

Annual sales in fiscal year 2009 were $36.5 billion. The company, incorporated January 3, 1977, as "Apple Computer, Inc." In 2007, the company dropped "Computer" from its corporate name following the announcement of its new iPhone smartphone and Apple TV digital video system

•

The company surpassed $10 billion in quarterly revenue for the first time in January, 2009.

Managerial Implications: Thinking Critically • The cash flow statement provides useful information about a business; however, an investor would want to examine the other financial statements before making an investment. Discussion Questions 1. To report inflows and outflows of cash for a period of time. 2. Income statement, balance sheet, statement of retained earnings. 3. Payments received on a note receivable, cash received from the sale of a company vehicle. 4. 5. 6. 7.

Purchasing land, purchasing a computer system. Retirement of bonds payable, repurchase of the company’s stock as treasury stock. Selling common stock, issuing bonds payable. Cash: checking/savings accounts, cash on hand. Cash equivalents: short-term assets easily converted into cash.

8. 9. 10. 11.

No, maturity date must be within three months from date acquired. $8,000 subtracted from net income in the operating activities section. Cash received reported in the investing $15,000 (the interest expense minus the amortization of the discount). Direct method: shows cash inflows from customers and cash outflows for expenses. Indirect method: begins with reported net income and adjusts to a cash net income by examining noncash expenses and revenues and changes in current assets and current liabilities. $10,000 added to net income in the operating activities section. Because they can be easily converted into cash. So investors and creditors are fully informed about activities that may affect future cash flows. a) outflow from financing activities b) inflow from operating activities c) inflow from investing activities d) outflow from operating activities e) inflow from operating activities f) inflow from financing activities

12. 13. 14. 15.

832  Chapter 24

EXERCISE 24.1 1. The 2,000 gain should be subtracted from net income in the operating section of the cash flow statement. The $5,000 cash received is reported as a cash inflow in the investing section of the cash flow statement. 2. The loss of $13,000 is added to net income in the operating section of the cash flow statement. The $77,000 cash received is reported as a cash inflow in the investing section of the cash flow statement. EXERCISE 24.2 Peter, Inc. Statement of Cash Flows Year Ended December 31, 2013 Cash Flows from Operating Activities Net income for year Adjustments to reconcile net income to cash used in operating activities: Depreciation Amortization of discount on bonds payable Total adjustments Net cash provided by operating activities

55 5 0 0 00

15 0 0 0 00 2 0 0 0 00 17 0 0 0 00 72 5 0 0 00

EXERCISE 24.3 Tampa Company Statement of Cash Flows Year Ended December 31, 2013

Cash Flows from Operating Activities Net income for year Adjustments to reconcile net income to cash used in operating activities: Depreciation Increase in accounts receivable Decrease in prepaid expenses Decrease in merchandise inventory Increase in accounts payable Total adjustments Net cash provided by operating activities

50 0 0 0 00

12 0 0 0 00 (10 0 0 0 00) 1 0 0 0 00 10 0 0 0 00 8 0 0 0 00 21 0 0 0 00 71 0 0 0 00

Chapter 24  833

EXERCISE 24.4 Stonebrook, Inc. Statement of Cash Flows Year Ended December 31, 2013 Cash Flows from Operating Activities Net income for year Adjustments to reconcile net income to cash used in operating activities: Increase in inventory Decrease in accounts payable Total adjustments Net cash provided by operating activities

60 0 0 0 00

(4 0 0 0 00) (3 5 0 0 00) (7 5 0 0 00) 52 5 0 0 00

EXERCISE 24.5 Ocean Inc. Statement of Cash Flows Year Ended December 31, 2013 Cash Flows from Operating Activities Net income for year Adjustments to reconcile net income to cash used in operating activities: Depreciation Decrease in accounts receivable Increase in merchandise inventory Decrease in accrued liabilities Decrease in accounts payable Total adjustments Net cash provided by operating activities

834  Chapter 24

115 0 0 0 00

15 0 0 0 00 5 0 0 0 00 (3 0 0 0 00) (1 5 0 0 00) (8 0 0 0 00) 7 5 0 0 00 122 5 0 0 00

EXERCISE 24.6 Cash flows from investing activities Note Receivable from company president (75,000) Proceeds from sale of truck 8,000 Cash Used in Investing Activities Note: Issuance of common stock for land is a financing and investing activity affecting cash flow that should be disclosed in the notes to the statement.

(67,000)

EXERCISE 24.7 Cash flows from investing activities Purchase of new building (50,000) Purchase of investment in bonds (49,000) Cash used in investing activities Note: Purchase of company’s own common stock is a financing activity.

(99,000)

EXERCISE 24.8 Cash flows from financing activities Retirement of bonds payable (106,000) Dividends paid on common stock (40,000) Cash used in financing activities Note: The payment of interest is included in the operating activities.

(146,000)

EXERCISE 24.9 Cash flows from financing activities Purchase of treasury stock Proceeds from Short term note payable Cash provided by financing activities

(60,000) 100,000

40,000

Chapter 24  835

PROBLEM 24.1A Cole, Inc. Statement of Cash Flows Year Ended December 31, 2013 Cash Flows from Operating Activities Net income for year Adjustments: Depreciation Increase in accounts receivable Increase in merchandise inventory Decrease in accounts payable Total adjustments Net cash provided by operating activities Cash Flows from Investing Activities Purchase of equipment Net cash used in investing activities Cash Flows from Financing Activities Proceeds from issuance of bonds payable Proceeds from issuance of common stock Net cash provided from financing activities Net Increase in Cash Cash, January 1, 2013 Cash, December 31, 2013

80 0 0 0 00 18 0 0 0 00 (50 0 0 0 00) (2 6 0 0 00) (17 0 0 0 00) (51 6 0 0 00) 28 4 0 0 00

(50 0 0 0 00) (50 0 0 0 00)

50 0 0 0 00 10 0 0 0 00 60 0 0 0 00 38 4 0 0 00 39 5 0 0 00 77 9 0 0 00

(Note to Instructor : From the data reported you cannot determine cash amounts paid for interest or income taxes during the year.)

Analyze: An increase in Accounts Payable indicates that purchases on credit exceeds the amount paid to creditors.

836  Chapter 24

PROBLEM 24.2A The Candy Company Statement of Cash Flows Year Ended December 31, 2013

Cash Flows from Operating Activities Net income for year Adjustments: Depreciation Amortization of intangibles Increase in accounts receivable Decrease in merchandise inventory Increase in prepaid expense Decrease in note payable—short term Decrease in accounts payable Increase in payroll taxes payable Decrease in income tax payable Total adjustments Net cash provided by operating activities Cash Flows from Investing Activities Addition to building Purchase of land Net cash used in investing activities Cash Flows from Financing Activities Proceeds from issuance of common stock Proceeds from issuance of bonds payable Payment of dividend on common stock Payment of mortgage payable Net cash provided by financing activities Net Increase in Cash Cash, January 1, 2013 Cash, December 31, 2013

60 0 0 0 00 6 0 0 0 00 6 0 0 00 (5 0 0 0 00) 3 2 0 0 00 (5 0 0 00) (3 0 0 0 00) (5 0 0 0 00) 1 0 0 00 (1 0 0 0 00) (4 6 0 0 00) 55 4 0 0 00

(60 0 0 0 00) (25 0 0 0 00) (85 0 0 0 00)

10 0 0 0 00 40 0 0 0 00 (15 0 0 0 00) (1 0 0 0 00) 34 0 0 0 00 4 4 0 0 00 72 0 0 0 00 76 4 0 0 00

(Note to Instructor : From the data reported you cannot determine cash amounts paid for interest or income taxes during the year.)

Analyze: Cash provided from operating activities is the largest net inflow of cash.

Chapter 24  837

PROBLEM 24.3A Jackson Corporation Statement of Cash Flows Year Ended December 31, 2013 Cash Flows from Operating Activities Net income Adjustments: Depreciation Increase in accounts receivable Decrease in inventories Decrease in prepaid advertising Decrease in accounts payable Increase in salaries payable Decrease in unearned revenues Increase in income taxes payable Total adjustments Net cash provided by operating activities Cash Flows from Investing Activities Purchase of property, plant, and equipment Net cash used in investing activities Cash Flows from Financing Activities Proceeds from issuance of common stock Payment of note payable due in 2015 Payment of dividend on common stock Net cash used by financing activities Net Increase in Cash Cash, January 1, 2013 Cash, December 31, 2013

55 2 0 0 00 15 0 0 0 00 (3 6 5 0 00) 5 0 0 0 00 2 0 0 0 00 (28 5 5 0 00) 1 0 0 0 00 (1 0 0 0 00) 1 0 0 0 00 (9 2 0 0 00) 46 0 0 0 00

(20 0 0 0 00) (20 0 0 0 00)

25 0 0 0 00 (30 0 0 0 00) (10 0 0 0 00) (15 0 0 0 00) 11 0 0 0 00 70 0 0 0 00 81 0 0 0 00

Note: Cash paid for income taxes during 2013 was $17,400. (Note to Instructor : From the data reported you cannot determine cash amounts paid for interest or income taxes during the year.)

Analyze: The write-off of a specific account receivable has no effect on cash flows or net income.

838  Chapter 24

PROBLEM 24.4A Short Company Statement of Cash Flows Year Ended December 31, 2013

Cash Flows from Operating Activities Net income for year Adjustments: Depreciation Loss on sale of equipment Increase in accounts receivable Increase in merchandise inventory Increase in prepaid rent Decrease in accounts payable Decrease in income taxes payable Total adjustments Net cash provided by operating activities Cash Flows from Investing Activities Purchase of land Proceeds from sale of equipment Proceeds from sale of bond investment Purchase of equipment Net cash used in investing activities Cash Flows from Financing Activities Proceeds from issuance of bonds payable Payment of dividend on common stock Net cash provided by financing activities Net Increase in Cash Cash, January 1, 2013 Cash, December 31, 2013 Notes:

73 5 7 5 00 9 0 0 0 00 10 0 0 0 00 (18 7 5 0) 00 (8 6 5 0) 00 (1 0 0 0) 00 (20 3 0 0) 00 (2 5 0) 00 (29 9 5 0 00) 43 6 2 5 00

(30 0 0 0) 00 20 0 0 0 00 20 0 0 0 00 (10 0 0 0) 00 0 00

40 0 0 0 00 (20 0 0 0) 00 20 0 0 0 00 63 6 2 5 00 53 2 5 0 00 116 8 7 5 00

(1) During the year, the company issued common stock of $30,000 for land. (2) Cash paid for income taxes was $24,775. (3) Cash paid for interest was $18,500.

Analyze: Cash increased by 119.5 percent from 2012 to 2013.

Chapter 24  839

PROBLEM 24.1B Auto Corporation Statement of Cash Flows Year Ended December 31, 2013 Cash Flows from Operating Activities Net loss Adjustments: Depreciation Gain on sale of equipment Decrease in accounts receivable Increase in merchandise inventory Increase in accounts payable Total adjustments Net cash used in operating activities Cash Flows from Investing Activities Proceeds from sale of equipment Purchase of equipment Net cash used in investing activities Cash Flows from Financing Activities Proceeds from issuance of common stock Paid cash dividends to common stockholders Net cash provided from financing activities Net decrease in Cash Cash, January 1, 2013 Cash, December 31, 2013

(25 0 0 0 00) 18 0 0 0 00 (2 0 0 0 00) 8 2 5 00 (2 0 0 0 00) 3 8 7 5 00 18 7 0 0 00 (6 3 0 0 00)

8 0 0 0 00 (18 0 0 0 00) (10 0 0 0 00)

25 0 0 0 00 (10 0 0 0 00) 15 0 0 0 00 (1 3 0 0 00) 44 9 0 0 00 43 6 0 0 00

(Note to Instructor : From the data reported you cannot determine cash amounts paid for interest or income taxes during the year.)

Analyze: The largest outlays of cash were for purchasing new equipment and paying cash dividends.

840  Chapter 24

PROBLEM 24.2B Music, Inc. Statement of Cash Flows Year Ended December 31, 2013 Cash Flows from Operating Activities Net income Adjustments: Depreciation Amortization of organization costs Gain from sale of land Increase in accounts receivable Increase in merchandise inventory Increase in prepaid expense Decrease in note payable-short term Decrease in accounts payable Increase in payroll taxes payable Decrease in income tax payable Total adjustments Net cash provided by operating activities Cash Flows from Investing Activities Addition to building Proceeds from sale of land Net cash provided by investing activities Cash Flows from Financing Activities Proceeds from issuance of common stock Proceeds from issuance of bonds payable Payment of dividend on common stock Net cash provided by financing activities Net Increase in Cash Cash, January 1, 2013 Cash, December 31, 2013

60 0 0 0 00 14 7 5 0 00 1 0 0 0 00 (20 0 0 0 00) (24 1 0 0 00) (13 4 0 0 00) (1 5 0 0 00) (5 0 0 0 00) (7 7 5 0 00) 1 0 0 00 (1 0 0 0 00) (56 9 0 0 00) 3 1 0 0 00

(25 0 0 0 00) 30 0 0 0 00 5 0 0 0 00

25 0 0 0 00 25 0 0 0 00 (15 0 0 0 00) 35 0 0 0 00 43 1 0 0 00 54 0 0 0 00 97 1 0 0 00

Financing and Investing Activities Not Affecting Cash Flow: A mortgage of $125,000 was obtained to pay for construction of a building in 2013. (Note to Instructor : From the data reported you cannot determine cash amounts paid for interest or income taxes during the year.)

Analyze: Cash provided from financing activities is the largest net inflow of cash.

Chapter 24  841

PROBLEM 24.3B Gulf Corporation Statement of Cash Flows Year Ended December 31, 2013 Cash Flows from Operating Activities Net income for year Adjustments: Depreciation Decrease in accounts receivable Decrease in inventories Decrease in prepaid advertising Decrease in accounts payable Decrease in income taxes payable Total adjustments Net cash provided by operating activities Cash Flows from Investing Activities Proceeds from sale of land Purchase of equipment Net cash provided by investing activities Cash Flows from Financing Activities Payment of note payable due in 2015 Payment of dividend on common stock Net cash used in financing activities Net Increase in Cash Cash, January 1, 2013 Cash, December 31, 2013

94 3 5 0 00 9 0 0 0 00 4 3 5 0 00 14 0 0 0 00 2 0 0 0 00 (30 5 0 0 00) (19 0 0 0 00) (20 1 5 0 00) 74 2 0 0 00

35 0 0 0 00 (25 0 0 0 00) 10 0 0 0 00

(15 0 0 0 00) (50 0 0 0 00) (65 0 0 0 00) 19 2 0 0 00 90 0 0 0 00 109 2 0 0 00

Note: During 2013, $100,000 in common stock was exchanged for a building in a non-cash financing and investing activity. (Note to Instructor: From the data given, you cannot determine the cash amounts paid for interest or taxes during 2013.)

Analyze: The ending balance of cash would have been $25,000 greater, or $134,200.

842  Chapter 24

PROBLEM 24.4B Beach Products, Inc. Statement of Cash Flows Year Ended December 31, 2013 Cash Flows from Operating Activities Net income for year Adjustments: Depreciation Gain on sale of equipment Increase in accounts receivable Increase in merchandise inventory Increase in prepaid advertising Decrease in accounts payable Increase in income tax payable Total adjustments Net cash provided by operating activities Cash Flows from Investing Activities Proceeds from sale of equipment Purchase of equipment Net cash provided by Investing activities Cash Flows from Financing Activities Proceeds from short term note payable Paid off bonds payable Proceeds from sale of common stock Payment of dividend on common stock Net cash used by financing activities Net Increase in Cash Cash, January 1, 2013 Cash, December 31, 2013

137 4 1 0 00 20 7 0 0 00 (3 0 0 0 00) (22 4 0 0 00) (14 0 0 0 00) (2 0 0 0 00) (7 2 0 0 00) 1 7 5 0 00 (26 1 5 0 00) 111 2 6 0 00

27 0 0 0 00 (20 0 0 0 00) 7 0 0 0 00

20 0 0 0 00 (50 0 0 0 00) 50 0 0 0 00 (30 0 0 0 00) (10 0 0 0 00) 108 2 6 0 00 10 1 5 0 00 118 4 1 0 00

Notes: During 2013, cash payments for income taxes were $57,140 and cash payments for interest were $12,000.

Analyze: Cash provided by operations was $111,260, while cash used in financing activities totaled $10,000. Yes, cash provided by operations was sufficient.

Chapter 24  843

CRITICAL THINKING PROBLEM 24.1 Preds Company Balance Sheet December 31, 2013 Assets Current Assets Cash Accounts Receivable Merchandise Inventory Prepaid Insurance Total Current Assets Property, Plant, and Equipment Land Building Less Accumulated Depreciation—Building Net Book Value—Building Equipment Less Accumulated Depreciation—Equipment Net Book Value—Equipment Total Property, Plant, and Equipment Total Assets Liabilities and Stockholders’ Equity Current Liabilities Accounts Payable Notes Payable Income Tax Payable Total Current Liabilities Long-Term Liabilities Mortgage Payable Total Liabilities Stockholders’ Equity Common Stock Retained Earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity

77 7 0 0 00 76 0 0 0 00 80 0 0 0 00 8 0 0 00 234 5 0 0 00 30 0 0 0 00 250 0 0 0 00 (5 0 0 0 00) 245 0 0 0 00 50 0 0 0 00 (5 0 0 0 00) 45 0 0 0 00 320 0 0 0 00 554 5 0 0 00

47 0 0 0 00 50 0 0 0 00 2 5 0 0 00 99 5 0 0 00 225 0 0 0 00 324 5 0 0 00 160 0 0 0 00 70 0 0 0 00 230 0 0 0 00 554 5 0 0 00

Analyze: Adjusting entries would be necessary for prepaid insurance, depreciation expense, interest expense, and income taxes payable.

844  Chapter 24

CRITICAL THINKING PROBLEM 24.2 1. Included as an operating activity. 2. Included as an operating activity. 3. Included as a financing activity. 4. Included as an operating activity. 5. Included as a financing activity. 6. Included as an investing activity. 7. Included as a financing activity, showing both inflow of cash and the subsequent outflow of cash when the note is paid off. 8. Included as a operating activity. 9. Included as a financing activity. 10. Included as an investing activity. 11. Included as investing activity. 12. Not included as an issuance of stock dividend has no effect on cash.

Chapter 24  845

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SOLUTIONS TO BUSINESS CONNECTIONS Managerial Focus: 1. Identifies actual cash received and used to forecast additional cash outflow required if borrowing money. 2. Disagree. Current profits will not be enough to sustain the business in the long term. 3. The statement of cash flows gives specific details on actual cash receipts and payments. Income statement does not. 4. Yes, full disclosure principle requires that both the borrowing and payment of a short-term loan should be included in the statement of cash flows. 5. Enable evaluation of customer’s ability to pay on a continuing basis. Ethical Dilemma: Ida’s action is unethical and audited financial statements will discover her actions. However, it could be argued that her actions are acceptable if the lack of payment was disclosed in the financial statements.

Financial Statement Analysis: Net cash provided by (1) operations was $5,125 million; (2) investing dollars used were $755 million; and (3) financing dollars used were $3,503. From these data, obviously, the cash provided from operations was used to invest and finance the remainder of the company's operations. Analyze Online: Answers will vary depending on the current year. Teamwork: The increase or decrease in cash can be a result of cash flow from operations, increased debt, or sale of stock. If the company is buying more property, plant, and equipment than it is selling, it is expanding. If the company is using the cash to purchase treasury stock, it is trying to gain more control of the business. Internet Connection: Microsoft has a higher balance in cash flow from operations than Federated. In order for technology companies to survive, a greater amount of cash must be on hand. Retail stores do not have the challenge of always being on the leading edge of technology. A smaller amount of cash is required.

846  Chapter 24

SOLUTIONS TO PRACTICE TEST Part A True-False 1. TRUE 2. TRUE 3. TRUE 4. FALSE 5. TRUE 6. TRUE 7. FALSE 8. TRUE *9. FALSE

10. 11. 12. 13. 14. 15. 16. 17.

FALSE TRUE TRUE TRUE FALSE FALSE TRUE FALSE

*Financing & Investing Activity Not Affecting Cash Flow Part B Matching 1. c 2. c 3. b 4. a 5. a 6. d 7. d 8. b 9. c 10. c

Chapter 24  847

MINI-PRACTICE SET 4 FINANCIAL ANALYSIS AND DECISION MAKING HHI MERCHANDISE, INC. Introduction HHI Merchandise, Inc. sells a variety of consumer products. Its comparative income statement and balance sheet for the years 2013 and 2012 are presented on the following pages. Instructions 1. Prepare a horizontal and a vertical analysis of the statements. Round all dollar calculations to the nearest whole dollar. Percentage calculations should be rounded to one decimal place (e.g., 11.2%). Remember that some vertical addition of percentages may not equal 100 percent due to rounding. 2.

Calculate the following ratios for each year: a. The rate of return on net sales. b. The rate of return on common stockholders’ equity. Preferred dividends are $5,000 for both years. (Remember that dividend requirements on preferred stock must be deducted from net income after taxes to obtain income available to common stockholders.) c. The earnings per share of common stock, assuming that the preferred stock is nonparticipating, noncumulative, and has no liquidation value. The number of outstanding shares of common stock remained constant at 100,000 throughout all of 2012 and 2013. d. The price-earnings ratio on common stock. The market values were $4.00 in 2012 and $3.00 in 2013. e. The rate of return on total assets. f. The ratio of stockholders’ equity to total liabilities. g. The current ratio. h. The acid-test ratio. i. The merchandise inventory turnover. Inventory was $75,000 at January 1, 2012. j. The accounts receivable turnover. Credit sales were $1,400,000 for 2013 and $1,300,000 for 2012. The beginning accounts receivable balance for 2012 was $123,500.

848  Chapter 24

MINI-PRACTICE SET 4 (continued)

Name

HHI Merchandise, Inc. Comparative Income Statement Years Ended December 31, 2013 and 2012 2013

2012

Revenue Sales Less: Sales Returns and Allowances Net Sales

1,898,000 (29,500) 1,868,500

1,642,000 (22,000) 1,620,000

Cost of Goods Sold Merchandise Inventory, January 1 Purchases Freight In Less: Purchases Discounts Purchases Returns and Allowances Total Merchandise Available for Sale Less Merchandise Inventory, December 31 Cost of Goods Sold Gross Profit on Sales

76,000 945,650 9,500 (10,000) (8,250) 1,012,900 (78,000) 934,900 933,600

75,000 800,000 7,500 (8,250) (5,000) 869,250 (76,000) 793,250 826,750

25,000 200,000 20,000 11,825 9,575 7,700 274,100

21,000 175,000 17,500 9,650 7,950 7,500 238,600

350,000 137,500 48,750 12,250 8,000 9,000 18,000 15,000 12,000 18,400 628,900 903,000 30,600

300,000 125,000 42,500 10,000 7,500 8,000 15,000 15,000 10,000 16,750 549,750 788,350 38,400

Operating Expenses Selling Expenses Advertising Sales Salaries Payroll Taxes Sales Supplies Expense Miscellaneous Selling Expenses Insurance Expense Total Selling Expenses Administrative Expenses Officers’ Salaries Office Employees Payroll Taxes Office Employees Office Supplies Insurance Expense—Administrative Uncollectible Accounts Expense Legal and Accounting Depreciation Expense—Building Depreciation Expense—Furniture Utilities Expense Total Administrative Expenses Total Operating Expenses Net Income from Operations

Chapter 24  849

MINI-PRACTICE SET 4 (continued)

Name

HHI Merchandise, Inc. Comparative Income Statement (continued) Years Ended December 31, 2013 and 2012 Other Income Interest and Dividends Total Other Income

4,675 4,675

4,500 4,500

Other Expenses Bond Interest Expense Interest Expense Total Other Expenses Net Other Expenses

6,930 6,320 13,250 8,575

6,930 6,070 13,000 8,500

Net Income Before Taxes Income Tax Expense Net Income After Taxes

22,025 7,709 14,316

29,900 10,465 19,435

850  Chapter 24

MINI-PRACTICE SET 4 (continued)

Name

HHI Merchandise, Inc. Comparative Balance Sheet December 31, 2013 and 2012 Assets Current Assets Cash Accounts Receivable Merchandise Inventory Prepaid Insurance Supplies Total Current Assets Property, Plant, and Equipment Land Building Less: Accumulated Depreciation—Building Furniture Less: Accumulated Depreciation—Furniture Total Property, Plant, and Equipment Other Assets Marketable Securities (Long-Term) Total Assets Liabilities and Stockholders’ Equity Current Liabilities Accounts Payable Notes Payable Bond Interest Payable Income Taxes Payable Sales Salaries Payable Other Payables Total Current Liabilities

2013

2012

38,157 90,000 78,000 600 975 207,732

61,942 121,500 76,000 600 1,000 261,042

105,000 300,000 (45,000) 60,000 (22,000) 398,000

105,000 300,000 (30,000) 50,000 (10,000) 415,000

40,000 645,732

40,000 716,042

119,500 45,000 500 7,709 10,000 5,200 187,909

125,000 60,000 500 10,465 14,000 7,500 217,465

Chapter 24  851

MINI-PRACTICE SET 4 (continued)

Name

HHI Merchandise, Inc. Comparative Balance Sheet (continued) December 31, 2013 and 2012 Long-Term Liabilities 10% Bonds Payable, due January 1, 2022 Premium on Bonds Payable Total Long-Term Liabilities Total Liabilities Stockholders’ Equity 5% Preferred Stock, $100 par, 1,000 shares authorized/outstanding Common Stock, $1 par, 500,000 shares authorized, 100,000 shares outstanding Paid-in Capital in Excess of Par—Common Stock Total Paid-in Capital Retained Earnings Retained Earnings—Unappropriated Retained Earnings—Appropriated Total Retained Earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity

852  Chapter 24

70,000 630 70,630 258,539

70,000 700 70,700 288,165

100,000

100,000 50,000 250,000

112,193 25,000 137,193 387,193 645,732

152,877 25,000 177,877 427,877 716,042

Assets

Property, Plant, and Equipment Land Building Less: Accumulated Depreciation—Building Furniture Less: Accumulated Depreciation—Furniture Total Property, Plant, and Equipment Other Assets Marketable Securities (Long-Term) Total Assets

Current Assets Cash Accounts Receivable Merchandise Inventory Prepaid Insurance Supplies Total Current Assets

ACCOUNT NAME

MINI-PRACTICE SET 4 (continued)

AMOUNTS

1 0 5 0 00 3 0 0 0 00 (3 0 0 0 0) 5 0 0 00 (1 0 0 0 0) 4 1 5 0 00 4 0 0 00 7 1 6 0 42

4 0 0 00 6 4 5 7 32

6 1 9 42 1 2 1 5 00 7 6 0 00 6 00 1 0 00 2 6 1 0 42

2012

1 0 5 0 00 3 0 0 0 00 (4 5 0 0 0) 6 0 0 00 (2 2 0 0 0) 3 9 8 0 00

3 8 1 57 9 0 0 00 7 8 0 00 6 00 9 75 2 0 7 7 32

2013

HHI Merchandise, Inc. Comparative Balance Sheet December 31, 2013 and 2012

6.2% 100.0%

16.3% 46.5% (7.0)% 9.3% (3.4)% 61.6%

5.9% 13.9% 12.1% 0.1% 0.2% 32.2%

2013

5.6% 100.0%

14.7% 41.9% (4.2)% 7.0% (1.4)% 58.0%

8.7% 17.5% 10.6% 0.1% 0.1% 36.5%

2012

PERCENT OF TOTAL ASSETS

Name

PERCENT

− 0− (7 0 3 1 0)

− 0− − 0− 1 5 0 00 1 0 0 00 1 2 0 00 (1 7 0 0 0)

0.0% (9.8)%

0.0% 0.0% 50.0% 20.0% 120.0% (4.1)%

(2 3 7 8 5) (38.4)% (3 1 5 0 0) (25.9%) 2 0 0 0 2.6% − 0− 0.0% (2 5) (2.5)% (5 3 3 1 0) (20.4)%

AMOUNT

INCREASE OR (DECREASE)

7 0 0 0 0 6 3 0 7 0 6 3 0 2 5 8 5 3 9

Long-Term Liabilities 10% Bonds Payable, due January 1, 2010 Premium on Bonds Payable Total Long-Term Liabilities Total Liabilities

AMOUNTS

1 1 9 5 0 0 4 5 0 0 0 5 0 0 7 7 0 9 1 0 0 0 0 5 2 0 0 1 8 7 9 0 9

2013

7 0 0 00 7 00 7 0 7 00 2 8 8 1 65

1 2 5 0 00 6 0 0 00 5 00 1 0 4 65 1 4 0 00 7 5 00 2 1 7 4 65

2012

HHI Merchandise, Inc. Comparative Balance Sheet (continued) December 31, 2013 and 2012

Liabilities and Stockholders’ Equity Current Liabilities Accounts Payable Notes Payable Bond Interest Payable Income Taxes Payable Sales Salaries Payable Other Payables Total Current Liabilities

ACCOUNT NAME

MINI-PRACTICE SET 4 (continued)

10.8% 0.1% 10.9% 40.0%

18.5% 7.0% 0.1% 1.2% 1.6% 0.8% 29.1%

2013

9.8% 0.1% 9.9% 40.2%

17.5% 8.4% 0.1% 1.5% 2.0% 1.0% 30.4%

2012

PERCENT OF TOTAL ASSETS

Name

(4.4)% (25.0)% 0.0% (26.3)% (28.6)% (30.7)% (13.6)%

PERCENT

− 0− 0.0% (7 0) (10.0)% (7 0) (0.1)% (2 9 6 2 6) (10.3)%

(5 5 0 0) (1 5 0 0 0) − 0− (2 7 5 6) (4 0 0 0) (2 3 0 0) (2 9 5 5 6)

AMOUNT

INCREASE OR (DECREASE)

Stockholders’ Equity 5% Preferred Stock, $100 par, 1,000 shares auth./outstanding Common Stock, $1 par, 500,000 shares authorized, 100,000 shares outstanding Paid-in Capital in Excess of Par—Common Stock Total Paid-in Capital Retained Earnings Retained Earnings—Unappropriated Retained Earnings—Appropriated Total Retained Earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity

ACCOUNT NAME

MINI-PRACTICE SET 4 (continued)

1 0 0 0 0 0 1 0 0 0 0 0 5 0 0 0 0 2 5 0 0 0 0 1 5 2 8 77 2 5 0 00 1 7 7 8 77 4 2 7 8 77 7 1 6 0 42

1 0 0 0 0 0 5 0 0 0 0 2 5 0 0 0 0 1 1 2 1 9 3 2 5 0 0 0 1 3 7 1 9 3 3 8 7 1 9 3 6 4 5 7 3 2

2012

1 0 0 0 0 0

2013

AMOUNTS

HHI Merchandise, Inc. Comparative Balance Sheet (continued) December 31, 2013 and 2012

17.4% 3.9% 21.3% 60.0% 100.0%

15.5% 7.7% 38.7%

15.5%

2013

21.4% 3.5% 24.8% 59.8% 100.0%

14.0% 7.0% 34.9%

14.0%

2012

PERCENT OF TOTAL ASSETS

Name

0.0% 0.0% 0.0%

0.0%

PERCENT

(4 0 6 8 4) (26.6)% − 0− 0 (4 0 6 8 4) (22.9)% (4 0 6 8 4) (9.5)% (7 0 3 1 0) (9.8)%

− 0− − 0− − 0−

− 0−

AMOUNT

INCREASE OR (DECREASE)

Retained Earnings, January 1 Additions: Net income Total Additions Deductions: Dividends-Preferred Stock Dividends-Common Stock Total Deductions Retained Earnings, December 31

ACCOUNT NAME

EXTRA FORM

MINI-PRACTICE SET 4 (continued)

1 8 8 4 4 2 1 9 4 3 5 1 9 4 3 5 5 0 00 5 0 0 00 5 5 0 00 1 5 2 8 77

1 4 3 1 6 1 4 3 1 6 5 0 0 0 5 0 0 0 0 5 5 0 0 0 1 1 2 1 9 3

2012

1 5 2 8 7 7

2013

AMOUNTS

0.8% 7.8% 8.5% 17.4%

2.2%

23.7%

2013

0.7% 7.0% 7.7% 21.4%

2.7%

26.3%

2012

PERCENT OF TOTAL ASSETS

HHI Merchandise, Inc. Comparative Statement of Retained Earnings-Unappropriated Years Ended December 31, 2013 and 2012

Name

0 0 0 (4 0 6 8 4)

(5 1 1 9)

(3 5 5 6 5)

AMOUNT

0.0% 0.0% 0.0% (26.6)%

(26.3)%

(18.9)%

PERCENT

INCREASE OR (DECREASE)

2 5 0 0 0 2 0 0 0 0 0 2 0 0 0 0 1 1 8 2 5 9 5 7 5 7 7 0 0 2 7 4 1 0 0

7 6 0 0 0 9 4 5 6 5 0 9 5 0 0 (1 0 0 0 0) (8 2 5 0) 1 0 1 2 9 0 0 (7 8 0 0 0) 9 3 4 9 0 0 9 3 3 6 0 0

Cost of Goods Sold: Merchandise Inventory, January 1 Purchases Freight In Less: Purchases Discounts Purchases Returns and Allowances Total Merchandise Available for Sale Less Merchandise Inventory, December 31 Cost of Goods Sold Gross Profit on Sales

Operating Expenses: Selling Expenses Advertising Sales Salaries Payroll Taxes Sales Supplies Expense Miscellaneous Selling Expenses Insurance Expense Total Selling Expenses

1 8 9 8 0 0 0 (2 9 5 0 0) 1 8 6 8 5 0 0

2013

2012

2 1 0 00 1 7 5 0 00 1 7 5 00 9 6 50 7 9 50 7 5 00 2 3 8 6 00

7 5 0 00 8 0 0 0 00 7 5 00 (8 2 5 0) (5 0 0 0) 8 6 9 2 50 (7 6 0 0 0) 7 9 3 2 50 8 2 6 7 50

1 6 4 2 0 00 (2 2 0 0 0) 1 6 2 0 0 00

AMOUNTS

1.3% 10.7% 1.1% 0.6% 0.5% 0.4% 14.7%

4.1% 50.6% 0.5% 0.5% 0.4% 54.2% 4.2% 50.0% 50.0%

101.6% 1.6% 100.0%

2013

1.3% 10.8% 1.1% 0.6% 0.5% 0.5% 14.7%

4.6% 49.4% 0.5% 0.5% 0.3% 53.7% 4.7% 49.0% 51.0%

101.4% 1.4% 100.0%

2012

4 0 0 0 2 5 0 0 0 2 5 0 0 2 1 7 5 1 6 2 5 2 0 0 3 5 5 0 0

1 0 0 0 1 4 5 6 5 0 2 0 0 0 1 7 5 0 3 2 5 0 1 4 3 6 5 0 2 0 0 0 1 4 1 6 5 0 1 0 6 8 5 0

2 5 6 0 0 0 7 5 0 0 2 4 8 5 0 0

AMOUNT

19.0% 14.3% 14.3% 22.5% 20.4% 2.7% 14.9%

1.3% 18.2% 26.7% 21.2% 65.0% 16.5% 2.6% 17.9% 12.9%

15.6% 34.1% 15.3%

PERCENT

PERCENT OF NET SALES INCREASE OR (DECREASE)

HHI Merchandise, Inc. Comparative Income Statement Years Ended December 31, 2013 and 2012

Revenue: Sales Less: Sales Returns and Allowances Net Sales

ACCOUNT NAME

MINI-PRACTICE SET 4 (continued)

4 5 00 4 5 00 6 9 30 6 0 70 1 3 0 00 8 5 00

4 6 7 5 4 6 7 5 6 9 3 0 6 3 2 0 1 3 2 5 0 8 5 7 5 2 2 0 2 5 7 7 0 9 1 4 3 1 6

Net Income Before Taxes Income Tax Expense Net Income After Taxes

2 9 9 00 1 0 4 65 1 9 4 35

3 0 0 0 00 1 2 5 0 00 4 2 5 00 1 0 0 00 7 5 00 8 0 00 1 5 0 00 1 5 0 00 1 0 0 00 1 6 7 50 5 4 9 7 50 7 8 8 3 50 3 8 4 00

2012

3 5 0 0 0 0 1 3 7 5 0 0 4 8 7 5 0 1 2 2 5 0 8 0 0 0 9 0 0 0 1 8 0 0 0 1 5 0 0 0 1 2 0 0 0 1 8 4 0 0 6 2 8 9 0 0 9 0 3 0 0 0 3 0 6 0 0

2013

AMOUNTS

1.2% 0.4% 0.8%

0.4% 0.3% 0.7% 0.5%

0.3% 0.3%

18.7% 7.4% 2.6% 0.7% 0.4% 0.5% 1.0% 0.8% 0.6% 1.0% 33.7% 48.3% 1.6%

2013

1.8% 0.7% 1.2%

0.4% 0.4% 0.8% 0.5%

0.3% 0.3%

18.5% 7.7% 2.6% 0.6% 0.5% 0.5% 0.9% 0.9% 0.6% 1.0% 33.9% 48.7% 2.4%

2012

PERCENT OF NET SALES

HHI Merchandise, Inc. Comparative Income Statement (continued) Years Ended December 31, 2013 and 2012

Administrative Expenses Officers’ Salaries Office Employees Payroll Taxes—Office Employees Office Supplies Insurance Expense—Administrative Uncollectible Accounts Expense Legal and Accounting Depreciation Expense—Building Depreciation Expense—Furniture Utilities Expense Total Administrative Expenses Total Operating Expenses Total Operating Income Other Income: Interest and Dividends Total Other Income Other Expenses: Bond Interest Expense Interest Expense Total Other Expenses Net Other Expenses

ACCOUNT NAME

MINI-PRACTICE SET 4 (continued)

(7 8 7 5) (2 7 5 6) (5 1 1 9)

0 2 5 0 2 5 0 7 5

1 7 5 1 7 5

5 0 0 0 0 1 2 5 0 0 6 2 5 0 2 2 5 0 5 0 0 1 0 0 0 3 0 0 0 0 2 0 0 0 1 6 5 0 7 9 1 5 0 1 1 4 6 5 0 (7 8 0 0)

AMOUNT

(26.3)% (26.3)% (23.6)%

0.0% 4.1% 1.9% 0.9%

3.9% 3.9%

16.7% 10.0% 14.7% 22.5% 6.7% 12.5% 20.0% 0.0% 20.0% 9.9% 14.4% 14.5% (20.3)%

PERCENT

INCREASE OR (DECREASE)

MINI-PRACTICE SET 4 (continued) RATIO

2013

a. Rate of return on net sales

2012 = 0.8%

$19,435 ÷ $1,620,000 = 1.2%

b. Rate of return on common stockholders’ equity $9,316 ÷ $287,193 (see Computations 1 and 2)

= 3.2%

$14,435 ÷ $327,877

= 4.4%

c. Earnings per share of common stock (see Computation 2)

$9,316 ÷ 100,000

= $0.09

$14,435 ÷ 100,000

= $0.14

d. Price-earnings ratio

3.00 ÷ $0.09

= 33.3:1

$4.00 ÷ $0.14

= 28.6:1

e. Rate of return on total assets

$35,275 ÷ $645,732

= 5.5%

$42,900 ÷ $716,042

= 6.0%

f. Ratio of stockholders’ equity to total liabilities $387,193 ÷ $258,539

= 1.5:1

$427,877 ÷ $288,165 = 1.5:1

g. Current ratio

$207,732 ÷ $187,909

= 1.1:1

$261,042 ÷ $217,465 = 1.2:1

h. Acid-test (Quick test) ratio

$128,157 ÷ $187,909

= 0.7:1

$183,442 ÷ $217,465 = 0.8:1

i. Merchandise inventory turnover (times)

$934,900 ÷ $77,000

12.1

$793,250 ÷ $75,500

10.5

j. Accounts receivable turnover (times)

$1,400,000 ÷ $105,750 =

13.2

$1,300,000 ÷ $122,500=

10.6

$14,316 ÷ $1,868,000

COMPUTATIONS

(1) Common stockholders’ equity Less Preferred stockholders’ equity Common stockholders’ equity (2) Net income after income taxes Less preferred stock dividends

2013 $387,193 100,000 $287,193

2012 $427,877 100,000 $327,877

$14,316 5,000 $9,316

$19,435 5,000 $14,435

Analyze: A 5% common stock dividend will reduce the EPS to $1.84 ($192,681/105,000) for 2013.

Chapter 24  859

CHAPTER 25 DEPARTMENTALIZED PROFIT AND COST CENTERS Chapter Opener: Thinking Critically Answers will vary. Mattel, Inc. may have measured the profitability of each business line individually, assessing the contribution made by each to the overall profits of the company. Company managers may have evaluated how new business lines complement or add value to the core toy business. Fast Facts • The company is divided into three business segments: Girls, Boys, and Infant/Preschool divisions. • The company’s first products were picture frames. A side business of dollhouse furniture made from picture frame scraps led the company into the toy business. •

In 1955, Mattel, Inc. became the first year-round sponsor of a TV show with “The Mickey Mouse Club.”

•

Headquartered in El Segundo, California, Mattel produces 800 million toys annually, its products reach 150 countries.

Managerial Implications: Thinking Critically • Using the contribution margin would allow a business to evaluate a manager on performance and costs that are controllable by the manager. Discussion Questions These questions are designed to check students’ understanding of new terms, concepts, and procedures presented in the chapter. 1.

Managerial accounting focuses on profitability issues of a business. Financial accounting focuses on reporting results of business operations from a historical perspective.

2. 3. 4. 5. 6. 7.

Uses financial data to project future operations and plan for growth/changes, while increasing profits. Reports financial data by segments/departments to tie managerial responsibility to operational results. Yes, each department is responsible for performance. To track profitability of each department. Gross profit on sales minus direct expenses. Departmental: reports income for each department, summarizes all departments for total business income.

Semidirect: expenses that can be assigned to certain dept. Indirect: expenses not readily assignable to a certain department.

Square footage of departments; charge to department where item located; allocated on basis of net sales.

10.

Considered a financing rather than an operational activity, thus an overall company expense.

860  Chapter 25

Women’s Clothing Men’s Clothing Combined Total

DEPARTMENT

EXERCISE 25.3

Women’s Clothing Men’s Clothing Combined Total

DEPARTMENT

EXERCISE 25.2

Women’s Clothing Men’s Clothing Combined Total

DEPARTMENT

EXERCISE 25.1

$600,000 200,000 $800,000

CREDIT SALES

$750,000 250,000 $1,000,000

BASIS: TOTAL SALES

$200,000 50,000 $250,000

BASIS: BOOK VALUE OF INVENTORY AND EQUIPMENT

$6,000 2,000 $8,000

CREDIT SALES RETURNS AND ALLOWANCES

75% 25% 100%

PERCENT

80% 20% 100%

PERCENT

$594,000 198,000 $792,000

BASIS: NET CREDIT SALES

$80,000 $80,000

TOTAL OFFICE EXPENSE

$20,000 $20,000

TOTAL INSURANCE EXPENSE

0.5% 0.5% 0.5%

PERCENT

$60,000 20,000 $80,000

ALLOCATION

$16,000 4,000 $20,000

ALLOCATION

$2,970 990 $3,960

ALLOCATION

EXERCISE 25.4 Cazle Company Income Statement (Partial) For Year Ended December 31, 2013 KITCHEN DEPARTMENT Gross Profit Direct Expenses Contribution Margin Indirect Expenses Net Income (Loss) from Operations Other Income Interest Income Net Income for the Year

862  Chapter 25

2 8 5 5 00 1 3 4 6 00 1 5 0 9 00 7 5 9 00 7 5 0 00

BATH DEPARTMENT 1 9 4 5 00 9 5 4 00 9 9 1 00 3 6 4 00 6 2 7 00

TOTAL 4 8 0 0 00 2 3 0 0 00 2 5 0 0 00 1 1 2 3 00 1 3 7 7 00 3 00 1 3 8 0 00

EXERCISE 25.5 Management must consider the fact that Department 1 has a positive contribution margin, although it is smaller than Department 2. Because it has a positive contribution margin, the department is helping to meet the indirect expenses. If Department 1 is closed, Department 2 would have to pick up the $45,000 of indirect expenses. Other questions to address could include the following: 1. Would closing Department 1 cause customers of Department 2 to stop buying from the store? 2. Does Department 1 have products that complement Department 2? 3. Do you have suppliers that provide you with products for both departments? If so, would losing part of their sales cause your prices to go up?

EXERCISE 25.6 Net Sales Cost of Goods Sold Gross Profit on Sales Direct Expenses Contribution Margin Indirect Expenses Net Income

$600,000 360,000 $240,000 105,000 $135,000 125,000 $10,000

EXERCISE 25.7 Department 1 should not be closed. It would reduce net income by 80 percent if it were discontinued. The absorption of the additional indirect expenses by the remaining department would hurt profits drastically. An additional reason for not dropping Department 1 is that you are unable to predict the impact it might have on your customers.

EXERCISE 25.8 Break-even point = $6,400/$32 = 200 units to sell to break even ($32 = $40 sales price - $8 variable cost)

Chapter 25  863

PROBLEM 25.1A New2U Income Statement Year Ended December 31, 2013 Operating Revenues Sales Sales Returns and Allowances Net Sales Cost of Goods Sold Merchandise Inventory, January 1 Purchases Freight In Delivered Cost of Purchases Less Purchases Returns and Allowances Net Delivered Cost of Purchases Total Merchandise Available for Sale Less Merchandise Inventory, December 31 Cost of Goods Sold Gross Profit on Sales Operating Expenses Direct Expenses Sales Salaries Expense Advertising Expense Store Supplies Expense Cash Short or Over Total Direct Expenses Contribution Margin Indirect Expenses Insurance Expense Rent Expense Utilities Expense Office Salaries Expense Other Office Expenses Uncollectible Accounts Expense Depreciation Expense—Furniture and Fixtures Depreciation Expense—Office Equipment Total Indirect Expenses Net Income from Operations Other Income Interest Income Other Expense Interest Expense Net Income for the Year

864  Chapter 25

DEPARTMENT A

DEPARTMENT B

TOTAL

5 3 6 2 5 0 4 2 0 0 5 3 2 0 5 0

2 8 8 7 5 0 2 8 0 0 2 8 5 9 5 0

8 2 5 0 0 00 7 0 0 00 8 1 8 0 0 00

4 5 0 0 0 2 0 0 0 0 0 5 0 0 2 0 0 5 0 0 1 5 0 0 1 9 9 0 0 0 2 4 4 0 0 0 4 1 0 0 0 2 0 3 0 0 0 3 2 9 0 5 0

1 5 0 0 0 1 1 5 0 0 0 5 0 0 1 1 5 5 0 0 5 0 0 1 1 5 0 0 0 1 3 0 0 0 0 1 1 0 0 0 1 1 9 0 0 0 1 6 6 9 5 0

6 0 0 00 0 3 1 5 0 00 0 1 0 00 0 3 1 6 0 00 0 2 0 00 0 3 1 4 0 00 0 3 7 4 0 00 0 5 2 0 00 0 3 2 2 0 00 0 4 9 6 0 00 0

1 0 0 0 0 0 1 5 0 0 0 6 6 0 4 0 1 1 5 7 0 0 2 1 3 3 5 0

5 0 0 0 0 5 0 0 0 2 0 8 0 5 5 1 0 0 1 1 1 8 5 0

1 5 0 0 0 00 2 0 0 0 00 6 8 00 1 2 00 1 7 0 8 0 00 3 2 5 2 0 00

9 7 5 0 2 7 0 0 0 4 5 0 0 2 6 0 0 0 9 1 0 3 2 5 0 3 6 0 0 3 2 5 7 5 3 3 5 1 3 8 0 1 5

5 2 5 0 9 0 0 0 1 5 0 0 1 4 0 0 0 4 9 0 1 7 5 0 2 4 0 0 1 7 5 3 4 5 6 5 7 7 2 8 5

1 5 0 0 00 3 6 0 0 00 6 0 0 00 4 0 0 0 00 1 4 0 00 5 0 0 00 6 0 0 00 5 0 00 1 0 9 9 0 00 2 1 5 3 0 00 3 0 00 5 0 00 2 1 5 1 0 00

PROBLEM 25.1A (continued) ALLOCATION OF INDIRECT EXPENSES Insurance Expense 1. Department A ($130,000 ÷ $200,000) × $15,000 = $9,750 Department B ($ 70,000 ÷ $200,000) × $15,000 = $5,250 Rent Expense 2. Department A (4,500 sq. ft. ÷ 6,000 sq. ft.) × $36,000 = $27,000 Department B (1,500 sq. ft. ÷ 6,000 sq. ft.) × $36,000 = $9,000 Utilities Expense Department A (4,500 sq. ft. ÷ 6,000 sq. ft.) × $6,000 = $4,500 Department B (1,500 sq. ft. ÷ 6,000 sq. ft.) × $6,000 = $1,500 Office Salaries Expense 3. Department A ($536,250 ÷ $825,000) × $40,000 = $26,000 Department B ($288,750 ÷ $825,000) × $40,000 = $14,000 Other Office Expenses Department A ($536,250 ÷ $825,000) × $1,400 = $910 Department B ($288,750 ÷ $825,000) × $1,400 = $490 Depreciation Expense—Office Equipment Department A ($536,250 ÷ $825,000) × $500 = $325 Department B ($288,750 ÷ $825,000) × $500 = $175 Uncollectible Accounts Expense 4. Department A ($532,050 ÷ $818,000) × $5,000 = $3,252 Department B ($285,950 ÷ $818,000) × $5,000 = $1,748 Depreciation Expense—Furniture and Fixtures 5. Department A ($30,000 ÷ $50,000) × $6,000 = $3,600 Department B ($20,000 ÷ $50,000) × $6,000 = $2,400 Analyze: Department B reports a higher return on net sales, 27% (greater than that of Department A with 25.9%).

Chapter 25  865

PROBLEM 25.2A 1.

The Yard Shop Income Statement Year Ended December 31, 2013 Sales Less Sales Returns and Allowances Net Sales Cost of Goods Sold Merchandise Inventory, January 1 Purchases Less Purchases Returns & Allowances Net Purchases Cost of Goods Available for Sale Less Merchandise Inventory, Dec. 31 Cost of Goods Sold Gross Profit Direct Expenses Contribution Margin Indirect Expenses Net Income (Loss) from Operations

PLANTS 1 2 6 7 50 1 7 50 1 2 5 0 00

CHEMICALS 7 5 5 00 5 00 7 5 0 00

TOOLS 5 0 4 00 4 00 5 0 0 00

TOTAL 2 5 2 6 50 2 6 50 2 5 0 0 00

2 6 00 5 0 0 00 5 00 4 9 5 00 5 2 1 00 2 5 00 4 9 6 00 7 5 4 00 3 0 0 00 4 5 4 00 9 6 00 3 5 8 00

2 6 00 4 7 0 00 4 00 4 6 6 00 4 9 2 00 2 4 00 4 6 8 00 2 8 2 00 1 7 5 00 1 0 7 00 5 4 00 5 3 00

2 9 00 3 6 0 00 3 00 3 5 7 00 3 8 6 00 2 0 00 3 6 6 00 1 3 4 00 1 5 5 00 ( 2 1 0 0) 5 0 00 (7 1 0 0)

8 1 00 1 3 3 0 00 1 2 00 1 3 1 8 00 1 3 9 9 00 6 9 00 1 3 3 0 00 1 1 7 0 00 6 3 0 00 5 4 0 00 2 0 0 00 3 4 0 00

PLANTS 1 2 5 0 00 50 2 0 0 00 1 0 0 00 4 5 4 00 1 0 0 00 3 5 4 00

CHEMICALS 7 5 0 00 30 2 0 0 00 6 0 00 1 0 7 00 6 0 00 4 7 00

TOOLS 5 0 0 00 20 2 0 0 00 4 0 00 (2 1 0 0) 4 0 00 (6 1 0 0)

TOTAL 2 5 0 0 00

PROBLEM 25.2A (continued)

Net Sales Percent of Total Net Sales Times Total Indirect Expenses Allocation of Indirect Expenses Contribution Margin Indirect Expenses Net Income (Loss) from Operations

2 0 0 00 5 4 0 00 2 0 0 00 3 4 0 00

Carefully evaluate the Tools Department because of its negative contribution margin.

3. The effect on total sales if the decision is made to close the Tools Department and how that would impact the sales departments. Analyze: The Tools Department looks a little better under this allocation method, although it continues to have a negative contribution margin.

866  Chapter 25

PROBLEM 25.1B Sports Shop, LLC Income Statement Year Ended December 31, 2013 Operating Revenues Sales Sales Returns and Allowances Net Sales Cost of Goods Sold Merchandise Inventory, January 1 Purchases Freight In Delivered Cost of Purchases Less Purchases Returns and Allowances Net Delivered Cost of Purchases Total Merchandise Available for Sale Less Merchandise Inventory, Dec. 31 Cost of Goods Sold Gross Profit on Sales Operating Expenses Direct Expenses Sales Salaries Expense Advertising Expense Store Supplies Expense Cash Short or Over Total Direct Expenses Contribution Margin Indirect Expenses Insurance Expense Rent Expense Utilities Expense Office Salaries Expense Other Office Expenses Uncollectible Accounts Expense Depreciation Expense—Furniture & Fixtures Depreciation Expense—Office Equipment Total Indirect Expenses Net Income from Operations Other Income Interest Income Net Income for the Year

EQUIPMENT

CLOTHES

TOTAL

3 0 0 0 00 3 0 00 2 9 7 0 00

2 0 0 0 00 2 0 00 1 9 8 0 00

5 0 0 0 00 5 0 00 4 9 5 0 00

2 9 0 00 1 2 0 0 00 2 0 00 1 2 2 0 00 2 5 00 1 1 9 5 00 1 4 8 5 00 3 1 0 00 1 1 7 5 00 1 7 9 5 00

2 0 0 00 8 5 0 00 5 00 8 5 5 00 1 5 00 8 4 0 00 1 0 4 0 00 2 4 0 00 8 0 0 00 1 1 8 0 00

4 9 0 00 2 0 5 0 00 2 5 00 2 0 7 5 00 4 0 00 2 0 3 5 00 2 5 2 5 00 5 5 0 00 1 9 7 5 00 2 9 7 5 00

8 5 0 00 1 0 0 00 5 00 25 9 5 5 25 8 3 9 75

4 5 0 00 5 0 00 3 00 25 5 0 3 25 6 7 6 75

1 3 0 0 00 1 5 0 00 8 00 50 1 4 5 8 50 1 5 1 6 50

1 2 6 00 2 1 0 00 4 2 00 3 0 0 00 9 60 1 8 00 2 4 00 3 00 7 3 2 60 1 0 7 15

5 4 00 9 0 00 1 8 00 2 0 0 00 6 40 1 2 00 1 6 00 2 00 3 9 8 40 2 7 8 35

1 8 0 00 3 0 0 00 6 0 00 5 0 0 00 1 6 00 3 0 00 4 0 00 5 00 1 1 3 1 00 3 8 5 50

2 05 3 8 7 55

Chapter 25  867

PROBLEM 25.1B (continued) ALLOCATION OF INDIRECT EXPENSES Insurance Expense 1. Equipment ($70,000 ÷ $100,000) × $18,000 = $12,600 Clothes ($30,000 ÷ $100,000) × $18,000 = $5,400 Rent Expense 2. Equipment (2,800 sq. ft. ÷ 4,000 sq. ft.) × $30,000 = $21,000 Clothes (1,200 sq. ft. ÷ 4,000 sq. ft.) × $30,000 = $9,000 Utilities Expense Equipment (2,800 sq. ft. ÷ 4,000 sq. ft.) × $6,000 = $4,200 Clothes (1,200 sq. ft. ÷ 4,000 sq. ft.) × $6,000 = $1,800

ALLOCATION OF INDIRECT EXPENSES Office Salaries Expense 3. Equipment ($300,000 ÷ $500,000) × $50,000 = $30,000 Clothes ($200,000 ÷ $500,000) × $50,000 = $20,000 Other Office Expenses Equipment ($300,000 ÷ $500,000) × $1,600 = $960 Clothes ($200,000 ÷ $500,000) × $1,600 = $640 Depreciation Expense—Office Equipment Equipment ($300,000 ÷ $500,000) × $500 = $300 Clothes ($200,000 ÷ $500,000) × $500 = $200 Uncollectible Accounts Expense 4. Equipment ($297,000 ÷ $495,000) × $3,000 = $1,800 Clothes ($198,000 ÷ $495,000) × $3,000 = $1,200 Depreciation Expense—Furniture and Fixtures 5. Equipment ($5,100 ÷ $8,500) × $4,000 = $2,400 Clothes ($3,400 ÷ $8,500) × $4,000 = $1,600 Analyze:

Clothes contributed 71.8% of the net income of the business.

868  Chapter 25

PROBLEM 25.2B 1.

It’s All Paper Income Statement Year Ended December 31, 2013 Sales Less Sales Returns and Allowances Net Sales Cost of Goods Sold Merchandise Inventory, January 1 Purchases Less Purchases Returns & Allowances Net Purchases Cost of Goods Available for Sale Less Merchandise Inventory, Dec. 31 Cost of Goods Sold Gross Profit Direct Expenses Contribution Margin Indirect Expenses Net Income (Loss) from Operations

PRINTING 7 6 9 00 9 00 7 6 0 00

SUPPLIES 4 4 2 50 2 50 4 4 0 00

CARDS 3 0 2 00 2 00 3 0 0 00

TOTAL 1 5 1 3 50 1 3 50 1 5 0 0 00

5 0 00 2 9 8 00 5 00 2 9 3 00 3 4 3 00 4 5 00 2 9 8 00 4 6 2 00 1 5 0 00 3 1 2 00 2 3 00 2 8 9 00

4 2 00 3 4 0 00 3 00 3 3 7 00 3 7 9 00 2 9 00 3 5 0 00 9 0 00 8 0 00 1 0 00 1 1 00 (1 0 0)

1 8 00 1 7 3 00 3 00 1 7 0 00 1 8 8 00 1 0 00 1 7 8 00 1 2 2 00 6 0 00 6 2 00 6 00 5 6 00

1 1 0 00 8 1 1 00 1 1 00 8 0 0 00 9 1 0 00 8 4 00 8 2 6 00 6 7 4 00 2 9 0 00 3 8 4 00 4 0 00 3 4 4 00

2. The supplies department shows a net loss of $100, which is a minor loss in the overall scope of the business. Since the contribution margin shows a positive $1,000, this department should probably be kept open. 3. The concept of offering all items to customers may cause concern to the owners if the decision is made to close the Supplies Department. The owners should consider what other items could be brought in to utilize the available floor space. Analyze: An increase of $100 would be required to cover the Supplies Department's indirect expenses.

Chapter 25  869

CRITICAL THINKING PROBLEM 25.1

Sales Cost of Goods Sold Gross Profit Direct Operating Expenses Contribution Margin Indirect Operating Expenses Net Profit

Wood Crafts 75,000 27,000 48,000 18,500 29,500 9,000 20,500

Clothing Items 60,000 39,500 20,500 11,000 9,500 8,000 1,500

Paper Goods 20,000 12,000 8,000 8,000 0 5,000 (5,000)

Totals 155,000 78,500 76,500 37,500 39,000 22,000 17,000

Close Paper Goods 128,000 63,500 64,500 29,500 35,000 16,000 19,000

Close Clothing Items 95,000 39,000 56,000 26,500 29,500 17,000 12,500

From the analysis given above, closing the Paper Goods department would make the net income of the business $19,000; $2,000 more than the current situation.

If the Clothing Items department is closed, the net income of the business will fall from $17,000 to $12,500. Do not close the Clothing Items department

Advise the owner to keep all departments, but try to increase sales in paper goods.

Analyze: Contribution Margin

Wood Crafts

Clothing Items

Paper Goods

$29,500

$9,500

CRITICAL THINKING PROBLEM 25.2 Using the contribution margin of a department would allow management to evaluate a manager on performance and costs that are controllable by the manager. Another argument for using the contribution margin in evaluating a department’s performance, is that even if the department were eliminated, the indirect expenses would still have to be paid or absorbed by the remaining departments. As a result, most management decisions are based on the contribution margin rather than net income by department. Management generally recognizes that many indirect expenses are allocated in a rather arbitrary manner and that many are uncontrollable costs.

870  Chapter 25

SOLUTIONS TO BUSINESS CONNECTIONS Managerial Focus: 1. Helps evaluate purchasing processes, quality of goods, and projection of sales. 2. Indicates poor cash control procedures; investigate immediately. 3. Aids management in evaluating how departments contribute to covering indirect costs and how they contribute to the overall income of the business. 4. 5.

Past experience; industry practices. Methods should be reasonable and fair. On each department’s contribution margin. Ensures accountability by department.

Ethical Dilemma: Since indirect costs can alter the departmental profit and this profit determines the manager’s bonus, allocating indirect costs evenly would not be appropriate. You should tell management to give the responsibility of determining the indirect costs to someone that is not affected by the bonus. Financial Statement Analysis: 1. Gift card revenues were recorded at $40 million and revenue from the sale of services was recorded at $2.6 billion. 2.

The revenue from sale of services was an increase of $500 million or 19% over FY 2008.

Teamwork: All production of food products require materials to be requisitioned from inventory and mixed together in a vat by cooks. These costs are direct costs. Small amounts of materials and inspection and supervision will be needed. These costs are indirect costs. These costs would be similar to every food product. The types of materials and labor would be dissimilar. Tortilla chips require corn meal and water, whereas ice cream requires cream and sugar. Internet Connection: General Motors provides income information by department. The reason General Motors (GMAC) Financial department is reported separately is that it has a higher net income than its automotive department.

Chapter 25  871

SOLUTIONS TO PRACTICE TEST Part A True-False 1. TRUE 2. TRUE 3. TRUE 4. FALSE 5. FALSE 6. FALSE 7. FALSE 8. FALSE 9. TRUE 10. FALSE

11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

TRUE FALSE FALSE FALSE FALSE FALSE FALSE FALSE FALSE TRUE

Part B Matching 1. c 2. b 3. e 4. d 5. a

872  Chapter 25

CHAPTER 26 ACCOUNTING FOR MANUFACTURING ACTIVITIES Chapter Opener: Thinking Critically Answers will vary. Students may list the following as costs: purchasing fewer raw materials such as sheet metal, plastic, glass, fabric, tires, and batteries; cutting back labor costs for assembly; costs associated with the manufacturing facilities such as rent, utilities, and depreciation of equipment. Fast Facts • Ford Motor Co. has said it plans to close 14 manufacturing plants in North America and cut between 25,000 to 30,000 jobs by 2012. •

Ford is the leading U.S.-based producer of hybrid-electric vehicles, with record sales that were up 72 percent in 2009.

•

With about 198,000 employees and about 90 plants worldwide, the company’s automotive brands include Ford, Lincoln, Mercury, and Volvo.

•

In the U.S. in 2009, Ford F-Series was the best-selling truck for the 33rd year in a row.

Managerial Implications: Thinking Critically • Not all of a manufacturing firm’s inventory is in a “ready to sell” condition. The three inventory accounts facilitate collecting unit cost data so the proper finished goods cost can be matched to revenue in the period the goods are sold. Discussion Questions These questions are designed to check students’ understanding of new terms, concepts, and procedures presented in the chapter. 1.

Merchandising businesses use accounts for obtaining, processing, and inventorying materials at all stages of production.

Raw materials—cost of materials to be processed. Work in process— partially completed products. Finished goods—cost of the completed items.

3. 4.

Cost of goods manufactured appears on income statement in the Cost of Goods Sold section. Beg. bal. of raw materials added to purchases and freight in, subtract purchases discounts and purchases returns and allowances of raw materials. From this subtotal, subtract the ending balance of raw materials.

5. 6.

Wages other than wages directly attributable to production. Yes, the companies with similar processes may classify items differently. If the cost of the raw material could be considered immaterial, it could be classified as an indirect material.

7. 8. 9. 10. 11.

Indirect labor. Manufacturing costs not classified as direct labor or direct material. Because of the beginning and ending inventories of work in process. Cost of direct materials and labor, plus an allocation of manufacturing overhead costs. Factory utilities, insurance, indirect labor, indirect material, depreciation of factory buildings and equipment, payroll taxes on factory wages.

12.

Cost of Goods Manufactured columns of the worksheet.

Chapter 26 873

Discussion Questions (continued) 13. Statements can be produced directly from the worksheet before the adjusting and closing entries are posted to the ledger accounts. 14.

The cost of goods manufactured statement must be produced before the income statement because the cost of goods manufactured is needed to prepare the cost of goods sold section of the income statement.

15.

A merchandising firm has one inventory account, Merchandise Inventory. Purchases are debited to the Purchases account, not directly to the inventory account.

16. 17.

Receiving clerk, storeroom clerk, forklift operator, security guard, factory clerical worker. Beginning finished goods inventory is added to cost of goods manufactured; ending finished goods inventory is then subtracted.

18.

Same method is used as for a merchandising firm; they reverse the effect of certain adjustments to save time and help prevent errors in the new period.

874 Chapter 26

EXERCISE 26.1 Socal Company Partial Statement of Cost of Goods Manufactured Year Ended December 31, 2013 Raw Materials Raw Materials Inventory, January 1 Materials Purchases Freight-In Delivered Cost of Purchases Less Purchases Returns and Allowances Net Purchases Total Materials Available Less Raw Materials Inventory, December 31 Raw Materials Used

38 0 0 0 00 695 0 0 0 00 20 0 0 0 00 715 0 0 0 00 6 9 0 0 00 708 1 0 0 00 746 1 0 0 00 35 0 0 0 00 711 1 0 0 00

EXERCISE 26.2 GENERAL JOURNAL DATE

DESCRIPTION Adjusting Entries

PAGE POST. REF.

1 2 2013 3 Dec. 31 Manufacturing Summary 4 Raw Materials Inventory 5 6 31 Raw Materials Inventory 7 Manufacturing Summary 8 9 31 Manufacturing Summary 10 Work in Process Inventory 11 12 31 Work in Process Inventory 13 Manufacturing Summary 14 15 31 Income Summary 16 Finished Goods Inventory 17 18 31 Finished Goods Inventory 19 Income Summary 20

DEBIT

38 0 0 0 00

35 0 0 0 00

80 0 0 0 00

75 0 0 0 00

62 0 0 0 00

60 0 0 0 00

CREDIT 1 2 3 38 0 0 0 00 4 5 6 35 0 0 0 00 7 8 9 80 0 0 0 00 10 11 12 75 0 0 0 00 13 14 15 62 0 0 0 00 16 17 18 60 0 0 0 00 19 20

Chapter 26 875

EXERCISE 26.3 Raw Materials Inventory (Beginning) Materials Purchases (Net) Total Materials Available Less Raw Materials Inventory (Ending) Raw Materials Used

$95,000 800,000 $895,000 75,000 $820,000

EXERCISE 26.4 Total Manufacturing Cost Less Manufacturing Overhead Less Raw Material Used Direct Labor Cost

$2,200,000 300,000 850,000 $1,050,000

EXERCISE 26.5 Insurance on office building. EXERCISE 26.6 Both work in process and raw materials inventories would be shown on the statement of cost of goods manufactured. EXERCISE 26.7 Freight in charges on purchases of raw materials would not be included in the Manufacturing Overhead section of the statement of cost of goods manufactured. This is a direct material cost. EXERCISE 26.8 3. Indirect materials and supplies; 4. Repairs to factory building; 5. Depreciation of factory equipment would be included in the Manufacturing Overhead section of the statement of cost of goods manufactured. EXERCISE 26.9 The following items would not be extended to the Cost of Goods Manufactured section of the worksheet: 1. Insurance on finished goods; 2. Payroll taxes on outside sales salaries; 5. Salary of accounts receivable clerk; and 9. Freight out.

876 Chapter 26

EXERCISE 26.10 PAGE

GENERAL JOURNAL DATE DESCRIPTION 1 Adjusting Entries 2 2013 (Adjustment a) 3 Dec. 31 Manufacturing Summary 4 Raw Materials Inventory 5 6 31 Raw Materials Inventory 7 Manufacturing Summary 8 9 (Adjustment b) 10 31 Insurance Expense—Factory 11 Prepaid Insurance 12 13 (Adjustment c) 14 31 Direct Labor 15 Salaries and Wages Payable 16 17 (Adjustment d) 18 31 Factory Supplies Expense 19 Factory Supplies 20

POST. REF.

DEBIT

42 0 0 0 00

40 0 0 0 00

12 0 0 0 00

6 0 0 0 00

7 0 0 0 00

1 2 3 4 5 6 7 31 Income Summary 8 Manufacturing Summary 9 10 2014 Reversing Entry 11 Jan. 1 Salaries and Wages Payable 12 Direct Labor 13

1 2 3 42 0 0 0 00 4 5 6 40 0 0 0 00 7 8 9 10 12 0 0 0 00 11 12 13 14 6 0 0 0 00 15 16 17 18 7 0 0 0 00 19 20

PAGE

GENERAL JOURNAL DATE DESCRIPTION 2013 Closing Entries Dec. 31 Manufacturing Summary Insurance Expense—Factory Direct Labor Factory Supplies Expense

CREDIT

POST. REF.

DEBIT 115 0 0 0 00

117 0 0 0 00

6 0 0 0 00

CREDIT 1 2 12 0 0 0 00 3 96 0 0 0 00 4 7 0 0 0 00 5 6 7 117 0 0 0 00 8 9 10 11 6 0 0 0 00 12 13

Chapter 26 877

PROBLEM 26.1A Dooley Manufacturing Company Statement of Cost of Goods Manufactured Year Ended December 31, 2013 Work in Process, January 1

39 0 0 0 00

Raw Materials Raw Materials, January 1 Materials Purchases Total Materials Available Less Raw Materials, December 31 Raw Materials Used

22 0 0 0 00 192 5 0 0 00 214 5 0 0 00 20 0 0 0 00 194 5 0 0 00

Direct Labor

195 0 0 0 00

Manufacturing Overhead Indirect Labor Payroll Taxes—Factory Utilities—Factory Repairs and Maintenance—Factory Indirect Materials and Supplies Depreciation—Factory Building Depreciation—Factory Equipment Insurance—Factory Property Taxes—Factory Total Manufacturing Overhead Total Manufacturing Costs Total Work in Process for Year Less Work in Process Inventory, December 31 Cost of Goods Manufactured

878 Chapter 26

36 0 0 0 00 23 0 0 0 00 24 0 0 0 00 5 0 0 0 00 6 0 0 0 00 5 0 0 0 00 4 5 0 0 00 9 0 0 0 00 8 0 0 0 00 120 5 0 0 00 510 0 0 0 00 549 0 0 0 00 36 0 0 0 00 513 0 0 0 00

PROBLEM 26.1A (continued) Dooley Manufacturing Company Income Statement Year Ended December 31, 2013 Revenue Sales Less Sales Returns and Allowances Net Sales Cost of Goods Sold Finished Goods Inventory, January 1 Cost of Goods Manufactured Total Goods Available for Sale Less Finished Goods Inventory, December 31 Cost of Goods Sold Gross Profit Operating Expenses Selling Expenses Sales Salaries Expense Payroll Taxes Expense—Sales Salaries Delivery Expense Advertising Expense Miscellaneous Selling Expenses Total Selling Expenses Administrative Expenses Officers’ Salaries Expense Office Salaries Expense Payroll Taxes Expense—Administrative Salaries Other Administrative Expenses Total Administrative Expenses Total Operating Expenses Net Income Before Income Taxes Income Tax Expense Net Income After Income Taxes

1,000 0 0 0 00 5 5 0 0 00 994 5 0 0 00 35 0 0 0 00 513 0 0 0 00 548 0 0 0 00 30 0 0 0 00 518 0 0 0 00 476 5 0 0 00

120 0 0 0 00 12 0 0 0 00 8 0 0 0 00 9 0 0 0 00 25 0 0 0 00 174 0 0 0 00 150 0 0 0 00 45 0 0 0 00 19 5 0 0 00 3 0 0 0 00 217 5 0 0 00 391 5 0 0 00 85 0 0 0 00 21 2 5 0 00 63 7 5 0 00

Analyze: Approximately $0.52 out of every dollar of net sales was related to manufacturing.

Chapter 26 879

PROBLEM 26.2A Bay Corp. Worksheet Year Ended December 31, 2013 TRIAL BALANCE ACCOUNT NAME 1 Cash

DEBIT 50 0 0 0 00

2 Accounts Receivable

75 0 0 0 00

3 Allowance for Doubtful Accounts

ADJUSTMENTS

CREDIT

DEBIT

2 0 0 0 00

CREDIT

(b)

2 5 0 00

4 Raw Materials Inventory

25 0 0 0 00

(a) 21 0 0 0 00 (a) 25 0 0 0 00

5 Work in Process Inventory

40 0 0 0 00

(a) 38 0 0 0 00 (a) 40 0 0 0 00

6 Finished Goods Inventory

42 0 0 0 00

(a) 35 0 0 0 00 (a) 42 0 0 0 00

7 Prepaid Insurance

6 0 0 0 00

0 0 0 00

8 Factory Supplies

4 0 0 0 00

(d)

5 0 0 00

9 Land

50 0 0 0 00

10 Factory Building

200 0 0 0 00

11 Accum. Depreciation—Fac. Bldg.

20 0 0 0 00

(e) 10 0 0 0 00

20 0 0 0 00

(e) 10 0 0 0 00

15 Accum. Depr.—Office Furn. & Equip.

4 0 0 0 00

(e) 2

16 Accounts Payable

76 0 0 0 00

12 Factory Machines

100 0 0 0 00

13 Accum. Depreciation—Fac. Machines 14 Office Furniture & Equipment

20 0 0 0 00 0 0 0 00

17 Salaries and Wages Payable

(f) 2 0 0 0 00

18 Income Tax Payable

(h) 2 1 4 9 00

19 Social Security Tax Payable

(g)

1 2 4 00

20 Medicare Tax Payable

(g)

2 9 00

21 Common Stock

100 0 0 0 00

22 Retained Earnings

248 5 0 0 00

23 Sales

995 5 0 0 00

24 Sales Returns and Allowances 25 Materials Purchases

5 5 0 0 00 252 0 0 0 00

26 Purchases Returns and Allowances

2 0 0 0 00

27 Freight In

10 0 0 0 00

28 Direct Labor

181 0 0 0 00

(f) 1 8 0 0 00

29 Indirect Labor

20 0 0 0 00

(f)

2 0 0 00

30 Payroll Taxes Expenses—Factory

20 6 0 0 00

(g)

1 5 3 00

31 Utilities—Factory 32 Totals Carried Forward

8 0 0 0 00 1,109 1 0 0 00

1,468 0 0 0 00

96 1 5 3 00

139 0 5 2 00

880 Chapter 26

PROBLEM 26.2A (continued)

ADJUSTED TRIAL BALANCE DEBIT

CREDIT

COST OF GOODS MANUFACTURED

DEBIT

CREDIT

INCOME STATEMENT DEBIT

CREDIT

BALANCE SHEET DEBIT

CREDIT

50 0 0 0 00

75 0 0 0 00

2 2 5 0 00

21 0 0 0 00

38 0 0 0 00

35 0 0 0 00

1 0 0 0 00

3 5 0 0 00

50 0 0 0 00

200 0 0 0 00

200 0 0 0 00 30 0 0 0 00

100 0 0 0 00

10 30 0 0 0 00

30 0 0 0 00

13 14 15

100 0 0 0 00 30 0 0 0 00

20 0 0 0 00

20 0 0 0 00 6 0 0 0 00

6 0 0 0 00

76 0 0 0 00

2 0 0 0 00

2 1 4 9 00

1 2 4 00

2 9 00

100 0 0 0 00

248 5 0 0 00

995 5 0 0 00

5 5 0 0 00

252 0 0 0 00

252 0 0 0 00 2 0 0 0 00

22 23 25

2 0 0 0 00

10 0 0 0 00

182 8 0 0 00

20 2 0 0 00

20 7 5 3 00

8 0 0 0 00 #### 7 5 3 00 1,494 5 5 2 00

8 0 0 0 00 493 7 5 3 00

31 2 0 0 0 00

5 5 0 0 00 995 5 0 0 00 593 5 0 0 00 497 0 5 2 00

32 34

Chapter 26 881

PROBLEM 26.2A (continued) Bay Corp. Worksheet (Continued) Year Ended December 31, 2013 TRIAL BALANCE

ACCOUNT NAME 1 Totals Brought Forward 2 Repairs and Maintenance—Factory 3 Indirect Materials and Supplies 4 Depreciation—Factory Building 5 Depreciation—Factory Machines 6 Insurance—Factory 7 Property Taxes—Factory 8 Sales Salaries Expense 9 Payroll Taxes Expense—Sales 10 Delivery Expense 11 Advertising Expense 12 Uncollectible Accounts Expense 13 Miscellaneous Selling Expense 14 Officers’ Salaries Expense 15 Office Salaries Expense 16 Payroll Taxes Expense—Admin. 17 Depr. Expense—Office Furn. & Equip. 18 Other Administrative Expenses 19 Income Tax Expense 20 Manufacturing Summary 21 22 Income Summary 23 24 Cost of Goods Manufactured 25 26 Net Income 27

882 Chapter 26

DEBIT

CREDIT

ADJUSTMENTS DEBIT

CREDIT

1,109 1 0 0 00 1,468 0 0 0 00 96 1 5 3 00 139 0 5 2 00 2 4 0 0 00 2 0 0 0 00 (d) 5 0 0 00 (e) 10 0 0 0 00 (e) 10 0 0 0 00 (c) 5 0 0 0 00 6 0 0 0 00 85 0 0 0 00 8 5 0 0 00 5 0 0 0 00 5 0 0 0 00 (b) 2 5 0 00 6 5 0 0 00 145 0 0 0 00 40 0 0 0 00 18 5 0 0 00 (e) 2 0 0 0 00 5 0 0 0 00 30 0 0 0 00 (h) 2 1 4 9 00 (a) 25 0 0 0 00 (a) 21 0 0 0 00 (a) 40 0 0 0 00 (a) 38 0 0 0 00 (a) 42 0 0 0 00 (a) 35 0 0 0 00 1,468 0 0 0 00 1,468 0 0 0 00 233 0 5 2 00 233 0 5 2 00

PROBLEM 26.2A (continued)

ADJUSTED TRIAL BALANCE DEBIT

CREDIT

1,092 7 5 3 00 1,494 5 5 2 00 2 4 0 0 00 2 5 0 0 00 10 0 0 0 00 10 0 0 0 00 5 0 0 0 00 6 0 0 0 00 85 0 0 0 00 8 5 0 0 00 5 0 0 0 00 5 0 0 0 00 2 5 0 00 6 5 0 0 00 145 0 0 0 00 40 0 0 0 00 18 5 0 0 00 2 0 0 0 00 5 0 0 0 00 32 1 4 9 00 25 0 0 0 00 21 0 0 0 00 40 0 0 0 00 38 0 0 0 00 42 0 0 0 00 35 0 0 0 00 1,588 5 5 2 00 1,588 5 5 2 00

COST OF GOODS MANUFACTURED

INCOME STATEMENT

DEBIT

CREDIT

DEBIT

493 7 5 3 00 2 4 0 0 00 2 5 0 0 00 10 0 0 0 00 10 0 0 0 00 5 0 0 0 00 6 0 0 0 00

2 0 0 0 00

5 5 0 0 00

CREDIT

BALANCE SHEET DEBIT

CREDIT

995 5 0 0 00 593 5 0 0 00

497 0 5 2 00

42 0 0 0 00 35 0 0 0 00 400 3 9 9 00 1,030 5 0 0 00 593 5 0 0 00 533 6 5 3 00

497 0 5 2 00

85 0 0 0 00 8 5 0 0 00 5 0 0 0 00 5 0 0 0 00 2 5 0 00 6 5 0 0 00 145 0 0 0 00 40 0 0 0 00 18 5 0 0 00 2 0 0 0 00 5 0 0 0 00 32 1 4 9 00 25 0 0 0 00 40 0 0 0 00

21 0 0 0 00 38 0 0 0 00

594 6 5 3 00

61 0 0 0 00 533 6 5 3 00

594 6 5 3 00

934 0 5 2 00 96 4 4 8 00 1,030 5 0 0 00 1,030 5 0 0 00 593 5 0 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

96 4 4 8 00

25 26

593 5 0 0 00

Chapter 26 883

PROBLEM 26.2A (continued) Bay Corp. Statement of Cost of Goods Manufactured Year Ended December 31, 2013 Work in Process, January 1

40 0 0 0 00

Raw Materials Raw Materials, January 1 Materials Purchases Less Purchases Returns and Allowances Add Freight In Net Delivered Cost of Raw Materials Total Materials Available Less: Raw Materials, December 31 Raw Materials Used

25 0 0 0 00 252 0 0 0 00 2 0 0 0 00 10 0 0 0 00 260 0 0 0 00 285 0 0 0 00 21 0 0 0 00 264 0 0 0 00

Direct Labor

182 8 0 0 00

Manufacturing Overhead Indirect Labor Payroll Taxes—Factory Utilities—Factory Repairs and Maintenance—Factory Indirect Materials and Supplies Depreciation—Factory Building Depreciation—Factory Machines Insurance—Factory Property Taxes—Factory Total Manufacturing Overhead Total Manufacturing Costs Total Work in Process for Year Less: Work in Process, December 31 Cost of Goods Manufactured

884 Chapter 26

20 2 0 0 00 20 7 5 3 00 8 0 0 0 00 2 4 0 0 00 2 5 0 0 00 10 0 0 0 00 10 0 0 0 00 5 0 0 0 00 6 0 0 0 00 84 8 5 3 00 531 6 5 3 00 571 6 5 3 00 38 0 0 0 00 533 6 5 3 00

PROBLEM 26.2A (continued) Bay Corp. Income Statement Year Ended December 31, 2013 Revenue Sales Less Sales Returns and Allowances Net Sales Cost of Goods Sold Finished Goods Inventory, January 1 Cost of Goods Manufactured Total Goods Available for Sale Less Finished Goods Inventory, December 31 Cost of Goods Sold Gross Profit Operating Expenses Selling Expenses Sales Salaries Expense 85 0 0 0 00 Payroll Taxes Expense—Sales Salaries 8 5 0 0 00 Delivery Expense 5 0 0 0 00 Advertising Expense 5 0 0 0 00 Uncollectible Accounts Expense 2 5 0 00 Miscellaneous Selling Expenses 6 5 0 0 00 Total Selling Expenses Administrative Expenses Officers’ Salaries Expense 145 0 0 0 00 Office Salaries Expenses 40 0 0 0 00 Payroll Taxes Expense—Administrative 18 5 0 0 00 Depreciation Expense—Office Furniture & Equip. 2 0 0 0 00 Other Administrative Expenses 5 0 0 0 00 Total Administrative Expenses Total Operating Expenses Net Income Before Income Taxes Income Tax Expense Net Income After Income Taxes

995 5 0 0 00 5 5 0 0 00 990 0 0 0 00 42 0 0 0 00 533 6 5 3 00 575 6 5 3 00 35 0 0 0 00 540 6 5 3 00 449 3 4 7 00

110 2 5 0 00

210 5 0 0 00 320 7 5 0 00 128 5 9 7 00 32 1 4 9 00 96 4 4 8 00

Chapter 26 885

PROBLEM 26.2A (continued) Bay Corporation Statement of Retained Earnings Year Ended December 31, 2013 Balance, January 1, 2013 Add: Net Income for Year Deduct 2013 Dividends Balance, December 31, 2013

886 Chapter 26

348 96 444 100 344

5 4 9 0 9

0 4 4 0 4

0 00 8 00 8 00 0 00 8 00

PROBLEM 26.2A (continued) Bay Corp. Balance Sheet December 31, 2013 Assets Current Assets Cash Accounts Receivable Less: Allowance for Doubtful Accounts Inventories Raw Materials Work in Process Finished Goods Prepaid Insurance Factory Supplies Total Current Assets Property, Plant, and Equipment Land Factory Building Less: Accumulated Depreciation—Factory Building Factory Machines Less: Accumulated Depreciation—Factory Machines Office Furniture and Equipment Less: Accumulated Depreciation—Off. Furn. & Equip. Total Property, Plant, and Equipment Total Assets

50 0 0 0 00 75 0 0 0 00 2 2 5 0 00 21 0 0 0 00 38 0 0 0 00 35 0 0 0 00

72 7 5 0 00

94 0 0 0 00 1 0 0 0 00 3 5 0 0 00 221 2 5 0 00

50 0 0 0 00 200 0 0 0 00 30 0 0 0 00 100 0 0 0 00 30 0 0 0 00 20 0 0 0 00 6 0 0 0 00

Liabilities and Stockholders’ Equity Current Liabilities Accounts Payable Salaries and Wages Payable Income Tax Payable Social Security Tax Payable Medicare Tax Payable Total Liabilities Stockholders’ Equity Common Stock ($1 par, 100,000 shares authorized and outstanding) Retained Earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity

170 0 0 0 00 70 0 0 0 00 14 0 0 0 00 304 0 0 0 00 525 2 5 0 00

76 0 0 0 00 2 0 0 0 00 2 1 4 9 00 1 2 4 00 2 9 00 80 3 0 2 00

100 0 0 0 00 344 9 4 8 00 444 9 4 8 00 525 2 5 0 00

Chapter 26 887

PROBLEM 26.2A (continued) GENERAL JOURNAL

DATE DESCRIPTION Adjusting Entries 1 2 2013 (Adjustment a) 3 Dec. 31 Manufacturing Summary 4 Raw Materials Inventory 5 6 31 Raw Materials Inventory 7 Manufacturing Summary 8 9 31 Manufacturing Summary 10 Work in Process Inventory 11 12 31 Work in Process Inventory 13 Manufacturing Summary 14 15 31 Income Summary 16 Finished Goods Inventory 17 18 31 Finished Goods Inventory 19 Income Summary 20 21 (Adjustment b) 22 31 Uncollectible Accounts Expense 23 Allowance for Doubtful Accounts 24 25 (Adjustment c) 26 31 Insurance—Factory 27 Prepaid Insurance 28 29 (Adjustment d) 30 31 Indirect Materials and Supplies 31 Factory Supplies 32

888 Chapter 26

PAGE POST. REF.

DEBIT

25 0 0 0 00

21 0 0 0 00

40 0 0 0 00

38 0 0 0 00

42 0 0 0 00

35 0 0 0 00

2 5 0 00

5 0 0 0 00

5 0 0 00

CREDIT 1 2 3 25 0 0 0 00 4 5 6 21 0 0 0 00 7 8 9 40 0 0 0 00 10 11 12 38 0 0 0 00 13 14 15 42 0 0 0 00 16 17 18 35 0 0 0 00 19 20 21 22 2 5 0 00 23 24 25 26 5 0 0 0 00 27 28 29 30 5 0 0 00 31 32

PROBLEM 26.2A (continued) GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

DATE DESCRIPTION 2013 (Adjustment e) Dec. 31 Depreciation—Factory Building Depreciation—Factory Machines Depreciation—Office Furniture and Equipment Accumulated Depreciation—Factory Building Accumulated Depreciation—Factory Machines Accumulated Depreciation—Office Furn. & Equip.

PAGE POST. REF.

(Adjustment f) 31 Direct Labor Indirect Labor Salaries and Wages Payable (Adjustment g) 31 Payroll Taxes—Factory Social Security Tax Payable Medicare Tax Payable (Adjustment h) 31 Income Tax Expense Income Tax Payable

DEBIT 10 0 0 0 00 10 0 0 0 00 2 0 0 0 00

1 8 0 0 00 2 0 0 00

1 5 3 00

2 1 4 9 00

CREDIT 1 2 3 4 10 0 0 0 00 5 10 0 0 0 00 6 2 0 0 0 00 7 8 9 10 11 2 0 0 0 00 12 13 14 15 1 2 4 00 16 2 9 00 17 18 19 20 2 1 4 9 00 21 22

Chapter 26 889

PROBLEM 26.2A (continued) GENERAL JOURNAL

DATE

DESCRIPTION Closing Entries

1 2 2013 3 Dec. 31 Purchases Returns and Allowances 4 Manufacturing Summary 5 6 31 Manufacturing Summary 7 Materials Purchases 8 Freight In 9 Direct Labor 10 Indirect Labor 11 Payroll Taxes—Factory 12 Utilities—Factory 13 Repairs and Maintenance—Factory 14 Indirect Materials and Supplies 15 Depreciation—Factory Building 16 Depreciation—Factory Machines 17 Insurance—Factory 18 Property Taxes—Factory 19 20 31 Sales 21 Income Summary 22 23 31 Income Summary 24 Sales Returns and Allowances 25 Sales Salaries Expense 26 Payroll Taxes Expense—Sales 27 Delivery Expense 28 Advertising Expense 29 Uncollectible Accounts Expense 30 Miscellaneous Selling Expense 31 Officers’ Salaries Expense 32 Office Salaries Expense 33 Payroll Taxes Expense—Administration 34 Depreciation Expense—Office Furn. and Equip. 35 Other Administrative Expenses 36 Income Tax Expense 37 Manufacturing Summary

890 Chapter 26

PAGE POST. REF.

DEBIT

2 0 0 0 00

529 6 5 3 00

995 5 0 0 00

892 0 5 2 00

CREDIT 1 2 3 2 0 0 0 00 4 5 6 252 0 0 0 00 7 10 0 0 0 00 8 182 8 0 0 00 9 20 2 0 0 00 10 20 7 5 3 00 11 8 0 0 0 00 12 2 4 0 0 00 13 2 5 0 0 00 14 10 0 0 0 00 15 10 0 0 0 00 16 5 0 0 0 00 17 6 0 0 0 00 18 19 20 995 5 0 0 00 21 22 23 5 5 0 0 00 24 85 0 0 0 00 25 8 5 0 0 00 26 5 0 0 0 00 27 5 0 0 0 00 28 2 5 0 00 29 6 5 0 0 00 30 145 0 0 0 00 31 40 0 0 0 00 32 18 5 0 0 00 33 2 0 0 0 00 34 5 0 0 0 00 35 32 1 4 9 00 36 533 6 5 3 00 37

PROBLEM 26.2A (continued) GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

DATE DESCRIPTION 2013 Dec. 31 Income Summary Retained Earnings 2014 Jan.

PAGE POST. REF.

Reversing Entries 1 Salaries and Wages Payable Direct Labor Indirect Labor 1 Social Security Tax Payable Medicare Tax Payable Payroll Taxes—Factory 1 Income Tax Payable Income Tax Expense

DEBIT 96 4 4 8 00

2 0 0 0 00

1 2 4 00 2 9 00

2 1 4 9 00

CREDIT 1 2 96 4 4 8 00 3 4 5 6 1 8 0 0 00 7 2 0 0 00 8 9 10 11 1 5 3 00 12 13 14 2 1 4 9 00 15 16

Analyze: $182,800 ÷ $533,653 = 34.3 percent. Bay Corporation spends much more than the industry standard on direct labor.

Chapter 26 891

PROBLEM 26.1B Faulkner Manufacturing Company Statement of Cost of Goods Manufactured Year Ended December 31, 2013 Work in Process, January 1

30 0 0 0 00

Raw Materials Raw Materials, January 1 Materials Purchases Freight In Less Purchases Returns and Allowance Delivered Cost of Raw Materials Total Materials Available Less Raw Materials, December 31 Raw Materials Used

29 0 0 0 00 395 0 0 0 00 10 0 0 0 00 4 0 0 0 00 401 0 0 0 00 430 0 0 0 00 30 0 0 0 00 400 0 0 0 00

Direct Labor

225 0 0 0 00

Manufacturing Overhead Depreciation-Factory Assets Indirect Labor Indirect Materials Insurance—Factory Payroll Taxes—Factory Property Taxes—Factory Repairs and Maintenance—Factory Total Manufacturing Overhead Total Manufacturing Costs Total Work in Process for Year Less Work in Process Inventory, Dec. 31 Cost of Goods Manufactured

892 Chapter 26

9 0 0 0 00 36 0 0 0 00 5 0 0 0 00 12 0 0 0 00 26 1 0 0 00 5 0 0 0 00 3 0 0 0 00 96 1 0 0 00 721 1 0 0 00 751 1 0 0 00 28 1 0 0 00 723 0 0 0 00

PROBLEM 26.1B (continued) Faulkner Manufacturing Company Income Statement Year Ended December 31, 2013 Revenue Sales Less Sales Returns and Allowances Net Sales Cost of Goods Sold Finished Goods Inventory, January 1 Cost of Goods Manufactured Total Goods Available for Sale Less Finished Goods Inventory, Dec. 31 Cost of Goods Sold Gross Profit Operating Expenses Selling Expenses Sales Salaries Expense Payroll Taxes Expense—Sales Salaries Other Selling Expense Total Selling Expenses Administrative Expenses Officers’ Salaries Expense Office Salaries Expense Payroll Taxes Expense—Administrative Repairs and Maintenance—Office Property Tax Expense—Office Other Administrative Expenses Depreciation Expense—Office Total Administrative Expenses Total Operating Expenses Net Income Before Income Taxes Income Tax Expense Net Income After Income Taxes

1,205 0 0 0 00 5 0 0 0 00 1,200 0 0 0 00 30 0 0 0 00 723 0 0 0 00 753 0 0 0 00 29 0 0 0 00 724 0 0 0 00 476 0 0 0 00

100 0 0 0 00 10 0 0 0 00 12 0 0 0 00 122 0 0 0 00 150 0 0 0 00 20 0 0 0 00 25 0 0 0 00 1 0 0 0 00 2 0 0 0 00 2 0 0 0 00 3 0 0 0 00 203 0 0 0 00 325 0 0 0 00 151 0 0 0 00 22 6 5 0 00 128 3 5 0 00

Analyze: Total manufacturing costs were Raw Materials, 55.3%; Direct Labor, 31.1%; and Overhead, 13.3%.

Chapter 26 893

PROBLEM 26.2B Square Company Worksheet Year Ended December 31, 2013 ADJUSTMENTS

TRIAL BALANCE

ACCOUNT NAME 1 Cash 2 Accounts Receivable 3 Allowance for Doubtful Accounts 4 Raw Materials Inventory 5 Work in Process Inventory 6 Finished Goods Inventory 7 Prepaid Insurance 8 Factory Supplies 9 Land 10 Factory Building 11 Accum. Depreciation—Fac. Bldg. 12 Factory Machines 13 Accum. Depreciation—Fac. Machines 14 Office Furniture & Equipment 15 Accum. Depr.—Office Furn. & Equip. 16 Accounts Payable 17 Salaries and Wages Payable 18 Income Tax Payable 19 Social Security Tax Payable 20 Medicare Tax Payable 21 Common Stock 22 Retained Earnings 23 Sales 24 Sales Returns and Allowances 25 Materials Purchases 26 Purchases Returns and Allowances 27 Freight In 28 Direct Labor 29 Indirect Labor 30 Payroll Taxes—Factory 31 Utilities—Factory 32 Totals Carried Forward 33

894 Chapter 26

DEBIT

CREDIT

DEBIT

CREDIT

40 0 0 0 00 80 0 0 0 00 2 0 0 0 00

(b) 0 0 0 00 (a) 20 0 0 0 00 (a) 38 0 0 0 00 (a) 26 (c) 2 (d) 3

4 0 0 00 0 0 0 00 0 0 0 00 0 0 0 00 0 0 0 00 0 0 0 00

60 0 0 0 00

(e) 15

0 0 0 00

20 0 0 0 00

(e) 5

0 0 0 00

8 0 0 0 00 78 0 0 0 00

(e) 2

0 0 0 00

(f) 2 (h) 1 (g) (g)

0 0 0 00 9 6 2 00 1 2 4 00 2 9 00

20 0 0 0 00 38 0 0 0 00 26 0 0 0 00 2 4 0 0 00 4 0 0 0 00 50 0 0 0 00 150 0 0 0 00

(a) 21 (a) 36 (a) 25

50 0 0 0 00 20 0 0 0 00

50 0 0 0 00 175 0 0 0 00 946 5 0 0 00 6 5 0 0 00 275 0 0 0 00 5 0 0 0 00 9 0 0 0 00 145 0 0 0 00 25 0 0 0 00 18 0 0 0 00 24 0 0 0 00 982 9 0 0 00

(f) 1 (f) (g) 1,344 5 0 0 00

8 0 0 00 2 0 0 00 1 5 3 00

84 1 5 3 00

115 5 1 5 00

PROBLEM 26.2B (continued)

ADJUSTED TRIAL BALANCE DEBIT

COST OF GOODS MANUFACTURED

CREDIT

DEBIT

CREDIT

INCOME STATEMENT DEBIT

CREDIT

40 0 0 0 00 80 0 0 0 00

BALANCE SHEET DEBIT

CREDIT

40 0 0 0 00 80 0 0 0 00 2 4 0 0 00

2 4 0 0 00

21 0 0 0 00 36 0 0 0 00 25 0 0 0 00 4 0 0 00 1 0 0 0 00 50 0 0 0 00 150 0 0 0 00

21 0 0 0 00 36 0 0 0 00 25 0 0 0 00 4 0 0 00 1 0 0 0 00 50 0 0 0 00 150 0 0 0 00 75 0 0 0 00

75 0 0 0 00

50 0 0 0 00

50 0 0 0 00 25 0 0 0 00

25 0 0 0 00

20 0 0 0 00

20 0 0 0 00 10 78 2 1

0 0 0 9 1

0 0 0 6 2 2 50 0 0 175 0 0 946 5 0

0 00 0 00 0 00 2 00 4 00 9 00 0 00 0 00 0 00

6 5 0 0 00 275 0 0 0 00

10 78 2 1

0 0 0 6 2 2 50 0 0 175 0 0

0 8 2 1 0 0

0 0 0 5 0 5

0 00 0 00 0 00 3 00 0 00 3 00

0 00 0 00 0 00 2 00 4 00 9 00 0 00 0 00

946 5 0 0 00 6 5 0 0 00 275 0 0 0 00

5 0 0 0 00 9 146 25 18 24 978

0 0 0 9 1

1,371 0 1 5 00

5 0 0 0 00 9 146 25 18 24 498

0 8 2 1 0 1

0 0 0 5 0 5

0 00 0 00 0 00 3 00 0 00 3 00

5 0 0 0 00

6 5 0 0 00

946 5 0 0 00

473 4 0 0 00

419 5 1 5 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33

Chapter 26 895

PROBLEM 26.2B (continued) Square Company Worksheet (Continued) Year Ended December 31, 2013 TRIAL BALANCE

ACCOUNT NAME 1 Totals Brought Forward 2 Repairs and Maintenance—Factory 3 Indirect Materials and Supplies 4 Depreciation—Factory Building 5 Depreciation—Factory Machines 6 Insurance—Factory 7 Property Taxes—Factory 8 Sales Salaries Expense 9 Payroll Taxes Expense—Sales 10 Delivery Expense 11 Advertising Expense 12 Uncollectible Accounts Expense 13 Miscellaneous Selling Expense 14 Officers’ Salaries Expense 15 Office Salaries Expense 16 Payroll Taxes Expense—Administrative 17 Depr. Expense—Office Furn. & Equip. 18 Other Administrative Expenses 19 Income Tax Expense 20 Manufacturing Summary 21 22 Income Summary 23 Totals 24 Cost of Goods Manufactured 25 26 Net Income 27

896 Chapter 26

DEBIT

CREDIT

982 9 0 0 00 5 0 0 0 00 4 0 0 0 00

1,344 5 0 0 00

ADJUSTMENTS DEBIT

84 1 5 3 00 (d) 3 (e) 15 (e) 5 (c) 2

0 0 0 00 0 0 0 00 0 0 0 00 0 0 0 00

(b)

4 0 0 00

(e) 2

0 0 0 00

CREDIT

115 5 1 5 00

6 0 0 0 00 95 0 0 0 00 9 5 0 0 00 7 5 0 0 00 2 0 0 0 00 6 5 0 0 00 150 0 0 0 00 40 0 0 0 00 19 0 0 0 00 1 1 0 0 00 16 0 0 0 00

1,344 5 0 0 00

(h) 1 9 6 2 00 (a) 20 0 0 0 00 (a) 21 0 0 0 00 (a) 38 0 0 0 00 (a) 36 0 0 0 00 (a) 26 0 0 0 00 (a) 25 0 0 0 00 197 5 1 5 00 197 5 1 5 00

PROBLEM 26.2B (continued)

ADJUSTED TRIAL BALANCE DEBIT

978 5 7 15 5 2 6 95 9 7 2 6 150 40 19 2 1 17 20 38 26 1,453

0 0 0 0 0 0 0 0 5 5 0 4 5 0 0 0 0 1 9 0 0 0 0

COST OF GOODS MANUFACTURED

CREDIT

5 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 6 0 0 0 1

3 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 2 00 0 00 0 00 0 00 5 00

DEBIT

1,371 0 1 5 00

498 5 7 15 5 2 6

1 0 0 0 0 0 0

CREDIT

5 0 0 0 0 0 0

3 00 0 00 0 00 0 00 0 00 0 00 0 00

5 0 0

0 00

INCOME STATEMENT CREDIT

6 5 0 0 00

946 5 0 0 00

473 4 0 0 00

419 5 1 5 00

25 0 0 0 00 971 5 0 0 00

473 4 0 0 00

419 5 1 5 00

95 9 7 2 6 150 40 19 2 1 17 21 36 25 1,453

0 0 0 0

0 0 0 1

0 00 0 00 0 00 5 00

20 0 0 0 00 38 0 0 0 00

21 0 0 36 0 0

0 00 0 00

596 1 5 3 00

62 0 0 534 1 5

0 00 3 00

596 1 5 3 00

596 1 5

3 00

BALANCE SHEET

DEBIT

0 5 5 0 4 5 0 0 0 0 1 9

0 0 0 0 0 0 0 0 0 0 0 6

DEBIT

CREDIT

0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 2 00

26 0 0 0 00 383 4 6 2 00 534 1 5 3 00 917 6 1 5 00 53 8 8 5 00 971 5 0 0 00

971 5 0 0 00

473 4 0 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

53 8 8 5 00

25 26

473 4 0 0 00

Chapter 26 897

PROBLEM 26.2B (continued) Square Company Statement of Cost of Goods Manufactured Year Ended December 31, 2013 Work in Process, January 1

38 0 0 0 00

20 0 0 0 00 275 0 0 0 00 5 0 0 0 00 9 0 0 0 00 279 0 0 0 00 299 0 0 0 00 21 0 0 0 00 278 0 0 0 00

Direct Labor

146 8 0 0 00

Manufacturing Overhead Indirect Labor Payroll Taxes—Factory Utilities—Factory Repairs and Maintenance—Factory Indirect Materials and Supplies Depreciation—Factory Building Depreciation—Factory Machines Total Manufacturing Overhead Property Taxes—Factory Total Manufacturing Overhead Total Manufacturing Costs Total Work in Process for Year Less: Work in Process Inventory, December 31 Cost of Goods Manufactured

898 Chapter 26

25 2 0 0 00 18 1 5 3 00 24 0 0 0 00 5 0 0 0 00 7 0 0 0 00 15 0 0 0 00 5 0 0 0 00 2 0 0 0 00 6 0 0 0 00 107 3 5 3 00 532 1 5 3 00 570 1 5 3 00 36 0 0 0 00 534 1 5 3 00

Get complete Order files download link below htps://www.mediafire.com/file/440vzkwo5xvm3zf/SM +College+Accoun�ng,+13e+John+Ellis+Price+David+Ha ddock+Michael++Farina.zip/file

If this link does not work with a click, then copy the complete Download link and paste link in internet explorer/ﬁrefox/google chrome and get all ﬁles download successfully.

PROBLEM 26.2B (continued) Square Company Income Statement Year Ended December 31, 2013 Revenue Sales Less Sales Returns and Allowances Net Sales Cost of Goods Sold Finished Goods Inventory, January 1 Cost of Goods Manufactured Total Goods Available for Sale Less Finished Goods Inventory, December 31 Cost of Goods Sold Gross Profit Operating Expenses Selling Expenses Sales Salaries Expense Payroll Taxes Expense—Sales Salaries Delivery Expense Advertising Expense Uncollectible Accounts Expense Miscellaneous Selling Expenses Total Selling Expenses Administrative Expenses Officers’ Salaries Expense Office Salaries Expenses Payroll Taxes Expense—Administrative Depreciation Expense—Office Furniture & Equip. Other Administrative Expenses Total Administrative Expenses Total Operating Expenses Net Income Before Income Taxes Income Tax Expense Net Income After Income Taxes

946 5 0 0 00 6 5 0 0 00 940 0 0 0 00 26 0 0 0 00 534 1 5 3 00 560 1 5 3 00 25 0 0 0 00 535 1 5 3 00 404 8 4 7 00

95 0 0 0 00 9 5 0 0 00 7 5 0 0 00 2 0 0 0 00 4 0 0 00 6 5 0 0 00 120 9 0 0 00 150 0 0 0 00 40 0 0 0 00 19 0 0 0 00 2 0 0 0 00 1 1 0 0 00

212 1 0 0 00 333 0 0 0 00 71 8 4 7 00 17 9 6 2 00 53 8 8 5 00

Chapter 26 899

PROBLEM 26.2B (continued) Square Company Statement of Retained Earnings Year Ended December 31, 2013 Balance, January 1, 2013 Add: Net Income for 2013 Deduct 2013 Dividends Paid Balance, December 31, 2013

900 Chapter 26

185 53 238 10 228

0 8 8 0 8

0 00 5 00 5 00 0 00 5 00

PROBLEM 26.2B (continued) Square Company Balance Sheet December 31, 2013 Assets Current Assets Cash Accounts Receivable Less: Allowance for Doubtful Accounts Inventories Raw Materials Work in Process Finished Goods Prepaid Insurance Factory Supplies Total Current Assets Property, Plant, and Equipment Land Factory Building Less: Accumulated Depreciation—Factory Building Factory Machines Less: Accumulated Depreciation—Factory Machines Office Furniture and Equipment Less: Accumulated Depreciation—Off. Furn. And Equip. Total Property, Plant, and Equipment Total Assets

40 0 0 0 00 80 0 0 0 00 2 4 0 0 00 21 0 0 0 00 36 0 0 0 00 25 0 0 0 00

77 6 0 0 00

82 0 0 0 00 4 0 0 00 1 0 0 0 00 201 0 0 0 00

50 0 0 0 00 150 0 0 0 00 75 0 0 0 00 50 0 0 0 00 25 0 0 0 00 20 0 0 0 00 10 0 0 0 00

Liabilities and Stockholders’ Equity Current Liabilities Accounts Payable Salaries and Wages Payable Income Tax Payable Social Security Tax Payable Medicare Tax Payable Total Liabilities Stockholders’ Equity Common Stock ($1 par, 100,000 shares authorized 50,000 outstanding) Retained Earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity

75 0 0 0 00 25 0 0 0 00 10 0 0 0 00 160 0 0 0 00 361 0 0 0 00

78 0 0 0 00 2 0 0 0 00 1 9 6 2 00 1 2 4 00 2 9 00 82 1 1 5 00

50 0 0 0 00 228 8 8 5 00 278 8 8 5 00 361 0 0 0 00

Chapter 26 901

PROBLEM 26.2B (continued) GENERAL JOURNAL

902 Chapter 26

PAGE POST. REF.

DEBIT

CREDIT

20 0 0 0 00 20 0 0 0 00 21 0 0 0 00 21 0 0 0 00 38 0 0 0 00 38 0 0 0 00 36 0 0 0 00 36 0 0 0 00 26 0 0 0 00 26 0 0 0 00 25 0 0 0 00 25 0 0 0 00

4 0 0 00 4 0 0 00

2 0 0 0 00 2 0 0 0 00

3 0 0 0 00 3 0 0 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32

PROBLEM 26.2B (continued) GENERAL JOURNAL POST. REF. DATE DESCRIPTION 1 2013 (Adjustment e) 2 Dec. 31 Depreciation—Factory Building 3 Depreciation—Factory Machines 4 Depreciation—Office Furniture and Equipment 5 Accumulated Depreciation—Factory Building 6 Accumulated Depreciation—Factory Machines 7 Accumulated Depreciation—Office Furn. & Equip. 8 9 (Adjustment f) 10 31 Direct Labor 11 Indirect Labor 12 Salaries and Wages Payable 13 14 (Adjustment g) 15 31 Payroll Taxes—Factory 16 Social Security Tax Payable 17 Medicare Tax Payable 18 19 (Adjustment h) 20 31 Income Tax Expense 21 Income Tax Payable 22

PAGE

DEBIT

CREDIT

15 0 0 0 00 5 0 0 0 00 2 0 0 0 00 15 0 0 0 00 5 0 0 0 00 2 0 0 0 00

1 8 0 0 00 2 0 0 00 2 0 0 0 00

1 5 3 00 1 2 4 00 2 9 00

1 9 6 2 00 1 9 6 2 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

Chapter 26 903

PROBLEM 26.2B (continued) GENERAL JOURNAL

DATE

DESCRIPTION Closing Entries

1 2 2013 3 Dec. 31 Purchases Returns and Allowances 4 Manufacturing Summary 5 6 31 Manufacturing Summary 7 Materials Purchases 8 Freight In 9 Direct Labor 10 Indirect Labor 11 Payroll Taxes—Factory 12 Utilities—Factory 13 Repairs and Maintenance—Factory 14 Indirect Materials and Supplies 15 Depreciation—Factory Building 16 Depreciation—Factory Machines 17 Insurance—Factory 18 Property Taxes—Factory 19 20 31 Sales 21 Income Summary 22 23 31 Income Summary 24 Sales Returns and Allowances 25 Sales Salaries Expense 26 Payroll Taxes Expense—Sales 27 Delivery Expense 28 Advertising Expense 29 Uncollectible Accounts Expense 30 Miscellaneous Selling Expense 31 Officers’ Salaries Expense 32 Office Salaries Expense 33 Payroll Taxes Expense—Administration 34 Depreciation Expense—Office Furn. & Equip. 35 Other Administrative Expenses 36 Income Tax Expense 37 Manufacturing Summary

904 Chapter 26

PAGE POST. REF.

DEBIT

CREDIT

5 0 0 0 00 5 0 0 0 00 538 1 5 3 00 275 0 0 0 00 9 0 0 0 00 146 8 0 0 00 25 2 0 0 00 18 1 5 3 00 24 0 0 0 00 5 0 0 0 00 7 0 0 0 00 15 0 0 0 00 5 0 0 0 00 2 0 0 0 00 6 0 0 0 00 946 5 0 0 00 946 5 0 0 00 891 6 1 5 00 6 5 0 0 00 95 0 0 0 00 9 5 0 0 00 7 5 0 0 00 2 0 0 0 00 4 0 0 00 6 5 0 0 00 150 0 0 0 00 40 0 0 0 00 19 0 0 0 00 2 0 0 0 00 1 1 0 0 00 17 9 6 2 00 534 1 5 3 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37

PROBLEM 26.2B (continued) GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 Dec. 31 Income Summary 3 Retained Earnings 4 Reversing Entries 5 2014 6 Jan. 1 Salaries and Wages Payable 7 Direct Labor 8 Indirect Labor 9 10 1 Social Security Tax Payable 11 Medicare Tax Payable 12 Payroll Taxes—Factory 13 14 1 Income Tax Payable 15 Income Tax Expense 16

PAGE POST. REF.

DEBIT

CREDIT

53 8 8 5 00 53 8 8 5 00

2 0 0 0 00 1 8 0 0 00 2 0 0 00 1 2 4 00 2 9 00 1 5 3 00 1 9 6 2 00 1 9 6 2 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Analyze: This company is performing better than others in its industry in regard to direct labor costs. Square Company spends 27.5% of cost of goods manufactured on direct labor, 3.5% less than the industry standard.

Chapter 26 905

CRITICAL THINKING PROBLEM 26 2 Sue Products Statement of Cost of Goods Manufactured Year Ended December 31, 31 2013 Workk in W i Process, P , January J y 1 ((2)) Manufacturing Costs Incurred in 2013 Direct Materials Raw Materials Inventory, January 1 P h Purchases (net) ( t)) Total Raw Materials Available Less Raw Materials Inventory, Inventory December 31 Direct Materials Used Di Direct L Labor b Manufacturing g Overhead ((3)) Total Costs Incurred in 2013 Total Costs in Process During Year Work in Process, December 31 C off Goods Cost G d Manufactured M f d

19 9 5 0 00

20 0 0 0 00 180 0 0 0 00 200 0 0 0 00 22 0 0 0 00 178 0 0 0 00 120 0 0 0 00 144 0 0 0 00 442 0 0 0 00 461 9 5 0 00 21 0 0 0 00 440 9 5 0 00

Sue Products Income Statement Year Ended December 31, 2013 Net Sales (4) Cost of Goods d Sold ld Fi i h d G Finished Goods d IInventory, t y, January J y 1 ((1)) Cost of Goods Manufactured Finished Goods Available for Sale Less Finished Goods Inventory, December 31 C t off Goods Cost G d Sold S ld Gross Profit Operating Expenses (4) Net Income

NOTES 1. Beginning Finished Goods 2 B 2. Beginning gi i g W Work k IIn P Process 3 Manufacturing Overhead 3. 4 Operating Expenses 4.

750 0 0 0 00 42 0 0 0 00 440 9 5 0 00 482 9 5 0 00 40 0 0 0 00 442 9 5 0 00 307 0 5 0 00 157 0 5 0 00 150 0 0 0 00

= 1.05 × $40,000 = $42,000 = 0.95 0 95 × $21,000 $$21,000 = $19,950 $19,950 $ = 1.2 1 2 × $120,000 $120 000 = $144 000 $144,000 = Gross Profit $307,050 $307 050 - Net Income $150,000 $150 000 = $157,050 $157 050

A ly T Analyze: Total t l iinventories t i iincreased d bby y $$1 $1,050 ,050 dduring i g th the yyear.

906 Chapter 26

CRITICAL THINKING PROBLEM 26.2 NeckWarmers Statement of Cost of Goods Manufactured Year Ended December 31, 2013 Work in Process, January 1 Raw Materials Raw Materials, January 1 Material Purchases Total Raw Materials Available Less Raw Materials, December 31 Raw Materials Used

í 72 0 72 0 3 5

0í

6 6 5 1

0 0 0 0

0í 0 0 00 0 0 00 0 0 00 68 5 0 0 00

Direct Labor Manufacturing Overhead Payroll Taxes Factory Supplies Utilities Repairs and Maintenance Rent on Factory Building Depreciation—Factory Equipment Total Manufacturing Overhead Total Manufacturing Costs Total Work in Process for Year Less: Work in Process Inventory, December 31 Cost of Goods Manufactured

45 0 0 0 00

4 5 0 0 00 2 0 0 0 00 2 2 0 0 00 5 0 0 00 12 0 0 0 00 9 0 0 00 22 1 0 0 00 135 135 4 131

0 00 0 00 0 00 0 00

Notes: 1. Material purchases equal the amount paid for inventory plus the inventory received but not yet paid for. 2. No beginning inventories since this is the first year of the business. 3. The ending finished goods inventory is not on this statement.

Chapter 26 907

SOLUTIONS TO BUSINESS CONNECTIONS Managerial Focus: 1. Need relevant cost information to compute per-unit costs of making an item. 2. Estimates made based on experience, inventory sheets, work in process, and wage summaries. 3. To categorize those costs directly attributable to products and pool those that are not for future allocation. 4. The overall business profit should be examined, not just the cost of goods manufactured statement. 5. Supplies are irrelevant if the ending inventory amounts are relatively the same over a long period of time. Cost of estimating, journalizing, and posting a small amount does not justify the benefit gained. Ethical Dilemma: Not recording the return of the toaster and then reselling the toaster will double the sales, reduce the cost of goods sold, and show a higher net income. Frederick is committing fraud and his actions could very easily put his company into bankruptcy. Financial Statement Analysis: 1. The vendor allowance is initially recorded as a reduction in the Merchandise Inventory account and a subsequent reduction in Cost of Goods Sold. 2. Not all vendors qualify for a discount. The company utilizes a predetermined volume level of purchases from a vendor for that vendor to qualify. The level is not disclosed in the notes. Teamwork: The student should total the materials, labor, and indirect costs in work in process. This total is put into finished goods then moved to costs of goods sold when the item is sold. Internet Connection: The four parts of the exam are Business Analysis, Management Accounting and Reports, Strategic Management, and Business Applications.

908 Chapter 26

SOLUTIONS TO PRACTICE TEST Part A True-False 1. FALSE 2. TRUE 3. FALSE 4. TRUE 5. FALSE 6. TRUE 7. TRUE 8. FALSE 9. TRUE 10. FALSE

Part B Completion 1. manufacturing costs 2. manufacturing overhead 3. direct materials 4. cost of goods manufactured 5. work in process 6. statement of cost of goods manufactured 7. credit; debit 8. asset; liability; stockholders' equity

Chapter 26 909

CHAPTER 27 JOB ORDER COST ACCOUNTING Chapter Opener: Thinking Critically Answers will vary. Students may suggest raw materials inventories of fabric, wood, springs, foam, nails, staples, or glue. Fast Facts • Spring Air operates on tight deadlines; sometimes having to manufacture 300 beds overnight to meet an order. •

Founded in 1926, The Spring Air Company is one of the world’s largest mattress manufacturing companies with more than 1,000 employees in 13 locations.

•

Spring Air consumer brands include: Back Supporter, Nature’s Rest, Four Seasons, and Chattam & Wells.

•

Spring Air operates plants in the U.S., Canada, Mexico, Ireland, the Middle East, Australia, and Argentina.

Managerial Implications: Thinking Critically • It is appropriate for businesses that produce each customer’s order as a special order or that produce orders for their products in batches rather than in a continuous operation. Discussion Questions These questions are designed to check students’ understanding of new terms, concepts, and procedures presented in the chapter. 1. 2.

A “running total” kept for value of inventory at all times. Job order number, customer, units produced, unit cost, and direct materials, labor, overhead applied to a job.

Cost of direct materials posted to Materials section of job order cost sheet and to Issued section of raw materials record in raw materials subsidiary ledger.

4. 5. 6. 7.

Provides authorization for materials to be issued from the storeroom. Cost of raw materials and manufacturing supplies on hand. Dr. Manufacturing Overhead, Cr. Raw Materials Inventory. Idle time is utilized to describe situations when no production is ongoing for various reasons. Generally assigned as part of manufacturing overhead.

Direct materials—from summaries of materials requisitions; Direct labor—from summaries of the labor time tickets; Overhead—from a computation based on the established application rate.

9. 10.

Dr. Work in Process; Cr. Manufacturing Overhead Applied. Indirect labor; indirect materials; depreciation of factory building and equipment; payroll taxes, repairs and maintenance; taxes and insurance on factory assets.

11. 12.

Used to provide a uniform rate to apply overhead to different jobs. Dr. Finished Goods Inventory, Cr. Work in Process Inventory.

910 Chapter 27

Discussion Questions (continued) 13. A time ticket is a form used to record hours worked and jobs performed. Its relationship to an order cost sheet is that upon entry to the sheet it summarizes the labor on an individual job. 14.

Three businesses that would use a job order cost accounting system could be a specialty cabinet manufacturer, large house boat manufacturer, and a construction company.

15.

Costs flow from procurement (Raw Materials Inventory), production (Work in Process Inventory), warehousing (Finished Goods Inventory), and selling (Cost of Goods Sold).

16.

A just-in-time inventory system is a system in which raw materials are ordered so they arrive just in time to be placed into production. An advantage is that stored inventory doesn’t take up valuable warehouse space. A disadvantage is the facility may run out of material if the order department anticipates material needs incorrectly.

Chapter 27 911

EXERCISE 27.1 GENERAL JOURNAL DATE DESCRIPTION 1 2013 2 May 31 Raw Materials Inventory 3 Accounts Payable 4

PAGE POST. REF.

DEBIT

CREDIT

70 0 0 0 00 70 0 0 0 00

1 2 3 4

EXERCISE 27.2 GENERAL JOURNAL DATE DESCRIPTION 1 2013 2 May 31 Raw Materials Inventory 3 Accounts Payable 4

PAGE POST. REF.

DEBIT

CREDIT

5 0 0 0 00 5 0 0 0 00

1 2 3 4

EXERCISE 27.3 PAGE

GENERAL JOURNAL DATE DESCRIPTION 1 2013 2 May 31 Manufacturing Overhead 3 Raw Materials Inventory 4

POST. REF.

DEBIT

CREDIT

4 5 0 0 00 4 5 0 0 00

1 2 3 4

EXERCISE 27.4 GENERAL JOURNAL DATE DESCRIPTION 1 2013 2 May 31 Work in Process Inventory 3 Raw Materials Inventory 4

912 Chapter 27

PAGE POST. REF.

DEBIT

CREDIT

60 0 0 0 00 60 0 0 0 00

1 2 3 4

EXERCISE 27.5 GENERAL JOURNAL

1 2 3 4 5 6 7 8

DATE DESCRIPTION 2013 Jan. 31 Work in Process (Direct Labor) Manufacturing Overhead (Indirect Labor) Social Security Tax Payable Medicare Tax Payable Employee Income Tax Payable Salaries and Wages Payable Total labor costs for January

PAGE POST. REF.

DEBIT

CREDIT

40 0 0 0 00 4 0 0 0 00 2 7 2 8 00 6 3 8 00 11 0 0 0 00 29 6 3 4 00

1 2 3 4 5 6 7 8

EXERCISE 27.6 Estimated Overhead Costs ÷ Direct Labor Costs $150,000 ÷ $750,000 = 20%

EXERCISE 27.7 Application Rate = 60% × direct labor costs $100,000 × 0.6 = $60,000 GENERAL JOURNAL

1 2 3 4 5

POST. REF. DATE DESCRIPTION 2013 May 31 Work in Process Inventory Manufacturing Overhead Applied Summary of overhead applied during May

PAGE DEBIT

CREDIT

60 0 0 0 00 60 0 0 0 00

1 2 3 4 5

Chapter 27 913

EXERCISE 27.8 1.

Overhead applied = $8,000 × 0.6 = $4,800

Total Cost Materials Labor Overhead Total Cost of Job 1203

$ 40,000.00 8,000.00 4,800.00 $ 52,800.00

EXERCISE 27.9 1.

Overhead was underapplied (actual cost exceeded applied amount)

Actual Overhead Costs Less Applied Overhead Costs Underapplied Overhead

914 Chapter 27

$ 90,000.00 87,000.00 $ 3,000.00

EXERCISE 27.10 PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7 8 9

DATE DESCRIPTION 2013 Dec. 31 Finished Goods Inventory Work in Process Inventory Cost of goods completed during year

POST. REF.

31 Cost of Goods Sold Finished Goods Inventory Cost of goods sold during year

DEBIT

CREDIT

150 0 0 0 00 150 0 0 0 00

199 0 0 0 00 199 0 0 0 00

1 2 3 4 5 6 7 8 9

Chapter 27 915

PROBLEM 27.1A GENERAL JOURNAL

PAGE POST. REF.

DATE DESCRIPTION 1 2013 2 April 30 Raw Materials Inventory 3 Accounts Payable 4 Cost of materials purchased during month 5 6 30 Work in Process Inventory 7 Manufacturing Overhead 8 Raw Materials Inventory 9 Cost of direct and indirect materials issued in April 10 11 30 Work in Process Inventory (Direct Labor) 12 Manufacturing Overhead (Indirect Labor) 13 Social Security Tax Payable 14 Medicare Tax Payable 15 Employee Income Tax Payable 16 Salaries and Wages Payable 17 Cost of direct and indirect labor for month 18 19 30 Manufacturing Overhead 20 Accounts Payable 21 Overhead costs incurred during month 22 23 30 Work in Process Inventory 24 Manufacturing Overhead Applied 25 Apply overhead at 80% of direct labor cost 26 27 30 Finished Goods Inventory 28 Work in Process Inventory 29 Cost of jobs completed during month 30 31 30 Cost of Goods Sold 32 Finished Goods Inventory 33 Cost of goods sold for April 34 35 30 Accounts Receivable 36 Sales 37 Sales on credit for April 38

916 Chapter 27

DEBIT 82 0 0 0 00

75 0 0 0 00 5 0 0 0 00

50 0 0 0 00 2 0 0 0 00

28 0 0 0 00

40 0 0 0 00

150 0 0 0 00

120 0 0 0 00

250 0 0 0 00

CREDIT 1 2 82 0 0 0 00 3 4 5 6 7 80 0 0 0 00 8 9 10 11 12 3 2 2 4 00 13 7 5 4 00 14 7 8 0 0 00 15 40 2 2 2 00 16 17 18 19 28 0 0 0 00 20 21 22 23 40 0 0 0 00 24 25 26 27 150 0 0 0 00 28 29 30 31 120 0 0 0 00 32 33 34 35 250 0 0 0 00 36 37 38

PROBLEM 27.1A (continued) NoCal Trailers Company Manufacturing Overhead Computations Month Ended April 30, 2013 Manufacturing Overhead Indirect Materials $5,000.00 Indirect Labor 2,000.00 Other Overhead Costs 28,000.00 Total Charged to Manufacturing Overhead Manufacturing Overhead Applied Overapplied Overhead for Month

35,000.00 40,000.00 ($5,000.00)

NoCal Trailers Company Partial Income Statement Month Ended April 30, 2013 Sales Cost of Goods Sold Subtract Overapplied Overhead Cost of Goods Sold (Adjusted to actual) Gross Profit on Sales

250 0 0 0 00 120 0 0 0 00 5 0 0 0 00 115 0 0 0 00 135 0 0 0 00

Analyze: Approximately $0.54 per sales dollar is realized as gross profit.

Chapter 27 917

PROBLEM 27.2A JOB ORDER COST SHEET For Stock Customer’s Name Dallas Apartment Corporation Address Item X10 Cabinets MATERIAL Date Amount 1/2/13

2,000 00

1/19/2013

500 00

Totals

LABOR Date Amount 1/2/13 1,000 00 1/19/2013

2,500 00

500 00

1,500 00

Job No. D42 Date 1/05/13 Started December 21, 2012 Completed January 19, 2013 Quantity 5 5 (ordered) (completed) OVERHEAD APPLIED SUMMARY Item Date Rate Amount Amount Materials 2,500 00 1/2/13 50% 500 00 Labor 1,500 00 1/19/2013 50% 250 00 Overhead Total Unit cost 750 00 Comments

750 00 4,750 00 950 00

JOB ORDER COST SHEET For Stock Customer’s Name Luxery Cabinets Address Item Kitchen Std MATERIAL Date Amount

LABOR Date Amount

1/31/13

4,000 00

1/31/13 2,000 00

4,000 00

2,000 00

Totals

Job No. J01 Date 1/05/13 Started January 5, 2013 Completed Quantity 8 (ordered) (completed) OVERHEAD APPLIED SUMMARY Item Date Amount Rate Amount Materials 4,000 00 1/31/13 50% 1,000 00 Labor 2,000 00 Overhead 1,000 00 Total 7,000 00 Unit cost 875 00 Comments 1,000 00

JOB ORDER COST SHEET For Stock XXX Customer’s Name Address Item Kitchen Std Wall Unit MATERIAL Date Amount

LABOR Date Amount

1/31/13

4,000 00

1/31/13 3,000 00

4,000 00

3,000 00

Totals

918 Chapter 27

Job No. J02 Date 1/05/13 Started January 5, 2013 Completed Quantity 5 (ordered) (completed) OVERHEAD APPLIED SUMMARY Item Amount Date Rate Amount Materials 4,000 00 1/31/13 50% 1,500 00 Labor 3,000 00 Overhead 1,500 00 Total 8,500 00 Unit cost 1,700 00 1,500 00 Comments

PROBLEM 27.2A (continued) GENERAL JOURNAL

1 2 3 4 5 6 7 8 9

DATE DESCRIPTION 2013 Jan. 31 Finished Goods Inventory Work in Process Inventory Cost of jobs completed during month

PAGE POST. REF.

31 Cost of Goods Sold Manufacturing Overhead Underapplied overhead costs

DEBIT

CREDIT

4 7 5 0 00 4 7 5 0 00

2 5 0 00 2 5 0 00

1 2 3 4 5 6 7 8 9

OVERHEAD COMPUTATIONS Total charged to Manufacturing Overhead Manufacturing overhead applied Job No. D42 ($500 × 50%) $250 Job No. J01 ($2,000 × 50%) 1,000 Job No. J02 ($3,000 × 50%) 1,500 Total charged to jobs Underapplied overhead for month

$3,000

2,750 $250

Analyze: The gross profit amount for Job No. D42 was $5,250 (if you ignore the $250 underapplied overhead for the month).

Chapter 27 919

PROBLEM 27.1B GENERAL JOURNAL

PAGE

POST. REF. DATE DESCRIPTION DEBIT CREDIT 1 2013 2 June 30 Raw Materials Inventory 98 0 0 0 00 3 Accounts Payable 98 0 0 0 00 4 Cost of materials purchased during month 5 6 30 Work in Process Inventory 85 0 0 0 00 7 Manufacturing Overhead 8 0 0 0 00 8 Raw Materials Inventory 93 0 0 0 00 9 Cost of direct and indirect materials issued in June 10 11 30 Work in Process Inventory (Direct Labor) 86 0 0 0 00 12 Manufacturing Overhead (Indirect Labor) 8 0 0 0 00 13 Social Security Tax Payable 5 7 6 6 00 14 Medicare Tax Payable 1 3 6 3 00 15 Employee Income Tax Payable 14 1 0 0 00 16 Salaries and Wages Payable 72 7 7 1 00 17 Cost of direct and indirect labor for June 18 19 30 Manufacturing Overhead 30 0 0 0 00 20 Accounts Payable 30 0 0 0 00 21 Overhead costs incurred in June 22 23 30 Work in Process Inventory 43 0 0 0 00 24 Manufacturing Overhead Applied 43 0 0 0 00 25 Apply overhead at 50% of direct labor cost 26 27 30 Finished Goods Inventory 200 0 0 0 00 28 Work in Process Inventory 200 0 0 0 00 29 Cost of jobs completed during month 30 31 30 Cost of Goods Sold 180 0 0 0 00 32 Finished Goods Inventory 180 0 0 0 00 33 Cost of goods sold in June 34 35 30 Accounts Receivable 375 0 0 0 00 36 Sales 375 0 0 0 00 37 Sales on credit for June 38

920 Chapter 27

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38

PROBLEM 27.1B (continued) Florida Fab, Inc. Manufacturing Overhead Computations Month Ended June 30, 2013 Manufacturing Overhead Indirect Materials Indirect Labor Other Overhead Costs Total Charged to Manufacturing Overhead Manufacturing Overhead Applied Underapplied Overhead for Month

$8,000.00 8,000.00 30,000.00 $46,000.00 43,000.00 ($3,000.00)

PROBLEM 27.1B (continued) Florida Fab, Inc. Partial Income Statement Month Ended June 30, 2013 Sales Cost of Goods Sold Plus Underapplied Overhead Cost of Goods Sold (Adjusted to actual) Gross Profit on Sales

375 0 0 0 00 180 0 0 0 00 3 0 0 0 00 183 0 0 0 00 192 0 0 0 00

Analyze: 94.9% of raw materials purchased were used in June.

Chapter 27 921

PROBLEM 27.2B JOB ORDER COST SHEET For Stock Customer’s Name Clift Apartments Address Item Special Order Bath

Job No. O45 Date 10/05/13 Started October 5, 2013 Completed November 21, 2013 Quantity 10 10 (ordered) (completed) MATERIAL LABOR OVERHEAD APPLIED SUMMARY Item Date Amount Date Amount Date Rate Amount Amount 23,000 00 50% 7,500 00 Materials 11/2/13 20,000 00 11/2/13 15,000 00 11/2/13 Labor 00 18,000 1,500 00 11/20/2013 3,000 00 11/20/2013 3,000 00 11/20/2013 Overhead 9,000 00 Total 50,000 00 5,000 00 Unit cost Totals 23,000 00 18,000 00 9,000 00 Comments: JOB ORDER COST SHEET For Stock Customer’s Name Address Item Kitchen Std

Job No. O48 Date 10/05/13 Started October 5, 2013 Completed Quantity 10 (ordered) (completed) MATERIAL LABOR OVERHEAD APPLIED SUMMARY Item Amount Date Rate Amount Date Amount Date Amount 00 16,000 Materials 11/2/13 6,000 00 11/2/13 50% 3,000 00 12,000 00 11/2/13 10,000 00 4,000 00 11/20/2013 4,000 00 11/20/2013 50% 2,000 00 Labor 11/20/2013 Overhead 5,000 00 31,000 00 Total Unit cost 3,100 00 Totals 16,000 00 10,000 00 5,000 00 Comments: Clift Apartments

JOB ORDER COST SHEET For Stock XXX Customer’s Name Address Item Kitchen Std Wall Unit MATERIAL Date Amount 11/30/13

6,000 00

Totals

6,000 00

922 Chapter 27

LABOR Date Amount 11/30/13

2,000 00

Job No. NO1 Date 11/01/13 Started November 1, 2013 Completed Quantity 5 (ordered) (completed) OVERHEAD APPLIED SUMMARY Item Date Rate Amount Amount Materials 6,000 00 11/30/13 50% 1,000 00 Labor 2,000 00 Overhead 1,000 00 Total 9,000 00 Unit cost 1,800 00 Comments 1,000 00

PROBLEM 27.2B (continued) PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7 8 9

DATE DESCRIPTION 2013 Nov. 30 Finished Goods Inventory Work in Process Inventory Cost of jobs completed during month

POST. REF.

DEBIT

CREDIT

50 0 0 0 00 50 0 0 0 00

30 Manufacturing Overhead Cost of Goods Sold Overapplied overhead costs

1 0 0 00 1 0 0 00

1 2 3 4 5 6 7 8 9

OVERHEAD COMPUTATIONS Actual Manufacturing Overhead Manufacturing overhead applied Job No. O45 Job No. O48 Job No. N01 Total charged to jobs Overapplied overhead for month

$4,400 $1,500 2,000 1,000 4,500 $100

Analyze: The November cost of goods sold was $49,900 ($50,000 í $100).

Chapter 27 923

CRITICAL THINKING PROBLEM 27.1 Job DE31 $10,000 9,000 (2) 2,700 $21,700

Materials Labor Overhead (1) Total Costs

Finished Goods, January 1, 2013 Cost of Goods Manufactured, January Goods Available for Sale Less: Finished Goods, January 31, 2013 Cost of Goods Sold

Job JA01 $9,500 4,000 1,200 $14,700

Job JA02 $12,500 22,000 (4) 6,600 $41,100

Cost of Goods Sold $30,000 36,400 ($21,700 + $14,700) $66,400 18,400 $48,000

Notes: 1. Overhead rate is calculated on the beginning costs of Job DE31; the ratio of overhead/direct manufacturing labor = $1,500/$5,000 = 30% 2. Total cost of Job DE31 $21,700 Less beginning costs $16,500 Costs added in January $5,200 Using the algebraic formula, you can solve for labor costs: Let x = direct labor cost 1.3x = $5,200 x = $5,200 ÷ 1.3 x = $4,000 If direct labor is $4,000; overhead is $1,200 (30% × $4,000) added in January. Total direct labor for Job DE31 is $5,000 (beg.) + $4,000 (Jan.) = $9,000. Total manufacturing overhead is $2,700 [$1,500 (beg.) + $1,200 (Jan.)]. 3. If total materials added for January were $22,000, and $9,500 of that amount was for Job JA01, the remainder of materials added had to belong to Job JA02—$12,500. 4. If total labor added in January was $30,000, and $4,000 of that amount was for Job JA01 and $4,000 was for Job DE31, then the remainder of $22,000 had to belong to Job JA02. 5. If gross profit is 40%, then the cost of goods sold must be 60%. For sales of $80,000, the cost of goods sold is $48,000 (60% × $80,000). Analyze:

No, the company is not on track for this goal. Raw materials costs are 53.6% of total costs for the two jobs completed in January ($19,500/$36,400).

924 Chapter 27

CRITICAL THINKING PROBLEM 27.2 a. Work in Process, July 1 $2,150 + $500 + $300 = $2,950 b. Finished Goods Inventory, July 1 $10,000 + $4,500 = $14,500 c. Cost of Goods Sold for July $10,000 + $4,000 + $4,800 + $3,500 = $22,300 d. Work in Process Inventory, July 31 $6,000 + $1,900 = $7,900 e. Finished Goods Inventory, July 31 $4,500 + $6,000 + $7,000 = $17,500 f. Sales for July 2013 $10,000 + $4,000 + $3,500 + $4,800 = $22,300 (cost of goods sold) $22,300 ÷ 0.5 = $44,600 (If gross profit is 50% of sales, then cost of goods sold is 50% of sales.)

Containers Inc. Condensed Income Statement Month Ended July 31, 2013 Sales Cost of Goods Sold Gross Profit Operating Expenses Net Income Before Tax Income Tax Expense Net Income After Tax

44 6 0 0 00 22 3 0 0 00 22 3 0 0 00 8 3 0 0 00 14 0 0 0 00 3 5 0 0 00 10 5 0 0 00

Chapter 27 925

SOLUTIONS TO BUSINESS CONNECTIONS Managerial Focus: 1. Access to materials should be controlled by someone not involved in the manufacturing process to prevent theft and to minimize errors. 2. The debit recorded for actual changes for overhead was less than the amount applied. Can result from an error in estimating overhead or the overhead application rate. 3. To prove accuracy of records. 4. Detailed data on direct labor cost is available in company payroll records. 5. Overhead overapplied (actual costs less than those originally estimated). Ethical Dilemma: Terry should bring the problem to the attention of the Corporate Financial Officer (CFO). The CFO will probably instruct Terry to keep a copy of all the travel reports as well as log in the days that Rachael is in the office. Rachael’s actions will increase the indirect costs and therefore decrease the net income. No matter how much Rachael has defrauded from her company, she should be fired as she cannot be trusted. Financial Statement Analysis: 1. The liability is reported on the balance sheet under the account named Deferred Revenue. 2. The balance on January 31, 2010, was $1.158 billion, a decrease of $7 million (0.6%) from FY 2008. Teamwork: The job cost card should list the vendor supplying the material and the employee working on the job. The amount and cost of the material should be included. The labor hours and cost should be listed with the indirect costs included. Internet Connection: JIT is a philosophy of continuous improvement in which non-value-adding activities are reduced . . . “a philosophy of manufacturing based on planned elimination of all waste.”

926 Chapter 27

SOLUTIONS TO PRACTICE TEST Part A True-False 1. TRUE 2. FALSE 3. FALSE 4. FALSE 5. TRUE 6. TRUE 7. TRUE

8. 9. 10. 11. 12. 13. 14.

TRUE FALSE FALSE TRUE FALSE FALSE TRUE

Part B Completion 1. materials requisition 2. receiving report 3. job order cost sheet 4. underapplied 5. perpetual 6. manufacturing overhead 7. manufacturing overhead 8. FIFO

Chapter 27 927

CHAPTER 28 PROCESS COST ACCOUNTING Chapter Opener: Thinking Critically Students’ responses will vary. As ConocoPhillips products move through different refineries, production costs are most likely classified and tracked within each refining facility. For example, labor, materials, and overhead costs for gallons of oil in production process for the Louisiana facility might be recorded separately from accounting entries recorded for Venezuela operations. Fast Facts • The company was founded to transport kerosene from eastern refineries to Utah by railroad tank and sell it in bulk, making it affordable for the pioneers. •

Today, the Conoco brand is owned by ConocoPhillips and Conoco Quality PROclean Gasolines are sold at more than 3,100 retail fuel sites in the United States.

• •

The company has 32,500 employees and assets of $173 billion. Top competitors are BP, Exxon, Mobil, and Royal Dutch/Shell.

Managerial Implications: Thinking Critically • This system is usually appropriate in situations in which there are continuous operations on standard types of products. Discussion Questions Note to the instructor : These questions are designed to check students’ understanding of new terms, concepts, and procedures presented in the chapter. 1. 2.

Products are not made in batches or special orders. Estimated number of finished products that could have been manufactured if costs had been applied only to started and completed units during the period and there had been no ending inventory of work in process.

Beginning work in process inventory and costs added during the current period.

Multiply units in ending work in process inventory by stage of completion for each cost element to determine equivalent units of work. Multiply equivalent units for each element by unit cost for that element. Add costs of each element to find total cost in process. No. Depends on stage of completion for each element. Yes. All cost data is posted to the departmental Work in Process accounts. Actual overhead costs each month are charged to the departmental Work in Process accounts. If products are not the same, the average cost calculation will be meaningless. No difference in handling of raw materials inventory and the finished goods inventory. Each element of cost in beginning inventory is added to amount of that element incurred during month. Total of the two components of each element is divided by equivalent production to arrive at average cost per unit of that element.

5. 6. 7. 8. 9. 10.

11.

Number of units of product transferred out of department is multiplied by 100 percent to determine number of equivalent units in products transferred out. Number of units of product in ending work in process inventory is multiplied by the stage of completion to arrive at the equivalent units in process. Both figures are added to determine the total equivalent units.

928 Chapter 28

EXERCISE 28.1 Equivalent units of production for prior department costs Units transferred in from prior department 10,000 is EU Alternative: Units transferred out to next department Plus units in ending work in process Equivalent units

8,000 2,000 10,000

EXERCISE 28.2 Equivalent units of production for materials: Units transferred to next department Ending work in process (2,000 units × 80%) Materials equivalent units

8,000 1,600 9,600

EXERCISE 28.3 Equivalent units of production for labor and overhead Units transferred to next department Ending work in process (2,000 units × 60%) Labor and overhead equivalent units

8,000 1,200 9,200

EXERCISE 28.4 1. Cost per equivalent unit for materials: Transferred out to next department (6,000 × 100%) = Ending work in process (2,000 × 100%) = Total equivalent production for materials Cost per equivalent unit = $24,000 ÷ 8,000 =

6,000 2,000 8,000 $3.00

2. Costs transferred to next department = 6,000 × $3 = 3. Cost of material in ending work in process = 2,000 × $3 =

$18,000 $6,000

Chapter 28 929

EXERCISE 28.5 1. Equivalent units for materials Materials Units completed Ending WIP—materials (500 units × 100%) Materials equivalent units 2. Cost per unit for material Material costs ÷ Materials equivalent units = ($6,000 + $25,900) ÷ 3,000 = 3. Cost of materials in goods transferred to next department = 2,500 × $10.63 = 4. Cost of materials in ending work in process = $31,900 í $26,575 =

2,500 500 3,000 $10.63 $26,575 $5,325

EXERCISE 28.6 1. Equivalent units for overhead Units completed Ending WIP—overhead (500 units × 80%) Overhead equivalent units 2. Cost per unit for overhead Overhead costs equivalent units = ($3,000 + $15,000) ÷ 2,900 = 3. Overhead costs transferred out = 2,500 units transferred × $6.21/unit = 4. Overhead costs in ending work in process = $18,000 í $15,525 =

930 Chapter 28

2,500 400 2,900 $6.21 $15,525 $2,475

EXERCISE 28.7 PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

DATE DESCRIPTION 2013 Sept. 30 Work in Process Inventory—Fab Dept. Work in Process Inventory—Finishing Dept. Raw Materials Inventory

POST. REF.

DEBIT

CREDIT

41 0 0 0 00 6 0 0 0 00 47 0 0 0 00

30 Work in Process Inventory—Fab Dept. Work in Process Inventory—Finishing Dept. Social Security Tax Payable Medicare Tax Payable Employee Income Tax Payable Salaries and Wages Payable

18 0 0 0 00 10 8 0 0 00

30 Work in Process Inventory—Fab Dept. Work in Process Inventory—Finishing Dept. Manufacturing Overhead

12 0 0 0 00 14 5 0 0 00

1 7 8 5 60 4 1 7 60 4 3 2 0 00 22 2 7 6 80

26 5 0 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

EXERCISE 28.8 PAGE

GENERAL JOURNAL

1 2 3 4 5 6 7

DATE DESCRIPTION 2013 Sept. 30 Work in Process—Finishing Department Work in Process Inventory—Fab Dept.

POST. REF.

30 Finished Goods Inventory Work in Process Inventory—Finishing Dept.

DEBIT

CREDIT

59 0 0 0 00 59 0 0 0 00 75 0 0 0 00 75 0 0 0 00

1 2 3 4 5 6 7

Chapter 28 931

EXERCISE 28.9 GENERAL JOURNAL

1 2 3 4 5 6 7

DATE DESCRIPTION 2013 Sept. 30 Accounts Receivable Sales 30 Cost of Goods Sold Finished Goods Inventory

932 Chapter 28

PAGE POST. REF.

DEBIT

CREDIT

100 0 0 0 00 100 0 0 0 00 60 0 0 0 00 60 0 0 0 00

1 2 3 4 5 6 7

PROBLEM 28.1A GoingGreen, Inc. Equivalent Production Computations Month Ended July 31, 2013 Molding Department Materials: Units transferred to assembly department Work in process (100 units × 100%) Equivalent production for materials in molding department

2 9 0 0 1 0 0 3 0 0 0

Labor and Overhead: Units transferred to assembly department Work in process (100 units × 90%) Equivalent production for labor and overhead in molding department

2 9 0 0 9 0 2 9 9 0

Assembly Department Materials: Units transferred to completion department Work in process (300 units × 80%) Equivalent production for materials in assembly department

2 6 0 0 2 4 0 2 8 4 0

Labor and Overhead: Units transferred to completion department Work in process (300 units × 80%) Equivalent production for labor and overhead in assembly department

2 6 0 0 2 4 0 2 8 4 0

Completion Department Materials: Units transferred to finished goods Work in process (400 units × 90%) Equivalent production for materials in completion department

2 2 0 0 3 6 0 2 5 6 0

Labor and Overhead: Units transferred to finished goods Work in process (400 units × 90%) Equivalent production for labor and overhead in completion department

2 2 0 0 3 6 0 2 5 6 0

Analyze: The assembly department reports the lowest stage of completion for the month of December: 80% labor, 80% overhead.

Chapter 28 933

PROBLEM 28.2A GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 Jun. 30 Work in Process Inventory—Fabricating Depart. 3 Work in Process—Assembly Depart. 4 Raw Materials Inventory 5 6 30 Work in Process Inventory—Fabricating Depart. 7 Work in Process—Assembly Department 8 Social Security Tax Payable 9 Medicare Tax Payable 10 Employee Income Tax Payable 11 Salaries and Wages Payable 12 13 30 Work in Process Inventory—Fabricating Depart. 14 Work in Process—Assembly Department 15 Manufacturing Overhead 16 17 30 Work in Process—Assembly Department 18 Work in Process Inventory—Fabricating Dept. 19 20 30 Finished Goods 21 Work in Process—Assembly Department 22 23 30 Accounts Receivable 24 Sales 25 26 30 Cost of Goods Sold 27 Finished Goods Inventory 28

934 Chapter 28

PAGE POST. REF.

DEBIT

CREDIT

45 0 0 0 00 7 3 8 0 00 52 3 8 0 00 34 9 8 6 00 14 7 9 0 00 3 0 8 6 11 7 2 1 75 7 5 0 0 00 38 4 6 8 14 16 5 1 3 00 7 8 3 0 00 24 3 4 3 00 87 7 9 5 00 87 7 9 5 00 110 6 7 0 00 110 6 7 0 00 150 0 0 0 00 150 0 0 0 00 76 5 0 0 00 76 5 0 0 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

PROBLEM 28.2A (continued) Rahc Games, Inc. Computation of Equivalent Unit Production Month Ended June 30, 2013 Fabricating Department Materials: Units transferred out to next department: 100% × 4,500 units Work in process: 100% × 500 units Equivalent units of production for materials

4 5 0 0 5 0 0 5 0 0 0

Labor and manufacturing overhead Units transferred out to next department: 100% × 4,500 units Work in process: 80% × 500 units Equivalent units of production for labor and overhead

4 5 0 0 4 0 0 4 9 0 0

Assembly Department Materials: Units transferred out to finished goods: 100% × 4,200 units Work in process: 100% × 300 units Equivalent units of production for materials

4 2 0 0 3 0 0 4 5 0 0

Labor and manufacturing overhead Units transferred out to finished goods: 100% × 4,200 units Work in process: 50% × 300 units Equivalent units of production for labor and overhead

4 2 0 0 1 5 0 4 3 5 0

Chapter 28 935

PROBLEM 28.2A (continued) Rahc Games, Inc. Cost of Production Report—Fabricating Department Month Ended June 30, 2013 UNITS

QUANTITY SCHEDULE (a) Quantity to be accounted for Started in production Total to be accounted for (b) Quantity accounted for Transferred out to next department Work in process—ending Total accounted for

5 0 0 0 5 0 0 0 4 5 0 0 5 0 0 5 0 0 0

TOTAL COST

COST SCHEDULE (c) Costs to be accounted for Costs in current department Materials Labor Manufacturing overhead Cumulative cost total

45 34 16 96

(d) Costs accounted for Transferred out to next department Work in process—ending Materials Labor Manufacturing overhead Rounding adjustment Total work in process—ending Total costs accounted for

0 9 5 4

0 8 1 9

E.P. UNITS*

0 00 ÷ 5 6 00 ÷ 4 3 00 ÷ 4 9 00

0 0 0 = 9 0 0 = 9 0 0 =

87 7 9 5 00 = 4 5 0 0 × 4 5 0 0 00 2 8 5 6 00 1 3 4 8 00 0 00 8 7 0 4 00 96 4 9 9 00

= = =

5 0 0 × 4 0 0 × 4 0 0 ×

UNIT COST

9 7 3 1 9

00 14 37 51

1 9 51 9 00 7 14 3 37

*Equivalent Production Units or Equivalent Units of Production

936 Chapter 28

PROBLEM 28.2A (continued) Rahc Games, Inc. Cost of Production Report—Assembly Department Month Ended June 30, 2013 UNITS

QUANTITY SCHEDULE (a) Quantity to be accounted for Transferred in from prior department Total to be accounted for (b) Quantity accounted for Transferred out to finished goods Work in process—ending Total accounted for

COST SCHEDULE (c) Costs to be accounted for Costs in prior department Costs in current department Materials Labor Manufacturing overhead Total current department costs Cumulative cost total (d) Costs accounted for Transferred out to finished goods Work in process—ending Costs in prior department Costs in current department Materials Labor Manufacturing overhead Rounding adjustment Total work in process Total costs accounted for *Equivalent Production Units or Equivalent Units of Production

4 5 0 0 4 5 0 0 4 2 0 0 3 0 0 4 5 0 0

TOTAL COST

E.P. UNITS*

UNIT COST

87 7 9 5 00 = 4 5 0 0

1 9 51

7 14 7 30 117

1 3 1 6 2 6

3 7 8 0 7

8 9 3 0 9

0 00 ÷ 4 0 00 ÷ 4 0 00 ÷ 4 0 00 5 00

5 0 0 = 3 5 0 = 3 5 0 =

110 6 7 0 00 = 4 2 0 0 ×

64 40 80 84 35

2 6 35

5 8 5 3 00

3 0 0 ×

1 9 51

4 9 2 00 5 1 0 00 2 7 0 00 0 00 7 1 2 5 00 117 7 9 5 00

= = =

3 0 0 × 1 5 0 × 1 5 0 ×

1 64 3 40 1 80

Analyze: The balance of the work in process in the fabricating department was $8,704.

Chapter 28 937

PROBLEM 28.3A Jasper Corporation Equivalent Unit Production Computations Month Ended August 31, 2013 First Department Materials: Units transferred out to next department: 100% × 10,500 units Work in process: 100% × 1,500 units Equivalent units of production for materials

10 5 0 0 1 5 0 0 12 0 0 0

Labor and Manufacturing Overhead: Units transferred out to next department: 100% × 10,500 units Work in process: 50% × 1,500 units Equivalent units of production for labor and overhead

10 5 0 0 7 5 0 11 2 5 0

938 Chapter 28

PROBLEM 28.3A (continued) Jasper Corporation Cost of Production Report Month Ended August 31, 2013 QUANTITY SCHEDULE (a) Quantity to be accounted for Work in process—beginning Started in production Total to be accounted for (b) Quantity accounted for Transferred out to next department Work in process—ending Total accounted for COST SCHEDULE (c) Costs to be accounted for Costs in current department Work in process—beginning Materials Labor Overhead Materials Labor Manufacturing overhead Cumulative cost total (d) Costs accounted for Transferred out to next department Work in process—ending Materials Labor Manufacturing overhead Rounding adjustment Total work in process—ending Total costs accounted for

UNITS 1 0 0 0 11 0 0 0 12 0 0 0 10 5 0 0 1 5 0 0 12 0 0 0 TOTAL COST

E.P. UNITS*

UNIT COST

7 9 6 0 00 5 3 0 0 00 2 7 5 0 00 42 20 11 74

9 2 2 4

6 5 5 6

0 00 ÷ 12 0 00 ÷ 11 0 00 ÷ 11 0 00

0 0 0 2 5 0 2 5 0

= = =

3 58 1 80 1 00 6 38

66 9 9 0 00 = 10

5 0 0

6 38

5 3 7 0 00 = 1 5 0 0 1 3 5 0 00 = 7 5 0 7 5 0 00 = 7 5 0 0 00 7 4 7 0 00 74 4 6 0 00

× × ×

3 58 1 80 1 00

*Equivalent Production Units or Equivalent Units of Production Analyze: 1,500 gallons of product will be held as beginning inventory for work in process on September 1 for the First Department. $7,470 is the total cost of the 1,500 gallons.

Chapter 28 939

PROBLEM 28.1B Clair Company Equivalent Production Computations Month Ended August 31, 2013 Molding Department Materials: Units transferred to next department Work in process (500 units × 100%) Equivalent production for materials in molding department

4 5 0 0 5 0 0 5 0 0 0

Labor and Overhead: Units transferred to next department Work in process (500 units × 90%) Equivalent production for labor and overhead in molding department

4 5 0 0 4 5 0 4 9 5 0

Assembly Department Materials: Units transferred to finishing department Work in process (200 units × 100%) Equivalent production for materials in assembly department

4 3 0 0 2 0 0 4 5 0 0

Labor and Overhead: Units transferred to finishing department Work in process (200 units × 80%) Equivalent production for labor and overhead in assembly department

4 3 0 0 1 6 0 4 4 6 0

Finishing Department Materials: Units transferred to finished goods Work in process (200 units × 100%) Equivalent production for materials in completion department

4 1 0 0 2 0 0 4 3 0 0

Labor and Overhead: Units transferred to finished goods Work in process (200 units × 50%) Equivalent production for labor and overhead in completion department

4 1 0 0 1 0 0 4 2 0 0

Analyze: 100% of the materials were added to the assembly department’s ending work in process inventory during August.

940 Chapter 28

PROBLEM 28.2B GENERAL JOURNAL

DATE DESCRIPTION 1 2013 2 May 31 Work in Process Inventory—Fabricating Depart. 3 Work in Process—Assembly Depart. 4 Raw Materials Inventory 5 6 31 Work in Process Inventory—Fabricating Depart. 7 Work in Process—Assembly Department 8 Social Security Tax Payable 9 Medicare Tax Payable 10 Employee Income Tax Payable 11 Salaries and Wages Payable 12 13 31 Work in Process Inventory—Fabricating Depart. 14 Work in Process—Assembly Department 15 Manufacturing Overhead 16 17 31 Work in Process—Assembly Department 18 Work in Process—Fabricating Department 19 20 31 Finished Goods 21 Work in Process—Assembly Department 22 23 31 Accounts Receivable 24 Sales 25 26 31 Cost of Goods Sold 27 Finished Goods Inventory 28

PAGE POST. REF.

DEBIT 51 9 2 0 00 7 9 8 0 00

34 8 8 0 00 14 7 6 0 00

17 2 2 2 00 10 4 5 5 00

99 7 5 0 00

127 2 0 0 00

230 0 0 0 00

115 0 0 0 00

CREDIT 1 2 3 59 9 0 0 00 4 5 6 7 3 0 7 7 68 8 7 1 9 78 9 7 5 0 0 00 10 38 3 4 2 54 11 12 13 14 27 6 7 7 00 15 16 17 99 7 5 0 00 18 19 20 127 2 0 0 00 21 22 23 230 0 0 0 00 24 25 26 115 0 0 0 00 27 28

Chapter 28 941

PROBLEM 28.2B (continued) Box Makers, Inc. Equivalent Units Production Computations Month Ended May 31, 2013 Fabricating Department Materials: Units transferred out to next department: 100% × 21,000 units Work in process: 100% × 1,000 units Equivalent units of production for materials

21 0 0 0 1 0 0 0 22 0 0 0

Labor and manufacturing overhead Units transferred out to next department: 100% × 21,000 units Work in process: 80% × 1,000 units Equivalent units of production for labor and overhead

21 0 0 0 8 0 0 21 8 0 0

Assembly Department Materials: Units transferred out to finished goods: 100% × 20,000 units Work in process: 100% × 1,000 units Equivalent units of production for materials

20 0 0 0 1 0 0 0 21 0 0 0

Labor and manufacturing overhead Units transferred out to finished goods: 100% × 20,000 units Work in process: 50% × 1,000 units Equivalent units of production for labor and overhead

20 0 0 0 5 0 0 20 5 0 0

942 Chapter 28

PROBLEM 28.2B (continued) Box Makers, Inc. Cost of Production Report-Fabricating Department Month Ended May 31, 2013 QUANTITY SCHEDULE (a) Quantity to be accounted for Started in production Total to be accounted for (b) Quantity accounted for Transferred out to next department Work in process—ending Total accounted for

COST SCHEDULE (c) Costs to be accounted for Costs in current department Materials Labor Manufacturing overhead Cumulative cost total (d) Costs accounted for Transferred out to next department Work in process—ending Materials Labor Manufacturing overhead Rounding adjustment Total work in process—ending Total costs accounted for

UNITS 22 0 0 0 22 0 0 0 21 0 0 0 1 0 0 0 22 0 0 0

TOTAL COST

51 34 17 104

9 8 2 0

2 8 2 2

E.P. UNITS*

0 00 ÷ 22 0 00 ÷ 21 2 00 ÷ 21 2 00

UNIT COST

0 0 0 = 8 0 0 = 8 0 0 =

2 36 1 60 0 79 4 75

99 7 5 0 00 = 21 0 0 0 ×

4 75

2 3 6 0 00 = 1 0 0 0 × 1 2 8 0 00 = 8 0 0 × 6 3 2 00 = 8 0 0 × 0 00 4 2 7 2 00 104 0 2 2 00

2 36 1 60 0 79

*Equivalent Production Units or Equivalent Units of Production

Chapter 28 943

PROBLEM 28.2B (continued) Box Makers, Inc. Cost of Production Report-Assembly Department Month Ended May 31, 2013 QUANTITY SCHEDULE (a) Quantity to be accounted for Transferred in from prior department Total to be accounted for (b) Quantity accounted for Transferred out to finished goods Work in process—ending Total accounted for

UNITS 21 0 0 0 21 0 0 0 20 0 0 0 1 0 0 0 21 0 0 0

TOTAL COST

E.P. UNITS*

UNIT COST

99 7 5 0 00 ÷ 21

0 0 0 =

4 75

7 14 10 33 132

0 00 ÷ 21 0 00 ÷ 20 5 00 ÷ 20 5 00 5 00

0 0 0 = 5 0 0 = 5 0 0 =

0 38 0 72 0 51 1 61 6 36

127 2 0 0 00 = 20

0 0 0 ×

6 36

= 1 0 0 0 ×

4 75

3 8 0 00 = 1 0 0 0 × 3 6 0 00 = 5 0 0 × 2 5 5 00 = 5 0 0 × 0 00 5 7 4 5 00 132 9 4 5 00

0 38 0 72 0 51

9 7 4 1 9

8 6 5 9 4

4 7 5 0 00

Analyze: The work in process balance for the fabricating Department on May 31 was $4,272.

944 Chapter 28

PROBLEM 28.3B NC Chemical Company Equivalent Unit Production Computations Month Ended April 30, 2013 First Department Materials: Units transferred out to next department: 100% × 47,000 units Work in process: 100% × 3,000 units Equivalent units of production for materials

47 0 0 0 3 0 0 0 50 0 0 0

Labor and Manufacturing Overhead: Units transferred out to next department: 100% × 47,000 units Work in process: 60% × 3,000 units Equivalent units of production for labor and overhead

47 0 0 0 1 8 0 0 48 8 0 0

Chapter 28 945

PROBLEM 28.3B (continued) NC Chemical Company Equivalent Unit Production Computations Month Ended April 30, 2013 QUANTITY SCHEDULE (a) Quantity to be accounted for Work in process—beginning Started in production Total to be accounted for (b) Quantity accounted for Transferred out to next department Work in process—ending Total accounted for COST SCHEDULE (c) Costs to be accounted for Costs in current department Work in process—beginning Materials Labor Overhead

UNITS 2 0 0 0 48 0 0 0 50 0 0 0 47 0 0 0 3 0 0 0 50 0 0 0 TOTAL COST

E.P. UNITS*

UNIT COST

6 5 0 0 00 5 3 0 0 00 2 5 8 0 00

Materials Labor Manufacturing overhead Cumulative cost total (d) Costs accounted for Transferred out to next department Work in process—ending Materials Labor Manufacturing overhead Rounding adjustment Total work in process—ending Total costs accounted for

51 5 0 0 00 ÷ 50 29 2 8 0 00 ÷ 48 17 0 8 0 00 ÷ 48 97 8 6 0 00

0 0 0 8 0 0 8 0 0

= = =

1 03 0 60 0 35 1 98

93 0 6 0 00 = 47

0 0 0

1 98

=3 0 0 0 =1 8 0 0 =1 8 0 0

× × ×

1 03 0 60 0 35

3 0 9 0 00 1 0 8 0 00 6 3 0 00 0 00 4 8 0 0 00 97 8 6 0 00

*Equivalent Production Units or Equivalent Units of Production

Analyze: The production cost attributable to products transferred is $93,060.

946 Chapter 28

CRITICAL THINKING PROBLEM 28.1 Texas Manufacturing, Inc. Equivalent Unit Production Computations Month Ended May 31, 2013 Mixing Department Materials: Units transferred out to next department: 100% × 30,000 units Work in process: 100% × 1,000 units Equivalent units of production for materials

30 0 0 0 1 0 0 0 31 0 0 0

Labor and Manufacturing Overhead: Units transferred out to next department: 100% × 30,000 units Work in process: 50% × 1,000 units Equivalent units of production for labor and overhead

30 0 0 0 5 0 0 30 5 0 0

Chapter 28 947

CRITICAL THINKING PROBLEM 28.1 (continued) Texas Manufacturing, Inc. Cost of Production Report Month Ended May 31, 2013 Mixing Department UNITS

QUANTITY SCHEDULE (a) Quantity to be accounted for Work in process—beginning Started in production Total to be accounted for (b) Quantity accounted for Transferred out to next department Work in process—ending Total accounted for

1 0 0 0 30 0 0 0 31 0 0 0 30 0 0 0 1 0 0 0 31 0 0 0 TOTAL COST

COST SCHEDULE (c) Costs to be accounted for Costs in current department Work in process—beginning Materials Labor (Note 1) Overhead (Note 1)

E.P. UNITS*

UNIT COST

8 4 0 0 00 6 0 0 0 00 6 0 0 0 00

Current period costs Materials Labor Manufacturing overhead (Note 2) Cumulative cost total (d) Costs accounted for Transferred out to next department Work in process—ending Materials Labor Manufacturing overhead Rounding adjustment Total work in process—ending Total costs accounted for

80 73 51 205

9 2 5 6

1 0 4 5

0 00 ÷ 31 0 00 ÷ 30 5 00 ÷ 30 5 00

0 0 0 5 0 0 5 0 0

= = =

2 2 1 6

61 40 69 70

201 0 0 0 00 = 30

0 0 0

6 70

2 6 1 0 00 = 1 0 0 0 1 2 0 0 00 5 0 0 8 4 5 00 5 0 0 0 00 4 6 5 5 00 205 6 5 5 00

× × ×

2 61 2 40 1 69

*Equivalent Production Units or Equivalent Units of Production

948 Chapter 28

CRITICAL THINKING PROBLEM 28.1 (continued) Texas Manufacturing, Inc. Equivalent Unit Production Computations Month Ended May 31, 2013 Note 1: 20,400 í $8,400 = $12,000 ÷ 2 = $6,000 Note 2: $6.70 í $2.61 í $2.40 = $1.69 (Overhead)

Analyze: 39% of current costs added in the mixing department is attributable to material costs.

Chapter 28 949

Work in Process, July 1 $2 150 + $500 + $300 = $2 $2,150 $2,950 950 Finished Goods Inventory Inventory, y, Julyy 1 $10 000 + $4,500 $10,000 $4 500 = $14,500 $14 500 Cost of Goods Sold for July $10,000 + $4,000 + $4,800 + $3,500 = $22,300 W k in Work i Process P Inventory, I t July J l 31 $6,000 + $1,900 $6,000 $1,900 = $7,900 $7,900 Finished Goods Inventory Inventory, July 31 $4 500 + $6,000 $4,500 $6 000 + $7,000 $7 000 = $17,500 $17 500 Sales for July 2013 $10 000 + $4,000 $10,000 $4 000 + $3,500 $3 500 + $4,800 $4 800 = $22,300 $22 300 ((cost off goods d sold) ld) $22,300 ÷ 0.5 $22,300 $ 0 5 = $44,600 $44 $ ,600 (If ( ggross profit p fit is i 50% off sales, l , then th costt off ggoods d sold ld is i 50% off sales.) l )

950 Chapter 28

SOLUTIONS TO BUSINESS CONNECTIONS Managerial Focus: 1. The choice of system depends on types of products manufactured and how orders are filled (special or continuous production). It is not possible to state that either system provides more accurate costs for each unit of product. 2. Quantity can be easily determined by review of account balance. This facilitates the prompt and efficient ordering of raw materials to maintain a proper level of finished goods. 3. Track increased labor costs related to rates/production times. 4. Assessment of cost control. 5. Without equivalent units, costs would be meaningless; necessary to factor in units already in production.

Ethical Dilemma: Virginia overstating the ending inventory has violated business ethics by not recording correct information. Since the ending inventory is next month’s beginning, if Virginia continues her behavior, the ending inventory will soon be too high and unable to maintain. Soon the business will fail. Financial Statement Analysis: 1. The company paid off $1.005 billion of long-term debt during FY 2009. 2. The company paid off more debt in FY 2009 than the two prior fiscal years.

Teamwork: The three processes to create cement lends it to process costing. Each activity is dependent on the previous activity before it can start its assigned task. Job costing could be used if the process started with a customer order and only the amount ordered by the customer was produced in a batch. Internet Connection: Two organizations that should be listed are Society for Inventory Management Benchmarking Analysis (SIMBA) and Inventory Management Inventory Control (INVATOL).

Chapter 28 951

SOLUTIONS TO PRACTICE TEST Part A True-False 1. FALSE 9. 2. FALSE 10. 3. TRUE 11. 4. FALSE 12. 5. TRUE 13. 6. TRUE 14. 7. TRUE 15. 8. TRUE

TRUE TRUE TRUE TRUE FALSE FALSE TRUE

Part B Completion 1. job order cost 2. equivalent production 3. service 4. Manufacturing Overhead (Control) 5. producing (or production) 6. quantity schedule 7. process cost 8. cost of production Part C Exercises 1. Transferred to next department (5,000 × 100%) Ending inventory of work in process (1,000 × 40%) Total equivalent units—overhead 2. Transferred to next department (4,500 × 100%) Ending inventory of work in process (500 × 50%) Total equivalent units—labor 3. Transferred to next department (900 × 100%) Ending inventory of work in process (100 × 100%) Total equivalent units—materials

952 Chapter 28

5,000

= =

400 5,400

4,500

= =

250 4,750

900

= =

100 1,000

CHAPTER 29 CONTROLLING MANUFACTURING COSTS: STANDARD COSTS Chapter Opener: Thinking Critically Manufacturing firms like Harley-Davidson often create flexible budgets, accounting for variable levels of production activity and the associated fixed and variable costs. Fast Facts • Revenue for Harley-Davidson was $4.2 billion in 2009. • In 2009, the Company shipped 223,023 Harley-Davidson motorcycles worldwide, compared to 303,479 in 2008. • • •

Harley-Davidson consistently makes Fortune magazine’s annual “100 Best Companies to Work For” list. Every year, about one-half of all new Harley-Davidson® motorcycles are sold to existing Harley® owners. One of the company’s strongest assets is H.O.G.®, the Harley Owners Group®, which has over one million members around the globe.

•

Harley-Davidson offers more than 5,500 different Genuine Motor Accessories

Managerial Implications: Thinking Critically • These questions are designed to check students’ understanding of new terms, concepts, and procedures presented in the chapter. Discussion Questions Note to instructor : These questions are designed to check students’ understanding of new terms, concepts, and procedures presented in the chapter. 1. 2. 3. 4. 5. 6. 7. 8.

Cost that does not change with each unit produced. They do not change on a per unit basis as the level of activity changes. Contain a fixed portion and a variable portion. Method that determines the fixed and variable components of a semivariable cost. Attainable range of production for a period. Financial plan based on levels of activity. Shows how actual costs compare with budgeted costs. Shows budgeted costs for several levels of activity, dividing costs between fixed and variable portions.

Allows for ease of comparison of actual results, because several levels of production were projected.

10. 11. 12. 13.

Anticipated costs of making a product under efficient but obtainable work conditions. Estimates for materials useage. Human resources. Standard cost per unit of material is multiplied by difference between actual material used and the standard amount of materials expected to be used for that level of production.

14. 15. 16.

Whether company paid more or less than expected for materials. Rate variance and time variance. Production manager.

Chapter 29 953

17.

The possible causes of materials variances are: prices of materials rise higher than budgeted; more materials are needed to manufacture the product; material waste is not controlled; defective materials or inexperienced workers increase material use.

18.

The possible causes of labor variances are: actual hours worked were more or less than hours budgeted; labor market conditions and wage scales set in union contracts may make it difficult to hire workers at the standard rates.

19.

The possible causes of overhead variances are: fixed overhead costs such as wages, insurance, or taxes are more or less than budgeted; semivariable overhead costs such as fringe benefits, manufacturing supplies, or maintenance are more or less than budgeted.

954 Chapter 29

EXERCISE 29.1 Quarter 3rd–highest quarter 1st–lowest quarter

Direct Labor Hours 15,000 10,000 5,000

Utilities Cost $3,500 2,500 $1,000

Variable cost per unit = $1,000/5,000 hrs = $0.20 Fixed cost per quarter using 3rd quarter data: Total cost Variable cost ($0.20 × 15,000) Fixed cost

$3,500 3,000 $500

EXERCISE 29.2 Total Budgeted Direct Labor Hours Fixed costs Variable costs ($1.25/direct labor hours) Total costs

95% 14,250 $6,000.00 17,812.50 $23,812.50

Percent of Budgeted Hours 100% 15,000 $6,000.00 18,750.00 $24,750.00

105% 15,750 $6,000.00 19,687.50 $25,687.50

EXERCISE 29.3 Standard cost per unit of product: Materials (2 × $10) Direct Labor (2 × $15) Manufacturing Overhead (.2 × $30) Standard cost per unit of product

$20 30 6 $56

Chapter 29 955

EXERCISE 29.4 Cost Element Materials: Standard: 20,000 gallons @ $1.00 Actual: 20,200 gallons @ $1.05 Labor: Standard: 2,500 hours @ $16 Actual: 2,600 hours @ $16.10 Manufacturing Overhead: Standard: 50% of direct labor standard Actual: 50% of actual direct labor Totals: Variance: $4,000 unfavorable

Standard Cost

Actual Cost

$20,000 $21,210 40,000 41,860 20,000 20,930 $84,000

$80,000

EXERCISE 29.5 Standard cost of materials Actual cost of materials Total unfavorable variance for materials

$20,000 21,210 ($1,210)

EXERCISE 29.6 Quantity variance for materials: (Standard í Actual) × Standard price (20,000 í 20,200) × $1.00 Unfavorable because actual exceeded standard

($200)

EXERCISE 29.7 Price variance for materials: (Standard price í Actual price) × actual useage ($1.00 í $1.05) × 20,200 Unfavorable because actual exceeded standard

956 Chapter 29

($1,010)

EXERCISE 29.8 Standard cost for labor (2,500 hrs × $16.00) Actual cost for labor (2,600 hrs × $16.10) Unfavorable because actual exceeded standard

$40,000 41,860 ($1,860)

EXERCISE 29.9 Quantity variance for labor: (Standard hours í Actual hours) × Standard rate (2,500 í 2,600) × $16 Unfavorable because actual exceeded standard

($1,600)

EXERCISE 29.10 Rate variance for labor: (Standard rate í Actual rate) × Actual hours ($16.00 í $16.10) × 2,600 Unfavorable because actual exceeded standard

($260)

EXERCISE 29.11 Total overhead variance Standard overhead (50% of direct labor) Actual overhead (50% of actual direct labor) Unfavorable because actual was more than standard

$20,000 20,930 ($930)

Chapter 29 957

PROBLEM 29.1A 1.

Month May (high) February (low) Differences Difference in costs Difference in hours

Direct Labor Hours 2,900 1,300 1,600

Variable rate per direct labor hour

$2,000 = $1.25/direct labor hour 1,600 Fixed cost per month (using May) Total cost Less variable costs ($1.25 × 2,900) Fixed costs 2. Variable costs ($1.25 × 2,300 hours) = Fixed costs Estimated total indirect labor costs

Analyze:

Indirect Labor Costs $8,000 $6,000 $2,000

$8,000 3,625 $4,375 $2,875 4,375 $7,250

Approximately 45.3% of total costs are attributable to variable costs.

958 Chapter 29

PROBLEM 29.2A 1.

Bibee Products, Inc. Flexible Budget for Manufacturing Overhead Month of May 2013 Number of direct hours Percent of expected capacity Variable costs Indirect labor ($1.00/hour) Payroll taxes ($0.25/hour) Indirect materials ($0.15/unit) Utilities ($0.40/hour) Maintenance ($0.25/hour) Total variable costs Fixed costs Indirect labor Payroll taxes Indirect materials Utilities Depreciation Taxes and insurance Maintenance Total fixed costs Total manufacturing costs

2 2 5 0 hrs 9 0%

2 5 0 0 hrs 1 0 0%

2 7 5 0 hrs 1 1 0%

2 2 5 0 00 5 6 2 50 3 3 7 50 9 0 0 00 5 6 2 50 4 6 1 2 50

2 5 0 0 00 6 2 5 00 3 7 5 00 1 0 0 0 00 6 2 5 00 5 1 2 5 00

2 7 5 0 00 6 8 7 50 4 1 2 50 1 1 0 0 00 6 8 7 50 5 6 3 7 50

1 8 0 0 00 1 0 0 00 1 0 0 00 2 0 0 00 1 2 0 0 00 5 0 0 00 2 0 0 00 4 1 0 0 00 8 7 1 2 50

1 8 0 0 00 1 0 0 00 1 0 0 00 2 0 0 00 1 2 0 0 00 5 0 0 00 2 0 0 00 4 1 0 0 00 9 2 2 5 00

1 8 0 0 00 1 0 0 00 1 0 0 00 2 0 0 00 1 2 0 0 00 5 0 0 00 2 0 0 00 4 1 0 0 00 9 7 3 7 50

Bibee Products, Inc. Manufacturing Overhead Budget Performance Report Month of May 2013 BUDGET FOR 1,900 HOURS Indirect labor [$1,800 + ($1.00 × 1,900)] Payroll taxes [$100 + ($0.25 × 1,900)] Indirect materials [$100 + ($0.15 × 1,900)] Utilities [$200 + ($0.40 × 1,900)] Depreciation Taxes and insurance Maintenance [$200 + ($0.25 × 1,900)] Total manufacturing overhead

3 7 0 0 00 5 7 5 00 3 8 5 00 9 6 0 00 1 2 0 0 00 5 0 0 00 6 7 5 00 7 9 9 5 00

ACTUAL

OVER

3 6 5 0 00 3 7 5 00 4 0 0 00 1 0 0 0 00 1 2 0 0 00 4 7 5 00 6 5 0 00 7 7 5 0 00

UNDER 5 0 00 2 0 0 00

1 5 00 4 0 00 0 00

5 5 00

2 5 00 2 5 00 3 0 0 00

Analyze: Total manufacturing overhead of $3.69 is projected per direct labor hour.

Chapter 29 959

PROBLEM 29.3A 1.

Cal Chemical Company Analysis of Materials Variance For Month of June 2013 COSTS STANDARD ACTUAL

COST ELEMENTS Starter Standard: 7,000 gal @ $0.40 (Note 1) Actual: 7,050 gal @ $0.38 Quantity variance: 50 gal @ $0.40 Price variance: $0.02 × 7,050 gal Acid Standard: 2,500 gal @ $1.20 Actual: 2,550 gal @ $1.22 Quantity variance: 50 gal @ $1.20 Price variance: $0.02 × 2,550 gal Activator Standard: 500 gal @ $12.00 Actual: 490 gal @ $12.20 Quantity variance: 10 gal @ $12.00 Price variance: $0.20 × 490 gal Totals

VARIANCES QUANTITY PRICE

2 8 0 0 00 2 6 7 9 00 (2 0 00) 1 4 1 00

3 0 0 0 00 3 1 1 1 00 (6 0 00) (5 1 00)

6 0 0 0 00 5 9 7 8 00 1 2 0 00 11 8 0 0 00 11 7 6 8 00

4 0 00

(9 8 00) (8 00)

Note 1: 1,000 gallons are needed for each batch. If 200 drums are to be produced, 10 batches must be manufactured (20 drums × 50 gal/drum). Total production cost standards must be prepared for 10 batches. 2. Starter Acid Activator Totals

Standard $2,800.00 $3,000.00 $6,000.00 $11,800.00

Actual $2,679.00 $3,111.00 $5,978.00 $11,768.00

Variance $121.00 ($111.00) $22.00 $32.00

Analyze: Only the starter liquid was purchased at less than the standard price.

960 Chapter 29

PROBLEM 29.4A 1.

Evad Manufacturing Company Analysis of Materials Variances For Month of March 2013 COST ELEMENTS Framing Standard: 50,000 sq. ft. @ $0.25 Actual: 49,650 sq. ft. @ $0.255 Quantity variance: 350 sq. ft. @ $0.25 Price variance: $0.005 × 49,650

COSTS STANDARD ACTUAL

VARIANCES QUANTITY PRICE

12 5 0 0 00 12 6 6 0 75 8 7 50 (2 4 8 25)

Filler Standard: 75,000 @ $0.05 Actual: 75,100 @ $0.045 Quantity variance: 100 @ $0.05 Price variance: $0.005 × 75,100

3 7 5 0 00 3 3 7 9 50 (5 00)

Totals

16 2 5 0 00

16 0 4 0 25

8 2 50

3 7 5 50 1 2 7 25

Evad Manufacturing Company Analysis of Labor Variances For Month of March 2013 COST ELEMENTS Cutting department Standard: 5,000 hours @ $14.00 Actual: 4,980 hours @ $14.05 Quantity variance: 20 hours @ $14.00 Rate variance: $0.05 × 4,980 Final department Standard: 2,500 hours @ $15.00 Actual: 2,550 hours @ $14.98 Quantity variance: 50 hours @ $15.00 Price variance: $0.02 × 2,550 hours Totals

COSTS STANDARD ACTUAL

VARIANCES QUANTITY PRICE

70 0 0 0 00 69 9 6 9 00 2 8 0 00 (2 4 9 00)

37 5 0 0 00 38 1 9 9 00 (7 5 0 00) 107 5 0 0 00 108 1 6 8 00

(4 7 0 00)

5 1 00 (1 9 8 00)

Analyze: The final department reported a total $699 unfavorable labor variance ($750 í $51).

Chapter 29 961

PROBLEM 29.1B 1.

Month May (high) January (low) Differences

Direct Labor Hours 4,700 3,200 1,500

Difference in costs Difference in hours

$1,125 = 1,500 Fixed cost per month (using May) Total cost Less variable costs ($0.75 × 4,700) Fixed costs 2.

Utility Costs $4,375 3,250 $1,125

Variable rate per direct labor hour

$0.75/direct labor hour

Variable cost ($0.75 × $3,500) = Fixed costs Estimated total costs

$4,375 3,525 $850 $2,625 850 $3,475

Analyze: The fixed costs are 19.4% of total costs.

962 Chapter 29

PROBLEM 29.2A 1.

Atlanta Manufacturing Company Flexible Budget for Manufacturing Overhead Year Ended December 31, 2013 Number of direct hours Percent of expected capacity Variable costs Indirect labor ($0.75/hour) Payroll taxes ($0.25/hour) Indirect materials ($0.25/unit) Utilities ($0.35/hour) Maintenance ($0.30/hour) Total variable costs Fixed costs Indirect labor Payroll taxes Indirect materials Utilities Depreciation Taxes and insurance Maintenance Total fixed costs Total manufacturing costs

32 4 0 0 hrs 9 0%

36 0 0 0 hrs 1 0 0%

39 6 0 0 hrs 1 1 0%

24 3 0 0 00 8 1 0 0 00 8 1 0 0 00 11 3 4 0 00 9 7 2 0 00 61 5 6 0 00

27 0 0 0 00 9 0 0 0 00 9 0 0 0 00 12 6 0 0 00 10 8 0 0 00 68 4 0 0 00

29 7 0 0 00 9 9 0 0 00 9 9 0 0 00 13 8 6 0 00 11 8 8 0 00 75 2 4 0 00

20 0 0 0 00 20 0 0 0 00 20 0 0 0 00 1 5 0 0 00 1 5 0 0 00 1 5 0 0 00 1 8 0 0 00 1 8 0 0 00 1 8 0 0 00 2 4 0 0 00 2 4 0 0 00 2 4 0 0 00 18 0 0 0 00 18 0 0 0 00 18 0 0 0 00 4 8 0 0 00 4 8 0 0 00 4 8 0 0 00 2 4 0 0 00 2 4 0 0 00 2 4 0 0 00 50 9 0 0 00 50 9 0 0 00 50 9 0 0 00 112 4 6 0 00 119 3 0 0 00 126 1 4 0 00

Atlanta Manufacturing Company Flexible Budget for Manufacturing Overhead Year Ended December 31, 2013 BUDGET FOR 35,000 HOURS 1,900 HOURS Indirect labor [$20,000 + ($0.75 × 35,000)] Payroll taxes [$1,500 + ($0.25 × 35,000)] Indirect materials [$1,800 + ($0.25 × 35,000)] Utilities [$2,400 + ($0.35 × 35,000)] Depreciation Taxes and insurance Maintenance [$2,400 + ($0.30 × 35,000)] Total manufacturing overhead

46 2 5 0 00 10 2 5 0 00 10 5 5 0 00 14 6 5 0 00 18 0 0 0 00 4 8 0 0 00 12 9 0 0 00 117 4 0 0 00

ACTUAL 45 9 5 0 00 10 2 0 0 00 10 9 0 0 00 15 0 0 0 00 18 0 0 0 00 4 9 0 0 00 12 5 5 0 00 117 5 0 0 00

OVER

UNDER 3 0 0 00 5 0 00

3 5 0 00 3 5 0 00 0 00 1 0 0 00 8 0 0 00

3 5 0 00 7 0 0 00

Analyze: Total manufacturing overhead of $3.31 is projected per direct labor hour.

Chapter 29 963

PROBLEM 29.3B 1.

Synthetic Manufacturing Co. Analysis of Materials Variance For Month of July 2013 COST ELEMENTS Plastic Base Standard: 22,000 lbs @ $0.65 (Note 1) Actual: 22,100 lbs @ $0.64 Quantity variance: 100 lbs @ $0.65 Price variance: $0.01 × 22,100 lbs

COSTS STANDARD ACTUAL

VARIANCES QUANTITY PRICE

14 3 0 0 00 14 1 4 4 00 (6 5 00) 2 2 1 00

Tint Standard: 1,000 lbs @ $0.22 Actual: 1,150 lbs @ $0.20 Quantity variance: 150 lbs @ $0.22 Price variance: $0.02 × 1,150 lbs Hardener Standard: 2,000 lbs @ $0.65 Actual: 2,050 lbs @ $0.66 Quantity variance: 50 lbs @ $0.65 Price variance: $0.01 × 2,050 lbs Totals

2 2 0 00 2 3 0 00 (3 3 00) 2 3 00

1 3 0 0 00 1 3 5 3 00 (3 2 50) 15 8 2 0 00

15 7 2 7 00

(1 3 0 50)

(2 0 50) 2 2 3 50

Note 1: 2,500 pounds are needed for each batch. If 25,000 pounds are to be produced, 10 batches must be manufactured. Total production cost standards must be prepared for 10 batches. 2. Plastic Base Tint Hardener Totals

Standard $14,300.00 220.00 1,300.00 $15,820.00

Actual $14,144.00 230.00 1,353.00 $15,727.00

Variance $156.00 (10.00) (53.00) $93.00

Favorable

Analyze: Both the plastic base and the tint were purchased at less than the standard price.

964 Chapter 29

PROBLEM 29.4B 1.

Leather Products Company Analysis of Materials Variance For Month of January 2013 COSTS STANDARD ACTUAL

COST ELEMENTS Raw Material Standard: 25,000 sections @ $2.00 Actual: 25,650 sections @ $2.04 Quantity variance: 650 @ $2.00 Price variance: $0.04 × 25,650

50 0 0 0 00 52 3 2 6 00 (1 3 0 0 00) (1 0 2 6 00)

Accessory sets Standard: 10,000 sets @ $0.50 Actual: 10,050 sets @ $0.52 Quantity variance: 50 sets @ $0.50 Price variance: $0.02 × 10,050 sets Totals

VARIANCES QUANTITY PRICE

5 0 0 0 00 5 2 2 6 00 (2 5 00) 55 0 0 0 00

57 5 5 2 00

(1 3 2 5 00)

(2 0 1 00) (1 2 2 7 00)

Leather Products Company Analysis of Labor Variances For Month of January 2013 COST ELEMENTS Cutting department Standard: 500 hours @ $14.00 Actual: 498 hours @ $13.95 Quantity variance: 2 hours @ $14.00 Rate variance: $0.05 × 498 Accessory department Standard: 1,250 hours @ $12.00 Actual: 1,280 hours @ $12.20 Quantity variance: 30 hours @ $12.00 Price variance: $0.20 × 1,280 hours Totals

COSTS STANDARD ACTUAL

VARIANCES QUANTITY PRICE

7 0 0 0 00 6 9 4 7 10 2 8 00 2 4 90

15 0 0 0 00 15 6 1 6 00 (3 6 0 00) 22 0 0 0 00

22 5 6 3 10

(3 3 2 00)

(2 5 6 00) (2 3 1 10)

Analyze: The greatest portion of the total accessory materials variance is attributable to the price variance.

Chapter 29 965

CRITICAL THINKING PROBLEM 29.1 1. Standard materials cost ($1.15 × 5,000) Less favorable materials variance Total materials cost 2. Unfavorable materials quantity variance Standard cost per gallon Units in excess of standard ($115/$1.15) Standard number of gallons Total number of gallons used 3. Total favorable materials variance Unfavorable materials quantity variance Favorable materials price variance 4. Unfavorable labor rate variance Actual hours worked Unfavorable rate per hour ($1,050/1,050) Standard labor rate per hour Actual labor rate per hour 5. Actual labor rate Actual hours worked Actual labor cost ($19 × 1,050 hours) 6. Actual labor cost Standard labor cost Total unfavorable labor variance Unfavorable labor rate variance Unfavorable labor time variance ($1,950 í $1,050)

$5,750 38 $5,712 $115.00 $1.15 100 5,000 5,100 $38.00 115.00 $153.00 $1,050.00 1,050 $1.00 18.00 $19.00 $19.00 1,050 $19,950.00 $19,950.00 18,000.00 $1,950.00 $1,050.00 $900.00

Analyze: The cost per gallon of raw materials is $1.12 ($5,712/5,100 gals).

966 Chapter 29

CRITICAL THINKING PROBLEM 29.2 Standard labor rate Unfavorable labor rate variance Actual labor rate

$15.00 $0.10 $15.10

The equation that expressed the computation of the total labor variance is (Standard quantity × Standard rate) í (Actual quantity × Actual rate) = Total labor variance Putting this into an equation gives the following: (5,000 hrs × $15) í (Actual hours × $15.10) ($75,000) í (Actual hours × $15.10) $75,000 í $255 $74,745 Actual hours Actual hours

= = = = = =

$255 $255 (Actual hours × $15.10) (Actual hours × $15.10) $74,745/$15.10 4,950

Chapter 29 967

SOLUTIONS TO BUSINESS CONNECTIONS Managerial Focus: 1. The distinction helps managers identify known cash needs from variable needs. 2. Depiction of actual and budgeted costs allows for quick identification of problem cost areas. 3. Can result from difference in quality and/or difference in volume purchased. 4. Possible cause: inexperienced workers were less productive causing higher labor costs. 5. Shared between personnel department and factory line supervisors. 6. Provide specific points of comparisons for evaluation of efficiencies. Ethical Dilemma: Shelly’s actions are questionable and are very close to unethical. It could be argued that her actions are not unethical since she received no benefit from the lower labor rate. The only change would be the difference between the planned and actual net income. Variances are made to indicate possible problems. Shelly’s actions have flagged the issue she wanted to bring forth to upper management.

Financial Statement Analysis: 1. Gift card revenues were recorded at $40 million and revenue from the sale of services was recorded at $2.6 billion. 2. The revenue from the sale of services was an increase of $500 million or 19% over FY 2008. Teamwork: The materials should be wax, coloring, labels, and a box. The labor should be a worker that pours the wax and one that puts the crayons in the boxes. The price and rates should be region specific. The various groups should develop standards that are close per unit but different by price or rate. Internet Connection: International Standards provide a reference framework, or a common technological language, between suppliers and their customers—which facilitates trade and the transfer of technology.

968 Chapter 29

SOLUTIONS TO PRACTICE TEST Part A True-False 1. FALSE 2. TRUE 3. TRUE 4. TRUE 5. FALSE 6. TRUE 7. FALSE 8. TRUE 9. TRUE 10. FALSE 11. FALSE 12. TRUE 13. FALSE 14. TRUE 15. FALSE 16. TRUE 17. FALSE Part B Completion 1. $311,600 2. $325,000 3. $325,000 4. $240,000 5. $225,000 6. $100,000 7. $13,400 F

Chapter 29 969

CHAPTER 30 COST-REVENUE ANALYSIS FOR DECISION MAKING Chapter Opener: Thinking Critically For Avon, the decision to cease operations at the site aligned with the company’s restructuring efforts aimed at enhancing the company's efficiency, effectiveness, and profitability. Other companies may have different reasons for closing plants. Fast Facts • Avon Representatives collectively earn an estimated $6 billion each year • Avon’s brand has 90% awareness across the globe and the company sells four lipsticks every second of the day. •

The Avon Foundation for Women is the world’s largest corporate philanthropy for women, and has raised and awarded $725 million.

Managerial Implications: Thinking Critically • Answers will vary. Costs, contribution margin, and the effect on net profit may be cited. Nonfinancial matters may also be considered, including quality of, and demand for, the product. Discussion Questions These questions are designed to check students’ understanding of new terms, concepts, and procedures presented in the chapter. 1. 2.

d. Variable manufacturing costs. Accounting procedure whereby all manufacturing costs, including fixed costs, are charged to cost of goods manufactured.

Direct costing: fixed costs allocated to expense in the period they are incurred. Absorption costing: fixed manufacturing overhead included in the cost of goods manufactured.

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

In most cases, direct costing; offers computation of the contribution margin. Difference between net sales and variable cost of goods sold. Net sales minus variable cost of goods sold and variable operating expenses. Difference in costs between one action and alternative action. Future earnings or potential benefits that are given up because of action taken. Past costs. Effect on employee morale, pace of technology improvements, availability of cash for purchase. Might anger existing customers. Cash from sale should offset the cost of new equipment. Historical data is not usually used primarily to make decisions. Future cash flows are more important. New equipment may entail training or layoffs.

970  Chapter 30

EXERCISE 30.1 1. Variable manufacturing costs ($65 x 10,000 units) Fixed manufacturing costs Total cost of goods manufactured

$650,000 100,000 $750,000

2. Total cost of goods manufactured Average cost per unit ($750,000/10,000 units)

$750,000 75.00

Ending Inventory ($75 x 1,000 units) 3. Cost of goods manufactured Less Ending Inventory Cost of goods sold 4. Sales ($175 x 9,000 units) Cost of Goods Sold Gross Profit Selling and Administrative Expenses: Variable Selling and Administrative ($25 x 9,000 units) Fixed Selling and Administrative Total Selling and Administrative Expenses Net Income

$75,000 $750,000 75,000 $675,000 $1,575,000 675,000 $900,000 $225,000 250,000 $475,000 $425,000

EXERCISE 30.2 1. Units in Ending Inventory Variable costs Absorption Costing Ending Inventory 2. Sales ($175 x 9,000 units) Cost of Goods Sold: Variable Manufacturing Costs ($65 x 10,000 units) Less Ending Inventory ($65 x 1,000 units) Cost of Goods Sold Manufacturing Margin 3. Manufacturing Margin Variable selling and administrative ($25 x 9,000) Marginal Income on Sales Fixed Manufacturing Costs Fixed Selling and Administrative Expenses Total Fixed Costs and Expenses Net Income

1,000 $65 $65,000 $1,575,000 $650,000 65,000 585,000 $990,000 $990,000 225,000 $765,000 $100,000 250,000 $350,000 $415,000

Chapter 30  971

EXERCISE 30.3 The relevant items are the cost of the new wrapping system, its useful life and estimated salvage value, the reduction in direct labor costs, and the increase in other fixed costs. EXERCISE 30.4 Variable cost per unit on export order: Variable manufacturing costs Variable selling and administrative costs Additional freight and shipping charges Total variable costs per unit

Effect on profits if special order is taken: Sales (1,000 units x $129) Variable costs ($94/unit x 1,000 units) Increase in income from special order

$55 20 19 $94

$129,000 94,000 $35,000

Acceptance of the special order will increase income by $35,000.

EXERCISE 30.5 1. Differential revenue from each unit Differential costs per unit: Direct materials Direct labor Variable manufacturing overhead Variable nonmanufacturing costs Contribution margin for each product sold

$219 $60 30 30 5

125 $94

Total increase in net income from accepting the order: $94/unit x 3,000 units = $282,000

2. The lowest price that would be acceptable would be at a level that covered all differential costs, $125

972  Chapter 30

EXERCISE 30.6 Decrease in direct labor (12,000 units x $1.00) Decrease in variable overhead (12,000 units x $1.00) Depreciation on new machine ($150,000 ÷ 10 years) Fixed costs effect Increase in net income

$12,000 12,000 (15,000) (2,000) $7,000

The analysis shows net income increasing by $7,000; therefore, the machine should be purchased.

EXERCISE 30.7 The firm would save $2.00 per part if purchased. Cost to purchase the part: Purchase price

Cost to manufacture the part: Direct material Direct labor Manufacturing overhead ($8 + $1) Differential cost savings if purchased

$42.00

$17.00 18.00 9.00

$44.00 $2.00

The company should purchase the part.

EXERCISE 30.8 The most Bay should pay would be the cost it would incur to manufacture it. There are other factors t consider besides just the direct saving from purchasing the product--idle time, customer concerns, etc

Chapter 30  973

PROBLEM 30.1A Omega Corporation Income Statement (Absorption Costing) For Year Ended December 31, 2013

Sales (3,000 units @ $139) Cost of Goods Sold

417 0 0 0 00

Beginning Inventory Variable Manufacturing Costs (2,900 @ $46) Fixed Manufacturing Costs Cost of Goods Manufactured Cost of Goods Available for Sale Less Ending Inventory [150 x ($219,650 ÷ 2,900)] Cost of Goods Sold Gross Profit Selling and Administrative Expenses Variable Expenses (3,000 @ $4) Fixed Expenses Total Selling and Administrative Expenses Net Income

133 4 0 0 00 75 0 0 0 00 208 4 0 0 00 208 4 0 0 00 11 3 6 1 00 197 0 3 9 00 219 9 6 1 00 12 0 0 0 00 50 0 0 0 00 62 0 0 0 00 157 9 6 1 00

Omega Corporation Income Statement (Direct Costing) For Year Ended December 31, 2013

Sales (3,000 units @ $139) Cost of Goods Sold Beginning Inventory Variable Manufacturing Costs (2,900 @ $46) Cost of Goods Available for Sale Less Ending Inventory (150 x $46) Cost of Goods Sold Manufacturing Margin Variable Selling and Administrative Costs (3,000 x $4) Marginal Income Fixed Costs and Expenses Fixed Manufacturing Expenses Fixed Selling and Administrative costs Total Fixed Costs and Expenses Net Income

974  Chapter 30

417 0 0 0 00

133 4 0 0 00 133 0 0 0 00 6 9 0 0 00 126 5 0 0 00 290 5 0 0 00 12 0 0 0 00 278 5 0 0 00 75 0 0 0 00 50 0 0 0 00 125 0 0 0 00 153 5 0 0 00

PROBLEM 30.1A (continued) The primary difference in net income arises from the difference in the treatment of fixed costs. In the direct costing method, all of the fixed manufacturing costs are currently expensed. Under absorption costing, a portion of the fixed manufacturing costs are included in the value of the ending inventory and therefore not totally expensed. Computations: Difference in ending inventory Ending inventory at absorption method Ending inventory at direct method Difference in net income

$11,361 6,900 $4,461

Approximately $4,461 of the difference is due to the fixed costs treatment. Analyze: Manufacturing managers would prefer to use the direct costing method.

PROBLEM 30.2A 1. Tech Inc. Income Statement (Direct Costing) Year Ended December 31, 2013 Sales (5,000 units @ $105) Cost of Goods Sold Cost of Goods Manufactured Direct Materials ($24 x 5,400) 129 6 0 0 00 Direct Labor ($22 x 5,400) 118 8 0 0 00 Variable Factory Overhead ($10 x 5,400) 54 0 0 0 00 Total Cost of Goods Manufactured 302 4 0 0 00 Less Finished Goods ($56 x 400) 22 4 0 0 00 Cost of Goods Sold Manufacturing Margin Variable Selling and Administrative Expenses ($9 x 5,000) Marginal Income on Sales Fixed Costs and Expenses Fixed Factory Overhead 56 0 0 0 00 Fixed Selling and Administrative Expenses 75 0 0 0 00 Total Fixed Costs and Expenses Net Income

525 0 0 0 00

280 0 0 0 00 245 0 0 0 00 45 0 0 0 00 200 0 0 0 00

131 0 0 0 00 69 0 0 0 00

Chapter 30  975

PROBLEM 30.2A (continued) 2. Tech Inc. Computations Foreign Sales Order Sales (400 x $75) Variable Manufacturing Costs Materials (400 x $24) Labor (400 x $22) Overhead (400 x $10) Manufacturing Margin Variable Shipping and Administrative Costs (400 x $10) Marginal Income on Order

30 0 0 0 00 9 6 0 0 00 8 8 0 0 00 4 0 0 0 00

22 7 4 3

4 6 0 6

0 0 0 0

0 00 0 00 0 00 0 00

Accept the order. Analyze:

12% ($3,600/$30,000) would be realized as marginal income on the foreign sales order.

PROBLEM 30.3A ANALYSIS OF EFFECTS OF PURCHASING MACHINE 1. Decreases in variable costs: Direct labor Variable manufacturing overhead Per unit decrease in variable costs Total decrease in variable costs (40,000 units x $9.25)

$8.00 1.25 $9.25 $370,000

Increases in fixed costs: Fixed manufacturing overhead Depreciation Total increase in fixed costs Net Decrease in Costs

190,000 $180,000

$40,000 150,000

2. The machine will pay for itself in 4.2 years. Management should probably buy the machine. There will obviously be employee concerns should layoffs be enacted after purchasing the machine. From the financial point of view, the machine should be purchased. Analyze: The reprocessing cost would be 1,200 units x $10/units or $12,000. The total decrease in variable costs should be reduced by the $12,000 to $358,000. Fixed costs would be unaffected, therefore, the net decrease in costs would be reduced to $168,000.

976  Chapter 30

PROBLEM 30.4A 1. Chicago Equipment Corporation Analysis of Effects of Making or Buying a Part Cost to purchase: Purchase price Shipping costs

4 8 00 5 00

Cost to make the part: Direct material Direct labor Variable manufacturing overhead Differential cost savings if manufactured

5 3 00

3 0 00 2 0 00 2 00

5 2 00 1 00

Based on the above information, the part should be manufactured, saving $1 per part.

2. There are no specific answers to the question. Areas of concern could include labor relations, effect on suppliers, effect on current customers, and the opportunity to take on new production. Analyze: The highest cost that Chicago should pay to buy the part is its cost to manufacture, $52.

Chapter 30  977

PROBLEM 30.1B 1. LB Industries Income Statement (Absorption Costing) For Year Ended December 31, 2013 Sales (4,000 units @ $90) Cost of Goods Sold Beginning Inventory Variable Manufacturing Costs (4,000 @ $35) Fixed Manufacturing Costs Cost of Goods Manufactured Cost of Goods Available for Sale Less Ending Inventory [200 x ($198,000 ÷ 4,000)] Cost of Goods Sold Gross Profit Selling and Administrative Expenses Variable Expenses (4,000 @ $4) Fixed Expenses Total Selling and Administrative Expenses Net Income

360 0 0 0 00 0 00 140 0 0 0 00 50 0 0 0 00 190 0 0 0 00 190 0 0 0 00 9 9 0 0 00 180 1 0 0 00 179 9 0 0 00 16 0 0 0 00 65 0 0 0 00 81 0 0 0 00 98 9 0 0 00

2. LB Industries Income Statement (Direct Costing) Sales (4,000 units @ $90) Cost of Goods Sold Beginning Inventory Variable Manufacturing Costs (4,000 @ $35) Cost of Goods Available for Sale Less Ending Inventory (200 x $35) Cost of Goods Sold Manufacturing Margin Variable Selling and Administrative Costs (4,000 x $4) Marginal Income Fixed Costs and Expenses Fixed Manufacturing Expenses Fixed Selling and Administrative costs Total Fixed Costs and Expenses Net Income

978  Chapter 30

360 0 0 0 00 0 00 140 0 0 0 00 148 0 0 0 00 7 0 0 0 00 133 0 0 0 00 227 0 0 0 00 16 0 0 0 00 211 0 0 0 00 50 0 0 0 00 65 0 0 0 00 115 0 0 0 00 96 0 0 0 00

PROBLEM 30.1B (continued) The difference in net income arises from the difference in the treatment of fixed costs. In the direct costing mode, all of the fixed manufacturing costs are expensed in the current period. Under absorption costing, a portion of the fixed manufacturing costs are included in the value of the ending inventory and therefore not totally expensed. Computations: Difference in Net Income Ending Inventory Under Absorption Ending Inventory Under Direct Difference

$2,900 $9,900 $7,000 $2,900

Analyze: Under the absorption costing method, fixed manufacturing costs amount to approximately 25% of the manufacturing costs.

PROBLEM 30.2B 1. Pitt Corporation Income Statement (Direct Costing) Year Ended December 31, 2013 Sales (4,800 units @ $125) Cost of Goods Sold Cost of Goods Manufactured Direct Materials ($26 x 5,000) 130 0 0 0 00 Direct Labor ($24 x 5,000) 120 0 0 0 00 Variable Factory Overhead ($10 x 5,000) 50 0 0 0 00 Total Cost of Goods Manufactured 300 0 0 0 00 Less Finished Goods ($60 x 200) 12 0 0 0 00 Cost of Goods Sold Manufacturing Margin Variable Selling and Administrative Expenses ($7 x 4,800) Marginal Income on Sales Fixed Costs and Expenses Fixed Factory Overhead 125 0 0 0 00 Fixed Selling and Administrative Expenses 75 0 0 0 00 Total Fixed Costs and Expenses Net Income

600 0 0 0 00

288 0 0 0 00 312 0 0 0 00 33 6 0 0 00 278 4 0 0 00

200 0 0 0 00 78 4 0 0 00

Chapter 30  979

PROBLEM 30.2B (continued) 2. Pitt Corporation Computations Foreign Sales Order Sales (1,000 x $79) Variable Manufacturing Costs: Materials (1,000 x $26) Labor (1,000 x $24) Overhead (1,000 x $10) Manufacturing Margin Variable Shipping and Administration (1,000 x $7) Marginal Income on Order

79 0 0 0 00 26 0 0 0 00 24 0 0 0 00 10 0 0 0 00

60 0 0 0 00 19 0 0 0 00 7 0 0 0 00 12 0 0 0 00

Yes, it would be profitable to accept the order. Analyze: Since both fixed and variable manufacturing costs would be used to compute unit costs, the total inventory would be higher under direct costing. PROBLEM 30.3B ANALYSIS OF EFFECTS OF PURCHASING MACHINE 1. Decreases in variable costs: Direct labor Variable manufacturing overhead Per unit decrease in variable costs Total decrease in variable costs (5,000 units x $3) Changes in fixed costs: Fixed manufacturing overhead Depreciation Total increase in fixed costs Net decrease in costs

$2.00 1.00 $3.00 $15,000

($10,000) 10,000 0.00 $15,000

2. The machine will pay for itself in 3.3 years. Management should probably buy the machine. There will obviously be employee concerns should layoffs be enacted after purchasing the machine. From the financial point of view, the machine should be purchased. Analyze: Direct labor costs are currently $14 per unit ($70,000 ÷ 5,000 units)

980  Chapter 30

PROBLEM 30.4B 1. Cal Computer Company Analysis of Effects of Making or Buying a Part Cost to purchase: Purchase price Shipping costs

8 5 00 5 00

Cost to make the part: Direct material Direct labor Variable manufacturing overhead Differential cost savings if manufactured

9 0 00

5 0 00 2 5 00 1 2 00

8 7 00 3 00

Based on the above information, the part should be manufactured, saving $3 per part. 2. There are no specific answers to the question. Areas of concern could include labor relations, effect on suppliers, effect on current customers, and the opportunity to take on new production. Analyze: The $1 reduction in shipping would still have the cost of purchase at $89, more than the cost to produce the unit.

Chapter 30  981

CRITICAL THINKING PROBLEM 30.1 1 Income 1. I ffor 44th hQ Quarter 2013 iis calculated: l l d Sales S l Cost and Expenses p Variable Costs Product Costs Containers i F ight In Freight I Delivery Sales Commission Advertising W h i Warehousing Oth Variable Other V i bl Total Variable Costs Contribution Margin Advertising Warehousing O h fixed Other fi d costs T t l Fixed Total Fi d Costs C t Net Income

20 0 0 0 00

10 0 0 0 00 8 0 0 00 4 0 0 00 4 0 0 00 4 0 0 0 00 2 0 0 0 00 4 0 0 00 6 0 0 00 18 6 0 0 00 1 4 0 0 00 5 0 0 00 2 0 0 00 3 0 0 00 1 0 0 0 00 4 0 0 00

2 2.

B d only Based l on the h calculations l l i shown, h iit would ld bbe appropriate i to continue i the h product d bbecause iit contributes $1,400 $1 400 toward paying the fixed costs. costs

3 3.

Some of the questions to be asked include: Can sales be increased? Do buyers purchase other products as a result l off our carrying i this hi iitem? Are our advertising d i i techniques h i effective ff i ffor this hi product? d How ddoes this product fit into our total product offering?

4. 4.

S ce v Si Since variable i bble cos costs ts equ equall 93% ooff ssales, les, the the fixed fi edd cos costs ts must ust equ equall 7% ooff ssales les att the the bbreak-even e k eve po point. i t. Since fixed costs equal $1,000, $1 000 you can divide $1 $1,000 000 by 7% to get the break-even point of $14 $14,286: 286: $ $1,000 ÷ 0.07 = $$14,286 (rounded).

Sales Variable costs (93% x 14,286) 14 286) Contribution Margin Fi d Costs Fixed C t Net Income ((Loss))

$14,286.00 $14 286 00 13 285 98 13,285.98 $1,000.02 1,000 00 1,000.00 $0 02 $0.02

Analyze: If you assume that sales will not suffer, suffer the net income for the quarter would increase to $2,400 $2 400 from the h current amount off $$400.

982  Chapter 30

CRITICAL THINKING PROBLEM 30.2 Bruin Manufacturing, Inc. Income Statement (Direct Costing)

Sales Variable Costs Manufacturing Operating Total Variable Costs Contribution Margin Fixed Costs Manufacturing Operating Total Fixed Costs Net Income (Loss)

ITEM 101

ITEM 102

ITEM 103

TOTAL

60 0 0 0 00

64 0 0 0 00

87 5 0 0 00

211 5 0 0 00

26 7 33 26

4 2 6 4

0 0 0 0

0 00 0 00 0 00 0 00

28 8 36 27

8 0 8 2

0 0 0 0

0 00 0 00 0 00 0 00

57 17 75 12

5 5 0 5

0 0 0 0

0 00 0 00 0 00 0 00

112 32 145 66

7 7 4 1

0 0 0 0

0 00 0 00 0 00 0 00

2 5 7 19

0 0 0 4

0 0 0 0

0 00 0 00 0 00 0 00

4 3 7 20

0 0 0 2

0 0 0 0

0 00 0 00 0 00 0 00

8 7 15 (3

0 5 5 0

0 0 0 0

0 00 0 00 0 00 0 00)

14 15 29 36

0 5 5 6

0 0 0 0

0 00 0 00 0 00 0 00

Chapter 30  983

CRITICAL THINKING PROBLEM 30.2 (continued) 1.

If Item 103 were discontinued, $12,500.00 that is currently being generated through the contribution margin to assist with fixed costs would be eliminated. Eliminating Item 103 would result in: Net Income from Items 101 and 102 Less: Fixed costs from Item 103 Net Income if Item 103 is decreased by

$39,600.00 15,500.00 $24,100.00

If sales price of Item 103 is increased to $40, resulting in unit sales of 1,000 units: Sales Variable Costs: Manufacturing costs $23,000.00 Operating costs 7,000.00 Contribution Margin Fixed Costs: Manufacturing costs $8,000.00 Operating costs 7,500.00 Net Loss

$40,000.00

30,000.00 $10,000.00

15,500.00 ($5,500.00)

While the contribution margin is positive, the item continues to produce an over-all loss. The item should probably be kept with attention given to increasing unit sales. 3. Sales Manufacturing costs Operating costs Contribution Margin Fixed Costs: Manufacturing costs Operating costs Net Income

$52,500.00 $16,500.00 12,000.00

$8,000.00 7,500.00

28,500.00 $24,000.00

15,500.00 $8,500.00

Drop Item 103 to produce Item 104. Item 104 produces a much larger contribution margin than item 103, and also has net income of $8,500.

984  Chapter 30

SOLUTIONS TO BUSINESS CONNECTIONS Managerial Focus: 1. Fixed costs should not be ignored when setting prices. 2. Identify variable costs, shipping costs, implications to existing customers. 3. Book value of old machine (a sunk cost) has no relevance to purchase of new machine. Consider effect of loss on earnings due to writing off old machine’s book value. 4.

Plant capacity, variable and fixed manufacturing costs, differential cost savings.

Ethical Dilemma: Upper management should be notified immediately. Brad should complete his analysis and show the corporate office that home office costs are causing the net loss in the company, and not the individual regions. Joe should not have the authority to move costs from his region to other regions. New assignment of duties should be prepared. Financial Statement Analysis: Making Decisions Using Financial Data 1. Because of the decrease in weekly sales and weighted average sales per square foot, you should probably be very conservative on the decision to open new stores. A key consideration would be the level of sales projection for the new location(s) and if those sales projects are above the average sales number per square foot. 2.

The 10-year compounded annual growth was for the average ticket sale is 0.8 percent. The percentage change from FY 2008 to FY 2009 is 6.9% decrease! The past three years have seen significant decreases in the average ticket sale.

Teamwork: Do you have the factory space? Do you have adequate work force? Is your vendor able to provide additional material? What are the sunk costs? What are the opportunity costs? Is there a demand for twice the amount of the product? How long will it take to pay it back? Internet Connection: The IRS website contains a series of business tips and educational features such as how to handle inventory.

Chapter 30  985

SOLUTIONS TO PRACTICE TEST Part A True-False 1. TRUE 2. FALSE 3. FALSE 4. FALSE 5. FALSE 6. TRUE 7. TRUE 8. FALSE 9. FALSE 10. FALSE 11. FALSE 12. TRUE 13. TRUE 14. TRUE 15. FALSE 16. TRUE 17. TRUE 18. TRUE Part B Matching 1. c 2. e 3. b 4. g 5. f 6. d 7. a

986  Chapter 30

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