SOLUTIONS MANUAL for Financial Accounting for Decision Makers 2nd Edition Mark DeFond ISBN 978161853 by StudyGuide

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Chapter 1 Financial Accounting and Business Decisions QUESTIONS 1.

Accounting can be defined as the process of measuring the economic activity of an enterprise in monetary terms and communicating the results to interested parties. The basic purpose of accounting is to provide financial information that is useful in making economic decisions.

The major goal of Financial Accounting is the preparation of a balance sheet, a statement of stockholders’ equity, a statement of cash flows, and an income statement for external users. These statements must be prepared in accordance with a well-defined set of conventions and rules called generally-accepted accounting principles. Managerial Accounting provides the data necessary for management to plan and control the operations of a business and to TESTBANor KSrules ELLgovern ER.Cmanagerial OM make decisions. No rigid conventions accounting; any analytical approach or mode of accounting may be employed in this area.

In addition to stockholders and creditors, the following outside groups may be interested in a company's financial data: prospective investors and creditors, financial analysts, taxing agencies, regulatory agencies, labor unions, and economic planners. Prospective investors and financial analysts desire to evaluate the relative attractiveness of various investments, while creditors are primarily interested in a firm's financial strength. Taxing and regulatory agencies are concerned with whether a firm has met its reporting or other legal requirements. Labor unions are interested in the firm's relations with employees, especially with regard to wages. Economic planners use reliable financial data in their planning and forecasting activities.

Generally-accepted accounting principles (GAAP) are the standards, procedures and rules that accountants follow when preparing financial statements. Many principles have evolved over time and have become entrenched through general acceptance. Although the SEC has the power to set the accounting principles, the agency has largely delegated that principlesetting responsibility. The primary non-governmental body whose pronouncements are authoritative concerning such principles is the Financial Accounting Standards Board (FASB).

The main advantages of the corporate form of organization are limited liability afforded to stockholders and the ease of selling ownership interests. The main disadvantage is the double taxation of the corporation’s net income at both the company and individual levels.

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Financial accounting provides financial information to investors and creditors who need to make decisions about where to allocate their resources. Financial statements express the economic activity of business entities in money terms and report on the entities' profitability, financial strength, and cash flow. Financial statements that present the results of economic activity fairly and completely should contribute significantly to the best possible allocation decisions by investors and creditors.

The accounting equation is Assets = Liabilities + Stockholders' Equity. Assets are the economic resources owned by a business that can be expressed in monetary terms. Liabilities are the obligations, or debts, that a business must pay in cash or in goods and services at some future time as a consequence of past transactions or events. Stockholders' equity is the ownership claims on the assets of the business and is represented as the difference between the enterprise's assets and liabilities.

The three types of business activities are operating activities, investing activities, and financing activities. Operating activities are the day-to-day business transactions of an enterprise. Investing activities are those events in which the firm acquires long-term resources necessary to conduct its business. And, financing activities consist of debt or equity financing that generate the funds necessary to conduct its business.

Corporate social responsibility is a value system that believes that enterprises should focus on more than just a business’ financial bottom line. Instead, the enterprise should also act socially responsible and also focus on its environmental bottom line.

10.

GAAP are the accounting standards, procedures and rules promulgated by the FASB to assist companies in the U.S. toTprepare financial statements. IFRS are the accounting TES BANKStheir ELL ER.CO M guidelines promulgated by the IASB to guide international businesses in the preparation of their financial statements.

11.

Revenues are an increase to a company’s resources that result when it provides goods or services to its customers. Sales revenue is measured by the value of the assets received in exchange for the goods or services delivered. Expenses are the decreases in a company’s resources from generating revenues. Expenses are measured by the value of the assets that are used up or exchanged as a result of a firm’s operating activities.

12.

The purpose of an income statement is to report the results of operations for a period. It does this by listing a firm's revenues and expenses for the period. The purpose of a statement of stockholders' equity is to report the events causing a change in stockholders' equity for a period. These events include owner investments and dividends and the earning of net income or net loss. The purpose of a balance sheet is to present a firm's assets, liabilities, and stockholders' equity on a given date. The purpose of a statement of cash flows is to report information about cash inflows and cash outflows during a period of time. The cash flows are grouped into three categories: operating activities, investing activities, and financing activities.

13.

A period-in-time statement presents financial information covering a specific period of time. These include the income statement, the statement of stockholders' equity, and the statement of cash flows.

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14.

A point-in-time statement presents financial information as of a specific date. An example is a balance sheet.

15.

$700,000 Assets - $220,000 Liabilities = $480,000 Stockholders' equity (300,000) Common stock $180,000 Retained earnings

16.

The following three aspects of the accounting environment may create ethical pressure on the accountant. (1) The output produced by accountants may have significant financial implications for one or more persons. Examples include calculation of a bonus amount or of income taxes owed. (2) Accountants have access to confidential, sensitive information, such as salary data, income tax returns, and details of various financial arrangements. (3) U.S. businesses tend to emphasize short-term profits, which may create pressure on accountants if management engages in unethical procedures to influence profits in the short run.

17.

The Management Discussion and Analysis (MD&A) section contain’s management’s interpretation of the company’s recent performance and financial condition and may also contain forward-looking statements about the company’s future opportunities and risks.

18.

An auditor’s report provides assurance to financial statement users that the data in the statements is fairly presented, and therefore, is likely to be useful for economic decisionmaking purposes.

19.

a. False. b. False. c. True. d. False.

The accounting process involves both measuring and communicating economic activities. Potential users internal management, taxing agencies, regulatory TESinclude TBANK SELLE R.COM agencies, investors, creditors, among others. Financial accounting is primarily used to communicate to outside users and managerial accounting is primarily used for internal communication. Because auditors are independent of the companies that they audit, their opinion helps to provide assurance to financial statement users that the information is fairly presented; however, they cannot guarantee that the financial statements are without error.

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SHORT EXERCISES SE1-1. Forms of Business Organization (LO1) a. Partnership b. Corporation c. Sole proprietorship

SE1-2. Accounting Processes (LO4) a. Communicating b. Measuring c. Measuring d. Communicating e. Measuring

SE1-3. Types of Statements (LO3) a. Investor b. Taxation authority c. Management d. Regulatory agency

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SE1-4. Accounting Organizations (LO4) a. FASB b. IASB

SE1-5. Business Activities (LO2) a. Operating b. Investing c. Operating d. Financing e. Financing f. Investing g. Operating h. Investing

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SE1-6. Financial Statement Items (LO5) a. BS b. IS c. SCF d. BS e. IS f. SCF g. IS, SRE h. BS

SE1-7. Annual Report Components (LO6) c. Details about potential new products to be introduced during the next year

SE1-8. Sarbanes-Oxley Act (LO3) c. A new statement of social responsibility

SE1-9. Financial Accounting and Generally Accepted Accounting Principles (LO4) 1. a. Provide comedy material for late-night talk shows.

TESTBANKSELLER.COM 2. b. A set of standards and procedures that form guidelines for international financial accounting. 3. c. Is a set of guidelines for preparing financial reports in the United States.

SE1-10. Cash Flow Activity Classification (LO2) 1. Financing 2. Operating 3. Investing 4. Operating 5. Financing 6. Operating

SE1-11. Using the Basic Accounting Equation (LO5) a. $40,000 b. $155,000 c. $25,000 increase

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SE1-12. Using the Basic Accounting Equation (LO5) a. $75,000 b. $140,000 c. $250,000

SE1-13. Financial Statements (LO5) a. Income Statement (IS) b. Balance Sheet (BS) and Statement of Cash Flows (CF) c. Statement of Cash Flows (CF) d. Statement of Stockholders’ Equity (SE) and Statement of Cash Flows (CF)

SE1-14. Financial Statements (LO5) a. Income Statement (IS) b. Balance Sheet (BS) and Statement of Cash Flows (CF) c. Statement of Cash Flows (CF) d. Statement of Retained Earnings (RE) and Statement of Cash Flows (CF)

SE1-15. Data Analytics (LO7) b. Computational techniquesTthat companies patterns, trends and associations EST BANKSEuse LLto ERreveal .COM in human behavior.

SE1-16. Blockchain (LO7) c. The ledger is distributed by mail.

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EXERCISES—SET A E1-1A. Forms of Business Organization (LO1) 1. Sole proprietorship and partnership (a & b) 2. Sole proprietorship (a) 3. Sole proprietorship and partnership (a & b) 4. Corporation (c) 5. Corporation (c)

E1-2A. Accounting Process (LO4) b. Identify c. Quantify a. Record

E1-3A. Types of Accounting (LO3) a. Managerial b. Tax c. Financial d. Combination as needed

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E1-4A. Corporate Social Responsibility (LO5) c. Competitive bottom line

E1-5A. Generally Accepted Accounting Principles (LO4) a. False b. False c. False d. True

E1-6A. Business Activities (LO2) a. Operating (O) b. Financing (F) c. Financing (F) d. Investing (I) e. Operating (O) f. Investing (I)

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E1-7A. The Accounting Equation (LO5) Stockholders’ Equity = $58,000 Assets = $63,000 Liabilities = $26,000

E1-8A. Determining Net Income (LO5) d. $8,000 net income

E1-9A. Determining Retained Earnings and Net Income (LO5) a. $57,000 b. $39,000 E1-10A. Determining Stockholders’ Equity (LO5) a. Stockholders’ equity = $124,000 b. Assets = $785,000

E1-11A. Financial Statements (LO5) TESTBANKSELLER.COM a. Balance Sheet b. Statement of Cash Flows c. Income Statement and the Statement of Stockholders’ Equity (or Statement of Retained Earnings) d. Statement of Cash Flows e. Balance Sheet f. Income Statement g. Balance Sheet h. Balance Sheet

E1-12A. Omitted Financial Statement Data (LO5) A. Sales revenue = $14,800 B. Liabilities = $18,000 C. Dividends = $7,000 D. Assets = $26,000

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E1-13A. Other Components of the Annual Report (LO6) a. Auditor’s report b. MD&A c. Notes to financial statements d. Not disclosed

E1-14A. Ethics (LO3) 1. (a) Pressure for a "good" number (b) The accountant should refuse to do it. 2. (a) Pressure to disclose confidential/ sensitive information (b) The accountant should not discuss the contract. 3. (a) Pressure to report good short-term profits (b) The accountant should not do it.

E1-15A. International Accounting Principles (LO4) a. International Accounting Standards Board (IASB) b. Improve the operation of the international capital market and reduce the financial reporting costs of multinational companies. TESTBANKSELLER.COM

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EXERCISES—SET B E1-1B. Forms of Business Organization (LO1) 1. c. Corporation 2. b. Partnership 3. c. Corporation 4. a. Sole proprietorship 5. c. Corporation

E1-2B. The Accounting Process (LO4) b. Identify a. Quantify c. Record

E1-3B. Types of Accounting (LO3) a. Managerial b. Tax c. Financial d. Combination as needed

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E1-4B. Corporate Social Responsibility (LO5) d. Efficiency bottom line

E1-5B. Generally Accepted Accounting Principles (LO4) a. True b. True c. True d. False

E1-6B. Business Activities (LO2) a. Operating (O) b. Financing (F) c. Financing (F) d. Investing (I) e. Operating (O) f. Investing (I)

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E1-7B. The Accounting Equation (LO5) Liabilities = $130,000 Stockholders’ Equity = $48,000 Assets = $89,000

E1-8B. Determining Net Income (LO5) d. $12,000 net income

E1-9B. Determining Retained Earnings and Net Income (LO5) a. Retained earnings = $53,000 b. Net income = $18,000 E1-10B. Determining Stockholders’ Equity (LO5) a. Stockholders’ equity = $450,000 b. Assets = $329,000

E1-11B. Financial Statements (LO5) TESTBANKSELLER.COM a. Balance Sheet b. Statement of Cash Flows c. Income Statement and the Statement of Stockholders’ Equity (or Statement of Retained Earnings) d. Statement of Cash Flows e. Balance Sheet f. Income Statement g. Balance Sheet h. Balance Sheet

E1-12B. Omitted Financial Statement Data (LO5) A. Sales revenue = $22,200 B. Liabilities = $27,000 C. Dividends = $4,500 D. Assets = $39,000

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E1-13B. Other Components of the Annual Report (LO6) a. Auditor’s report b. MD&A c. Notes to the financial statements d. Not disclosed

E1-14B. Ethics (LO3) 1. (a) Pressure to achieve a “good” number (b) Do not comply with the request. 2. (a) Pressure to reveal sensitive, confidential information (b) Do not comply with the request. 3. (a) Pressure to achieve short-run profits (b) Do not comply with the request.

E1-15B. International Accounting Principles (LO4) Two major benefits to the worldwide acceptance of a global set of international accounting principles include: 1. Makes it easier for companies that more TESTB ANraise KSELcapital LER.inCO M than one country by allowing investors to compare companies from different countries. 2. Reduces the cost of complying with different accounting standards since a multi-national company will be able to follow just one set of standards.

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PROBLEMS—SET A P1-1A. Forms of Business Organization (LO1) a. Sole proprietorship. The business doesn’t require any capital (corporation) nor does it require any partners with particular skills or expertise (partnership). b. Partnership. There is more than one owner but the business doesn’t require any new capital (corporation). c. Corporation. Capital formation will be important to bring the product to market plus limited liability will be needed to protect the personal assets of the three chemists. d. Corporation. New capital will be required to finance the expansion plus there will be liability exposure.

P1-2A. Financial Statements (LO5) a. Income statement. Stock prices are a function of future earnings. b. Balance sheet. This statement reveals any collateralizable assets.

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c. Statement of stockholders’ equity (or Statement of retained earnings). This statement shows the net income and dividends paid. d. Statement of cash flows. This statement shows the cash flows from operations, from investing, and from financing.

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P1-3A. Balance Sheet (LO5) NORMANDY CATERING SERVICE Balance Sheet May 31, 2019 Assets Cash ..................................................................... Accounts receivable ............................................. Supplies ............................................................... Equipment ............................................................ Total Assets ..................................................

$ 12,200 18,300 16,400 55,000 $101,900

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

5,200 20,000 $ 25,200

Stockholders' Equity Common stock .................................................... Retained earnings ............................................... Total Stockholders' Equity ............................. Total Liabilities and Stockholders' Equity ...........

$ 42,500 34,200 $ 76,700 $101,900

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P1-4A. Statement of Stockholders’ Equity and Balance Sheet (LO5) a. LYNCH JANITORIAL SERVICE, INC. Balance Sheets December 31, 2019 Assets Cash ...................................................................... Accounts receivable ............................................. Supplies ................................................................. Land ........................................................................ Building ................................................................... Equipment ............................................................. Total Assets .....................................................

2018

$ 23,000 42,000 20,000 40,000 250,000 43,000 $418,000

$ 20,000 33,000 18,000 40,000 260,000 45,000 $416,000

Liabilities Accounts payable .................................................. Mortgage payable ................................................. Total Liabilities .................................................

6,000 90,000 $ 96,000

$ 9,000 100,000 $109,000

Stockholders' Equity Common stock ...................................................... Retained earnings ................................................. Total Stockholders' Equity TEST............................... BANKSELLER.COM Total Liabilities and Stockholders' Equity ..............

$220,000 102,000 $322,000 $418,000

$220,000 87,000 $307,000 $416,000

b. LYNCH JANITORIAL SERVICE INC. Statement of Stockholders’ Equity For Year Ended December 31, 2019 Balance, December 31, 2018 Add: Net income Less: Dividends paid Balance, December 31, 2019

Common Stock $220,000

$220,000

Retained Earnings $87,000 25,000 10,000 $102,000

Total $307,000 25,000 10,000 $322,000

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P1-5A. Statement of Retained Earnings and Balance Sheet (LO5) a. HOUSE JANITORIAL SERVICE, INC. Balance Sheets December 31, 2019 Assets Cash ...................................................................... Accounts receivable ............................................. Supplies ................................................................. Land ........................................................................ Building ................................................................... Equipment ............................................................. Total Assets ..................................................... Liabilities Accounts payable .................................................. Mortgage payable ................................................. Total Liabilities ................................................. Stockholders' Equity Common stock ...................................................... Retained earnings ................................................. Total Stockholders' Equity TEST............................... BANKSELLER.COM Total Liabilities and Stockholders' Equity ..............

2018

$ 46,000 84,000 40,000 80,000 500,000 86,000 $836,000

$ 40,000 66,000 36,000 80,000 520,000 90,000 $832,000

12,000 180,000 192,000

$440,000 204,000 644,000 $836,000

$440,000 174,000 614,000 $832,000

18,000 200,000 218,000

b. HOUSE JANITORIAL SERVICE INC. Statement of Retained Earnings For Year Ended December 31, 2019 Balance, December 31, 2018 Add: Net income Less: Dividends paid Balance, December 31, 2019

$174,000 50,000 (20,000) $204,000

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P1-6A. Income Statement and Balance Sheet (LO5) a. DART DELIVERY SERVICE Income Statement For Month Ended March 31, 2019 Revenue Delivery fees earned ................................... Expenses Rent expense ............................................. Advertising expense .................................... Supplies expense ....................................... Salaries expense ........................................ Insurance expense ...................................... Miscellaneous expense .............................. Total Expenses ...................................... Net income ........................................................

$ 19,300 $1,500 900 2,700 6,300 800 200 12,400 $ 6,900

b. DART DELIVERY SERVICE Balance Sheet March 31, 2019 Assets Cash Accounts receivable Supplies

Total Assets

TESTBANKSELLER.COM $12,900 9,700 6,500

$29,100

Accounts payable Notes payable Total Liabilities

Liabilities $1,200 6,000 $7,200

Stockholders’ Equity Common stock 15,000 Retained earnings 6,900 Total Stockholders' Equity

$21,900

Total Liabilities and Stockholders' Equity

$29,100

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P1-7A. Statement of Cash Flows (LO5) a. MANTLE CORPORATION Statement of Cash Flows For Year Ended Dec. 31, 2019 Operating activities Cash collected from customers Cash paid for operating expenses Cash flow from operating activities

$ 330,000 (210,000)

Investing activities Cash purchase of equipment Cash flow for investing activities

( 27,000)

Financing activities Principal payments on notes payable Cash dividends paid Cash flow for financing activities Increase in cash

120,000

(27,000)

(47,000) (42,000) (89,000) $ 4,000

b. Mantle Corporation’s operations provided $120,000 of cash flow. This provided sufficient cash for Mantle to purchase make and pay a cash dividend. TEequipment, STBANKS ELLnote ER.payments, COM P1-8A. Ethics (LO3) 1. (a) Pressure to achieve a favorable outcome (b) The accountant should correct the inappropriate charges. 2. (a) Pressure to achieve a favorable outcome (b) The accountant should report the sales revenue in the year earned. 3. (a) Pressure to discuss confidential, sensitive information (b) The accountant should not discuss the contract.

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P1-9A. Income Statement, Statement of Stockholders’ Equity, and Balance Sheet (LO5) a. NAPOLEAN CORPORATION Income Statement For Year Ended December 31, 2019 Sales revenue $30,000 Expenses 18,000 Net income $12,000

NAPOLEAN CORPORATION Statement of Stockholders’ Equity For Year Ended December 31, 2019

Balance, January 1, 2019 Add: Net income Less: Dividends paid Add: Issuance of common stock Balance, December 31, 2019

Common Stock $0

30,000 $30,000

Retained Earnings $0 12,000 (4,500) ______ $7,500

Total $0 12,000 (4,500) 30,000 $37,500

NAPOLEAN CORPORATION TESTBBalance ANKSESheet LLER.COM December 31, 2019 Assets Cash Accounts receivable Inventory Building Equipment Total assets Liabilities and Stockholders’ Equity Liabilities Accounts payable Notes payable Total liabilities Stockholders’ Equity Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity

$ 2,250 3,750 4,500 60,000 22,500 $93,000

$ 6,000 49,500 55,500 30,000 7,500 37,500 $93,000

b. The dividend amount of $4,500 appears very large relative to the corporation’s earnings of $12,000 and remaining cash balance of $2,250. For young corporations such as Napolean, it may be wiser to retain this cash so that they have a cushion for unexpected events, or for additional opportunities.

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P1-10A. Income Statement, Statement of Stockholders’ Equity, Balance Sheet and Statement of Cash Flows (LO5) GREGG CORPORATION Income Statement For Year Ended December 31, 2019 Sales revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20,000 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . 12,000 Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,000 GREGG CORPORATION Statement of Stockholders’ Equity For Year Ended December 31, 2019 Common Retained Stock Earnings Balance, January 1, 2019. . . . . . . . . . . . . . . . . $ 0 $ 0 Add: Common stock issued. . . . . . . . . . . . . . . 20,000 Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000 Less: Dividends. . . . . . . . . . . . . . . . . . . . . . . . (3,000) Balance, December 31, 2019 $ 20,000 $ 5,000

Assets Cash Accounts receivable Inventory Building Equipment Total assets

Total $ 0 20,000 8,000 (3,000) $ 5,000

GREGG CORPORATION Balance Sheet December 31, 2019 TESTBANKSELiabilities LLER.COM $1,500 Accounts Payable $4,000 2,500 Notes payable 33,000 3,000 Total liabilities $37,000 40,000 Stockholders’ Equity 15,000 Common stock 20,000 $62,000 Retained earnings 5,000 Total stockholders’ equity 25,000 Total liabilities and stockholders’ equity $62,000

GREGG CORPORATION Statement of Cash Flows For Year Ended December 31, 2019 Cash flow from operating activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,500 Cash flow from investing activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (55,000) Cash flow from financing activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 Net increase in cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500 Cash at January 1, 2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 Cash at December 31, 2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,500

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P1-11A. Financial Statements and Other Components (LO5, LO6) 1. c. Balance Sheet 2. g. Auditor’s report 3. f. Notes to the Financial Statements 4. d. Statement of Cash Flows 5. a. Income Statement 6. e. Management Discussion and Analysis (MD&A) 7. b. Statement of Stockholders’ Equity

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PROBLEMS—SET B P1-1B. Forms of Business Organization (LO1) a. Sole proprietorship. No new capital is required (corporation) and no additional skills or expertise are needed (partnership). b. Partnership. No new capital is required (corporation) but there is more than one owner. c. Partnership. No new capital is required (corporation) but there is more than one owner. d. Corporation. New capital will be required to finance the expansion and there will be significant liability exposure to be avoided.

P1-2B. Financial Statements (LO5) a. Income statement. This statement reveals revenue growth over time. b. Balance sheet. Reveals the relative use of debt versus equity financing. c. Statement of stockholders’ equity (or Statement of Retained Earnings). Permits a comparison of dividends paid to net income. d. Statement of cash flow. Reveals the principal sources and uses of cash.

P1-3B. Balance Sheet (LO5)

TESTCONTRACTORS, BANKSELLER. COM BETTIS PLUMBING INC. Balance Sheet June 30, 2019 Assets Cash ....................................................................... Accounts receivable .............................................. Supplies .................................................................. Land ........................................................................ Equipment ............................................................... Total Assets ............................................................

$ 14,700 9,200 30,500 25,000 98,000 $177,400

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

8,900 30,000 $ 38,900

Stockholders' Equity Common stock ........................................................ Retained earnings ................................................... Total Stockholders' Equity .................................. Total Liabilities and Stockholders' Equity ...............

$100,000 38,500 $138,500 $177,400

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P1-4B. Statement of Stockholders’ Equity and Balance Sheet (LO5) a. JORDAN PACKAGING SERVICE Balance Sheets December 31, 2019 2018 Assets Cash ...................................................................... Accounts receivable .............................................. Supplies ................................................................. Equipment .............................................................. Total Assets ......................................................

$10,000 22,800 4,700 32,000 $69,500

$ 8,000 17,500 4,200 27,000 $56,700

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

$1,800 25,000 26,800

$1,600 25,000 26,600

Stockholders’ Equity Common stock ...................................................... Retained earnings ................................................. Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity .........

5,000 37,700 42,700 $69,500

5,000 25,100 30,100 $56,700

TESTBANKSELLER.COM b. JORDAN PACKAGING SERVICE Statement of Stockholders’ Equity For Year Ended December 31, 2019 Balance, December 31, 2018 Add: Net income Less: Dividends paid Balance, December 31, 2019

Common Stock $5,000 _____ $5,000

Retained Earnings $25,100 24,600 (12,000) $37,700

Total $30,100 24,600 (12,000) $42,700

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P1-5B. Statement of Retained Earnings and Balance Sheet (LO5) a. JACKSON PACKAGING SERVICE Balance Sheets December 31, 2019 2018 Assets Cash ...................................................................... Accounts receivable .............................................. Supplies ................................................................. Equipment ..............................................................

$20,000 45,600 9,400 64,000

$ 16,000 35,000 8,400 54,000

Total Assets ......................................................

$139,000

$113,400

$3,600 50,000 53,600

$3,200 50,000 53,200

Stockholders’ Equity Common stock ...................................................... Retained earnings ................................................. Total Stockholders’ Equity

10,000 75,400 85,400

10,000 50,200 60,200

$139,000

$113,400

TE STBANKSE LLE......... R.COM Total Liabilities and Stockholders’ Equity b. JACKSON PACKAGING SERVICE Statement of Retained Earnings For Year Ended December 31, 2019 Balance, December 31, 2018 Add: Net income Less: Dividends paid Balance, December 31, 2019

$50,200 49,200 (24,000) $75,400

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P1-6B. Income Statement and Balance Sheet (LO5) a. R. LEVY, INTERIOR DECORATOR Income Statement For Year Ended December 31, 2019 Revenue Decorating fees earned ................................. Expenses Supplies expense .......................................... Insurance expense ........................................ Advertising expense ...................................... Salaries expense ............................................ Rent expense ................................................. Miscellaneous expense ................................. Total Expenses ......................................... Net income ...........................................................

$67,600 $ 9,700 1,500 1,700 30,000 7,500 200 50,600 $17,000

b. R. LEVY, INTERIOR DECORATOR Balance Sheet December 31, 2019 Assets Cash Accounts receivable Supplies

Total Assets

TESTBANKSELLER.COM $ 17,700 10,600 6,100

$34,400

Accounts payable Notes payable Total Liabilities

Liabilities $ 1,800 4,000 $ 5,800

Stockholders’ Equity Common stock 11,600 Retained earnings 17,000 Total Stockholders' Equity

28,600

Total Liabilities and Stockholders’ Equity

$34,400

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P1-7B. Statement of Cash Flows (LO5) a. MAYS CORPORATION Statement of Cash Flows For Year Ended Dec. 31, 2019 Operating activities Cash collected from customers Cash paid for operating activities Cash flow from operating activities

$ 660,000 (420,000)

Investing activities Cash purchase of equipment Cash flow for investing activities

(127,000)

Financing activities Principal payments on note payable Cash dividends paid Cash flow for financing

(127,000) (84,000)

$240,000

(127,000)

Decrease in cash

(211,000) $ (98,000)

b. Mays Corporation’s operations generated $240,000 of cash, however this was not adequate to provide for both the $127,000 TESTBcash ANKused SELfor LEinvesting R.COM activities and the $211,000 cash used for financing activities.

P1-8B. Ethics (LO3) 1. (a) Pressure to achieve a favorable outcome (b) The accountant should correct the expense deduction. 2. (a) Pressure to achieve a favorable outcome (b) The accountant should properly report the revenue when earned. 3. (a) Pressure to divulge sensitive, confidential information (b) The accountant should not discuss employee salary data.

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P1-9B. Income Statement, Statement of Stockholders’ Equity, and Balance Sheet (LO5) a. WATSON & WATSON CORPORATION Income Statement For Year Ended December 31, 2019 Sales revenue Expenses Net income

$35,000 18,000 $17,000

WATSON & WATSON CORPORATION Statement of Stockholders’ Equity For Year Ended December 31, 2019

Balance, January 1, 2019 Add: Net income Less: Dividends paid Add: Issuance of common stock Balance, December 31, 2019

Common Stock $0

30,000 $30,000

Retained Earnings $0 17,000 (4,500) ______ $12,500

Total $0 17,000 (4,500) 30,000 $42,500

WATSON TEST&BWATSON ANKSELCORPORATION LER.COM Balance Sheet December 31, 2019 Assets Cash Accounts receivable Inventory Building Equipment Total assets Liabilities and Stockholders’ Equity Liabilities Accounts payable Notes payable Total liabilities Stockholders’ Equity Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity

$ 7,250 3,750 4,500 60,000 22,500 $98,000

$ 6,000 49,500 55,500 30,000 12,500 42,500 $98,000

b. The dividend amount of $4,500 appears very large relative to the corporation’s earnings of $17,000 and remaining cash balance of $7,250. For young corporations such as Watson & Watson, it may be wiser to retain this cash so that they have a cushion for unexpected events, or for additional opportunities. ©Cambridge Business Publishers, 2020 Solutions Manual, Chapter 1

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P1-10B. Income Statement, Statement of Stockholders’ Equity, Balance Sheet and Statement of Cash Flows (LO5) DEANS & HALE CORPORATION Income Statement For Year Ended December 31, 2019 Sales revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25,000 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . 17,000 Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,000 DEANS & HALE CORPORATION Statement of Stockholders’ Equity For Year Ended December 31, 2019 Common Retained Stock Earnings Balance, January 1, 2019. . . . . . . . . . . . . . . . . $ 0 $ 0 Add: Common stock issued. . . . . . . . . . . . . . . 20,000 Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000 Less: Dividends. . . . . . . . . . . . . . . . . . . . . . . . (3,000) Balance, December 31, 2019 $ 20,000 $ 5,000

Assets Cash Accounts receivable Inventory Building Equipment Total assets

Total $ 0 20,000 8,000 (3,000) $ 5,000

DEANS & HALE CORPORATION Balance Sheet December 31, 2019 TESTBANKSELiabilities LLER.COM $1,500 Accounts Payable $4,000 2,500 Notes payable 43,000 3,000 Total liabilities $47,000 50,000 Stockholders’ Equity 15,000 Common stock 20,000 $72,000 Retained earnings 5,000 Total stockholders’ equity 25,000 Total liabilities and stockholders’ equity $72,000 DEANS & HALE CORPORATION Statement of Cash Flows For Year Ended December 31, 2019

Cash flow from operating activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,500 Cash flow from investing activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (55,000) Cash flow from financing activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 Net increase in cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500 Cash at January 1, 2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 Cash at December 31, 2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,500

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P1-11B. Financial Statements and Other Components (LO5, LO6) 1. c. Balance Sheet 2. g. Auditor’s report 3. f. Notes to the Financial Statements 4. d. Statement of Cash Flows 5. a. Income Statement 6. e. Management Discussion and Analysis (MD&A) 7. b. Statement of Stockholders’ Equity

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SERIAL PROBLEM: ANGEL CITY GREETINGS SP1. a. Sole proprietorship. Kate does not require any capital formation (corporation) nor does she need any additional expertise (partnership). b. Since Kate has few assets, the key information for her will be revenues and expenses on the income statement and carefully managing her cash flows via her statement of cash flow. c. Kate’s asset accounts will involve cash, accounts receivable (assuming that she extends trade credit to her customers), inventory, and her iMac as her equipment. Her revenues will be from card sales and any fees that she charges for card design classes, while her expenses will be principally materials used to create cards, depreciation on her iMac, and income taxes. d. Kate should set up a separate bank checking account for her business to facilitate her cash management of her expenses for school versus for her business.

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EXTENDING YOUR KNOWLEDGE REPORTING AND ANALYSIS EYK1-1. Financial Reporting Problem: Columbia Sportswear Company a . Columbia’s total assets increased by $199.0 million from 2016 to 2017. b. Columbia’s cash and cash equivalents account increased by $121.8 million from 2016 to 2017. The company ended fiscal-year 2017 with a cash and cash equivalents balance of $673.2 million. c. Accounts receivable at year-end 2017 totaled $364.9 million, whereas accounts payable ended the year at $252.3 million. This could suggest that Columbia is having difficulty collecting from its credit customers in a timely manner. d. Sales revenue increased by $89.1 million from 2016 to 2017. e.

Net income for 2017 was $105.1 million, and that figure is down 86.8 million from 2017.

EYK1-2. Comparative Analysis Problem: Columbia Sportswear Company vs. Under Armour, Inc. Columbia Under Armour 1. a. b. c. d.

Total assets $2,212.9 million Sales TESTBANKSEL2,466.1 LER.million COM Net income 105.1 million Cash flow from operations 341.1 million

$ 4,006.4 million 4,976.6 million (48.3) million 234.1 million

2. Based on 2017 comparable financial data, Under Armour is larger than Columbia when measured in terms of total assets and in terms of sales revenue. Under Armour is less profitable in terms of net income and in terms of generating cash flow from operations.

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EYK1-3. Business Decision Problem a. $285,000 Assets - $45,000 Liabilities = $240,000 Net Assets. $72,000 Average Annual Income / $240,000 Investment = 30 percent return. Seale's return would be 24 percent ($72,000 Average Annual Income / $300,000 Investment), assuming no adjustment is made for salary. (See part b.) b. No. Withdrawals do not affect net income, since they are not part of the firm's operating activities. However, in calculating Krey's return in part a, Seale might wish to "impute" an amount for Krey's half-time work in computing Krey's return on investment. Thus, if Seale believes that Krey's services are worth $18,000 (half of the $36,000 salary he expects to pay a full-time manager), annual income should be calculated at $54,000 instead of $72,000. If Seale hires a full-time manager at $36,000, his return will be only 12 percent [($72,000 $36,000)/$300,000]. c. Yes, the difference between net income shown in the financial statements and net income shown on the tax return can be legitimate, since income tax rules for determining revenues and deductions from revenues may differ from generally-accepted accounting principles. Seale may obtain additional assurance about the propriety of the financial statements by engaging a licensed professional accountant to audit the financial statements and render a report on them. Tax preparers usually prepare a statement reflecting how the taxable income was arrived at as compared to the financial statements. This document would also provide assurances.

EYK1-4. Financial Analysis Problem a. Columbia’s financial statements Deloitte TESTwere BANaudited KSELLbyER .COM& Touche LLP. b. 2017 net income totaled $105.1 million versus $191.9 million in 2016. c. The cash flow from financing in 2017 was $84.4 million cash outflow. The principal use of cash for financing was the payment of dividends and repurchases of common stock. d. Accrued liabilities totaled $182.2 million in 2017 and was composed of accrued salaries ($79.5 million), accrued import duties ($12.4 million), accrued product warranty ($12.3 million), and other accrued liabilities ($78.1 million). e. Columbia reports that its significant estimates involved revenue recognition, the allowance for doubtful accounts, inventory, product warranty, long-lived and intangible assets, incomes taxes, and stock-based compensation. f.

Columbia rounds its financial data to the nearest thousand dollars.

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CRITICAL THINKING EYK1-5. Accounting Research Problem a. 1. General Mills uses the corporate form of business organization. The balance sheets for General Mills present a stockholders’ equity section with common stock and retained earnings categories. These are the label and categories that characterize the balance sheet of a corporation. Also, the title of the company is “General Mills, Inc.” with Inc. referring to being incorporated. 2. The date of the most recent balance sheet presented is May 28, 2017. 3. Goodwill, at $8,747.2 million, represents the largest asset reported on the May 28, 2017, balance sheet. The largest liability reported is long-term debt at $7,642.9 million. b. 1. The time period covered by the most recent statement of earnings is the fiscal year ended May 28, 2017. 2. General Mills reported sales revenues of $15,619.8 million for the fiscal year ended May 28, 2017. Sales revenues decreased $943.3 million from the prior fiscal year. 3. Net earnings of $1,657.5 million are reported for the fiscal year ended May 28, 2017. This represents a decrease of $39.9 million from the net earnings for the preceding fiscal year. c. 1. For the fiscal year ended May 28, 2017, the net cash provided by operating activities was $2,313.3 million, and this figure was lower than in fiscal 2016.

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2. For the fiscal year ended May 28, 2017, the net cash used by investment activities was $646.9 million. In the prior fiscal year, net cash of $93.4 million was provided by investment activities 3. For the fiscal year ended May 28, 2017, the net cash used by financing activities was $1,645.5 million, and this figure was lower than in fiscal 2016.

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EYK1-6. Accounting Communication Activity a. NEWBY COMPANY Balance Sheet December 31, 2019 Assets Cash Accounts receivable Inventory Equipment Total

$15,000 30,000 20,000 28,000 $93,000

Liabilities and Stockholders' Equity Accounts payable $22,000 Notes payable 38,000 Common stock 10,000 Retained earnings 23,000 Total $93,000

b. Memo to Jasper Your balance sheet included the following errors: 1. Accounts payable is not an asset but a liability. 2. Inventory is not a liability but an asset. 3. Retained earnings is calculated as follows: Retained earnings, Jan. 1, 2019 .................. Add: Net income ........................................... Less: Dividends paid .................................... Retained earnings, Dec. 31, 2019 ...............

$10,000 24,000 11,000 $23,000

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c. (Would be included in the memo) The purpose of a balance sheet is to report a company’s assets, liabilities, and stockholders’ equity as of a given date.

EYK1-7. Accounting Ethics Case It is important for a CPA to be independent when performing audit services because third parties will be relying on the audited financial statements in making decisions. The financial statements are the representations of the corporation's management. The audit by a CPA adds credibility to the financial statements. Only if third parties believe that the CPA is independent will a CPA be able to add credibility to financial statements. Jack is not independent for three reasons: (1) His brother is president and chair of the board of directors of the company to be audited. (2) Jack is on the board of directors of the company to be audited. (3) Jack does consulting work for the company. Under the Sarbanes-Oxley Act, CPAs can no longer remain independent if they engage in consulting work, however Jack's other activity for the company—tax work—does not impair a CPA's independence. This last point may generate some discussion, particularly in this case when the potential auditor is the same person (Jack) who is doing the tax work. Usually, when the same CPA firm does both auditing and tax work, different persons do the audit than do the tax work.

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EYK1-8. Corporate Social Responsibility Problem a. “At Columbia Sportswear, we are committed to building a company of which we can all be proud – not only of the innovative products we create and the financial results we achieve, but the manner in which we achieve them. Whether it’s responsible sourcing, giving back to our communities, or reducing our environmental impact, we believe corporate responsibility is a companywide effort.” b. “We are committed to exploring ways to design products efficiently so that they require less raw materials and fewer components, use less water and energy to manufacture and assemble, are safer for the environment, produce minimal waste, and come from ethical, humane resources. We take a holistic lifecycle approach to measuring and managing production-based sustainability performance.” c. Columbia is participating in the HERproject, (Health Enables Returns), which provides health education for female factory workers in developing countries and links women’s health to business value. Columbia started a program called ReThreads, a clothing and footware recyling program, which is designed to keep their products out of landfills once they are no longer wearable. d. It’s the corporate culture of individuals who founded the company, but it is also good business.

EYK1-9. Forensic Accounting Problem a. Some sample engagements: money laundering, insurance fraud, employee fraud investigations, contract and TEprocurement STBANKSfraud, ELLEasset R.Cmisappropriation. OM b. Some skills: attention to detail, analytical, objective, integrity, objectivitiy, independence, credibility, verbal and written communication skills. c. This textbook provides a basic understanding of double-entry accounting and the basic financial statements, which is required knowledge for a forensic accountant.

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EYK1-10. Working with the takeaways a. You should request an annual report from Columbia Sportswear containing the income statement, the statement of retained earnings, the balance sheet, and a statement of cash flows. Alternatively, you can download this data directly from the company’s Website or from the SEC site. b. It is important that these statements be audited by an independent auditor such as Deloitte and Touche, the auditors of Columbia’s financial statements. The auditor is able to provide a level of assurance that the financial statements are presented fairly and can be relied upon for investment decision-making purposes. c. Each of the four financial statements provides different information that, taken together, provides a more complete view of the financial condition and operating performance of the company. The income statement reports revenues and expenses—that is, information regarding the company’s profitability. The statement of retained earnings provides information regarding the company’s decision as to how much net income will be distributed to its stockholders and how much will be retained in the company to fund future growth. The balance sheet reports Columbia’s assets, liabilities, and stockholders’ equity to help you evaluate the company’s financial position. Finally, the statement of cash flows reports the company’s sources and uses of cash to help you determine the company’s ability to generate future cash flow and details how those cash flows are likely to be used.

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Chapter 2 Processing Accounting Information QUESTIONS 1.

The five major steps in the accounting cycle are: 1. Analyze. Analyze transactions from source documents. 2. Record. Journalize transactions. 3. Adjust. Journalize adjusting entries. 4. Report. Prepare financial statements. 5. Close. Journalize closing entries.

The fiscal year is the annual accounting period adopted by a firm. A firm using a fiscal year ending on December 31 is on a calendar-year basis.

TESTBthat ANK SELLEbusiness R.COMtransactions are invoices sent to Examples of source documents underlie customers, invoices received from suppliers, bank checks, bank deposit slips, cash receipt forms, and written contracts.

a. b. c. d.

Purchase inventory using cash: Increase inventory, decrease cash Make a payment on account: Decrease accounts payable, decrease cash Pay employee salaries: Decrease cash, increase salary expense Borrowed money from a bank: Increase cash, increase note payable

a. b. c. d. e. f. g.

No effect No effect Decrease stockholders’ equity (retained earnings) No effect Increased stockholders’ equity (common stock) Increased stockholders’ equity (revenue) Increased stockholders’ equity (revenue)

No. Without knowing how much cash is on hand, it is impossible to determine whether a dividend of $80,000 can be paid by the company.

Retained earnings is $180,000 [$700,000 - $220,000 - $300,000] on December 31.

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Account Professional Fees Earned Accounts Receivable Accounts Payable Cash Common Stock Advertising Expense Supplies Dividends

Type Revenue Asset Liability Asset Stockholders’ equity Expense Asset Stockholders’ equity

A chart of accounts is a list of the accounts appearing in the general ledger, with the account numbering system indicated. Normally the accounts are classified as asset, liability, stockholders’ equity, revenue, and expense accounts, and often the numbering system identifies the account classification. For example, a coding system might assign the numbers 100–199 to assets, 200–299 to liabilities, and so on.

10.

A balance sheet may be in balance but still in error because of recording errors in the ledger accounts. For example, a cash sale in the amount of $1,000 may have been erroneously entered in the ledger as an increase of $100 in cash and sales. The trial balance would still balance because the entered debit and credit were of the same amount.

11.

It is possible for a transaction to only impact the left side of the basic accounting equation. An example is the collection of accounts receivable, which increases Cash and decreases Accounts Receivable.

12.

No. This transaction has no impact on any of the basic accounting equation components; consequently, no entry would be recorded until the asset was received or cash paid.

13.

An account is an individual record of increases and decreases in specific assets, liabilities, and stockholders’ equity.

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SHORT EXERCISES SE2-1. The Accounting Cycle (LO1) b. Analyze; record; adjust; report; close

SE2-2. Analyze a Transaction (LO2) a. Increase Cash and increase Common stock b. Increase Cash and increase Note payable c. Increase Accounts Receivable and increase Revenue d. Increase Inventory and increase Accounts payable e. Increase Cash and decrease Accounts receivable

SE2-3. Determine a Transaction (LO2) The transaction was a sale of goods on account.

SE2-4. Determine the Cash Balance (LO2) $9,500 = [$10,000 + $5,000 - $3,500 - $2,000]

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SE2-5. Recording Transactions with the Accounting Equation (LO2) BALANCE SHEET

Assets 1 2 3 4 5

Liabilities

100,000 -30,000 25,000 -2,500 -1,200

INCO M E STATE M E NT +

Stockholders' Equity

Revenues

−

Expenses

= Net Income

100,000 -30,000 25,000 -2,500 -1,200

1,200

-1,200

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SE2-6. Recording Transactions with the Accounting Equation (LO2) BALANCE SHEET

Assets 1 2 3 4

-100,000 100,000 10,000 21,000 -21,000 -15,000

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

Revenues

−

Expenses

= Net Income

10,000

-15,000

Note that transactions 1 and 3 both increase and decrease assets.

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EXERCISES – SET A E2-1A. Accounting Equation (LO2) a. Stockholders' Equity = $115,000 b. Assets = $60,000 c. Liabilities = $41,000

E2-2A. Transaction Analysis (LO2) (a) Increase assets (Office Equipment) Decrease assets (Cash) (b. Increase assets (Accounts Receivable) Increase stockholders’ equity (Sales Revenue) (c) Decrease stockholders’ equity (increase Rent Expense) Decrease assets (Cash) (d) Increase assets (Cash) Increase stockholders’ equity (Sales Revenue) (e) Increase assets (Cash) TEReceivable) STBANKSELLER.COM Decrease assets (Accounts (f) Increase assets (Office Furniture) Increase liabilities (Accounts Payable) (g) Decrease stockholders’ equity (increase Salaries Expense) Decrease assets (Cash) (h) Decrease liabilities (Accounts Payable) Decrease assets (Cash) (i) Decrease stockholders’ equity (increase Dividends) Decrease assets (Cash)

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E2-3A. Analysis of Accounts (LO2) (a) $4,550 ($5,250 + $5,400 -$6,100) (b) $15,700 ($8,500 + $16,500 -$9,300) (c). $25,000 ($15,000 + $30,000 -$20,000) (d) $1,340 ($1,720 + $2,900 -$3,280) (e) $9,000 ($46,000 - $5,000 -$32,000)

E2-4A. Transaction Analysis (LO2) (a) Dollar amount of services performed for clients on account. (b) Dollar amount collected from clients on account. (c) Funds borrowed in exchange for written promissory note to repay. (d) Dollar amount of office equipment purchased. (e) Amount paid to suppliers on account. TESTBANKSELLER.COM (f) Amount purchased from suppliers on account. (g) Amount of revenue earned by providing services for clients (h) Dividends paid by the firm. (i) Amount of capital invested in the common stock of the firm. (j) Amount of wage expense incurred. E2-5A. Transaction Analysis (LO2) (1) a. Increase an asset (2) k. Increase an expense (3) g. Increase dividends (4) c. Decrease a liability (5) c. Decrease a liability (6) k. Increase an expense (7) a. Increase an asset (8) a. Increase an asset

d. Increase a liability b. Decrease an asset b. Decrease an asset b. Decrease an asset b. Decrease an asset d. Increase a liability d. Increase a liability f. Increase common stock

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E2-6A. Transaction Analysis (LO2) ASSETS

= LIABILITIES +

STOCKHOLDERS' EQUITY Retained Earnings

1 2 3 6 11 17 19 25 30 30

Accounts Cash Receivable 12,000 -950

Supplies

Office Equipment =

6,400 -1,800 3,250 -3,000 -2,000 -350 -2,500 4,650

3,800

Accounts Payable

Common Stock + Revenue - Expense 12,000 950

Dividend

6,400 2,000

4,700 -3,250

4,700 -3,000 2,000 350 2,500

1,450

3,800

6,400 =

5,400 +

12,000 +

4,700 -

3,800 -

16,300 =

2,000 16,300

E2-7A. Source Documents (LO3) Transaction Date Source Document June 1 Investor's check, bank deposit slip 2 Bank check, lease contract 3 Seller's invoice 6 Seller's invoice, check TES TBANbank KSEL LER.COM 11 Invoices to customers 17 Client's checks, bank deposit slip 19 Seller's invoice, bank check 25 Bank check 30 Seller's invoice, bank check 30 Payroll records, bank checks

E2-8A. Transaction Analysis Template (LO2) BALANCE SHEET

Assets a b c d

10,000 12,000 -1,600 8,000 -8,000

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

Revenues

−

Expenses

= Net Income

10,000 12,000 -1,600

12,000 1,600

12,000 -1,600

Note that transaction (d) both increased and decreased assets.

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E2-9A. Transaction Analysis Template (LO2) BALANCE SHEET

Assets a

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

Revenues

Expenses

−

= Net Income

-4,000 4,000 50,000

b c d

50,000 800

-800 -25,000

-25,000

800

-800

Note that transaction (a) both increased and decreased assets.

E2-10A. Transaction Analysis (LO2) (1) a. Increase an asset (2) a. Increase an asset (3) k. Increase an expense (4) a. Increase an asset (5) a. Increase an asset (6) a. Increase an asset (7) c. Decrease a liability (8) k. Increase an expense (9) a. Increase an asset

f. Increase common stock d. Increase a liability b. Decrease an asset b. Decrease an asset d. Increase a liability j. Increase a revenue Tb.EDecrease STBANKan SEasset LLER.COM b. Decrease an asset b. Decrease an asset

E2-11A. Transaction Analysis (LO2) ASSETS

= LIABILITIES +

STOCKHOLDERS' EQUITY Retained Earnings

1 2 3 4 5 6 7 8 9 10

Cash 19,500

Legal Accounts Office Database Receivable Equipment Subscription = 10,400

-700 -9,600

Accounts Payable

Common Stock + Revenue - Expense 19,500

10,400 700 9,600

11,300 -6,000 -2,800 9,400

Dividend

11,300 -6,000 2,800

-9,400 180

180

-1,500 8,300

1,500 1,900

10,400

9,600

4,580

+ 19,500

+ 11,300

3,680

30,200 =

1,500 30,200

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E2-12A. Transaction Analysis (LO2) ASSETS

= LIABILITIES +

STOCKHOLDERS' EQUITY Retained Earnings

1 2 3 4 5 6 7 8 9

Accounts Cash Receivable 20,000 -1,100

Supplies

Office Equipment

2,900 -1,700

Accounts Payable

Common Stock + Revenue - Expense 20,000 1,100

2,900

1,700 7,300

-1,950 -1,500 5,800 -2,200

17,350

Dividend

7,300 1,950 -1,500

-5,800 2,200

1,500

1,700

2,900 =

1,400

20,000

7,300

3,050

23,450 =

2,200 23,450

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EXERCISES – SET B E2-1B. Accounting Equation (LO2) a. Stockholders' Equity = $315,000 b. Assets = $82,000 c. Liabilities = $89,000

E2-2B. Transaction Analysis (LO2) (a) Increase assets (Office equipment) Decrease assets (Cash) (b) Increase assets (Accounts receivable) Increase stockholders’ equity (Sales revenue) (c) Decrease stockholders’ equity (Increase Utilities expense) Decrease assets (Cash) (d) Increase assets (Cash) Increase stockholders’ equity (Sales revenue) (e) Increase assets (Cash) TESTBANKSELLER.COM Decrease assets (Accounts receivable) (f) Increase assets (Office equipment) Increase liabilities (Accounts payable) (g) Decrease stockholders’ equity (Increase Salaries expense) Decrease assets (Cash) (h) Decrease liabilities (Accounts payable) Decrease assets (Cash) (i) Decrease stockholders’ equity (Increase Dividends) Decrease assets (Cash)

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E2-3B. Analysis of Accounts (LO2) (a) $2,550 ($5,400 + $5,250 - $8,100) (b) $17,700 ($10,500 + $16,500 -$9,300) (c) $27,000 ($17,000 + $30,000 -$20,000) (d) $340 ($5,280 -1,720 - $3,900) (e) $7,000 ($46,000 - $5,000 -$34,000)

E2-4B. Transaction Analysis (LO2) (a) Dollar amount of services performed for clients on account (b) Dollar amount collected from clients on account (c) Funds received for additional promissory note payable (d) Dollar amount of office equipment purchased (e) Amount paid to suppliers on account (f) Amount purchased from suppliers TESTBon ANaccount KSELLER.COM (g) Amount of revenue earned by providing services for clients (h) Dividends declared by the firm (i) Amount of capital invested in the common stock of the firm (j) Amount of wage expense incurred

E2-5B. Transaction Analysis (LO2) (1) a. Increase an asset (2) k. Increase an expense (3) g. Increase dividends (4) c. Decrease a liability (5) c. Decrease a liability (6) k. Increase an expense (7) a. Increase an asset (8) k. Increase an expense (9) a. Increase an asset

d. Increase a liability b. Decrease an asset b. Decrease an asset b. Decrease an asset b. Decrease an asset d. Increase a liability d. Increase a liability b. Decrease an asset f. Increase common stock

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E2-6B. Transaction Entries (LO2) ASSETS

LIABILITIES

STOCKHOLDERS' EQUITY Retained Earnings

1 2 3 3 4 7 21 23 28 29 30 30

Accounts Cash Receivable 9,000 -2,850 10,000 -2,500 -4,300 -350 3,500 -3,000 2,300 -2,300 -1,000 -1,750 -95 5,455

1,200

Supplies

Prepaid Van lease

Equipment

Accounts Payable

Notes Payable

Common Stock + 9,000

Revenue

Expense

Dividend

2,850 10,000 5,500

3,000

4,300 350 3,500 -3,000 1,000 1,750 95 4,300

2,850

5,500 =

10,000 +

9,000 +

3,500 -

2,195 -

1,000

19,305 =

19,305

E2-7B. Source Documents (LO3) April 1 Bank deposit slip, owner's check 2 Bank check, lease contract 3 Check from bank, promissory note 3 Seller's invoice, bank check 4 Seller's invoice, bank check 7 Seller's invoice, TESbank TBAcheck NKSELLER.COM 21 Invoices to customers 23 Bank check 28 Customers' checks, bank deposit slip 29 Bank check 30 Bank checks, payroll records 30 Seller's invoice, bank check

E2-8B. Transaction Analysis Template (LO2) BALANCE SHEET

Assets a b c d

-8,000 6,000 -1,800

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

Revenues

−

Expenses

= Net Income

-8,000

-400

6,000 -1,800 -400

6,000 1,800

6,000 -1,800

400

-400

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E2-9B. Transaction Analysis Template (LO2 BALANCE SHEET

Assets a b c d

Liabilities

-4,000 4,000 -5,000

INCO M E STATE M E NT +

Stockholders' Equity

-5,000 600

Revenues

Expenses

−

-600 -30,000

-30,000

= Net Income

600

-600

Note that transaction (a) both increased and decreased assets.

E2-10B. Transaction Analysis (LO2) (1) a. Increase an asset (2) a. Increase an asset (3) k. Increase an expense (4) a. Increase an asset (5) a. Increase an asset (6) a. Increase an asset (7) c. Decrease a liability (8) k. Increase an expense (9) a. Increase an asset

f. Increase common stock d. Increase a liability b. Decrease an asset b. Decrease an asset d. Increase a liability j. Increase a revenue b. Decrease an asset b. Decrease an asset Tb.EDecrease STBANKan SEasset LLER.COM

E2-11B. Transaction Analysis (LO2) ASSETS

= LIABILITIES +

STOCKHOLDERS' EQUITY Retained Earnings

1 2 3 4 5 6 7 8 9 10

Cash 20,000

Legal Accounts Office Database Receivable Equipment Subscription = 12,400

-700 -11,600

Accounts Payable

Common Stock + Revenue - Expense 20,000

12,400 700 11,600

11,300 -6,000 -2,800 9,400

Dividend

11,300 -6,000 2,800

-9,400 180

180

-2,000 6,300

2,000 1,900

12,400

11,600 =

6,580

20,000

11,300

3,680

32,200 =

2,000 32,200

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E2-12B. Transaction Analysis (LO2) ASSETS

= LIABILITIES +

STOCKHOLDERS' EQUITY Retained Earnings

1 2 3 4 5 6 7 8 9

Accounts Cash Receivable 25,000 -1,500

Supplies

Office Equipment

2,900 -1,900

Accounts Payable

Common Stock + Revenue - Expense 25,000 1,500

2,900

1,900 7,300

-1,950 -1,500 5,800 -3,000

20,950

Dividend

7,300 1,950 -1,500

-5,800 3,000

1,500

1,900

2,900 =

1,400 +

25,000 +

7,300 -

3,450 -

27,250 =

3,000 27,250

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PROBLEMS—SET A P2-1A. Transaction Analysis (LO2) (a) Collected $6,500 cash on accounts receivable. (b) Purchased $400 of supplies on account. (c) Sold $7,000 in goods and services on account. (d) Paid $800 on accounts payable. (e) Paid cash dividends of $4,900 to shareholders. (f) Paid $300 cash for supplies. (g) Took out a $1,200 loan at a bank, signing a note payable.

P2-2A. Transaction Analysis (LO2) a. Total assets = $18,500 = Total liabilities + Stockholders’ Equity. b. (2) Borrowed $2,000, signing a note payable. (3) Collected $6,100 on accounts receivable. (4) Purchased $980 in supplies on account. (5) Provided $6,800 in services on account. (6) Paid $300 on accounts payable. (7) Provided $1,500 in services and the TESTB ANcollected KSELLE R.cash. COM (8) Paid an $800 cash dividend OR paid $800 of an expense.(ie rent expense) (9) Purchased $750 of office equipment for cash. (10) Paid $2,500 towards settlement of the outstanding note payable. c. Total assets = $26,180 = Total liabilities + Stockholders’ Equity.

P2-3A. Transaction Analysis (LO2) a. & b.

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

Cash

$9,700 - 950 + 8,800 - 500 + 1,600 + 5,000

+ + + + + + + + + + + + +

- 4,000 - 6,000 - 9,800 - 50 $3,800

Accounts receivable $14,800 - 8,800

+ 8,100

$14,100 $27,700

+ + + + + + + + + + + + + +

Van $0

+ 9,800 $9,800

= = = = = = = = = = = = = = =

Accounts payable $600

-500

+ 410

$510

+ + + + + + + + + + + + + +

Notes payable $2,500

+ + + + + + 5,000 + + + + + + + $7,500 + $27,700

Common stock $18,400

$18,400

+ + + + + + + + + + + + + +

Retained earnings $3,000 - 950

+ 1,600 + 8,100 - 4,000 - 410 - 6,000 - 50 $1,290

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P2-4A. Transaction Analysis (LO2) a. & b. Cash 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

$50,000 - 4,800 -900 - 1,800 + 22,700 - 1,500 + 13,200 - 16,000 - 3,000 $57,900

Accounts receivable

+ 15,900

= = = = = = = = = = = = =

+ + + + + + + + + + + + +

- 13,200

$2,700

Accounts payable

+ 1,600

- 1,500

+ 3,500 $3,600

+ + + + + + + + + + + + + +

Common stock $50,000

$50,000

+ + + + + + + + + + + + + +

Retained earnings - 4,800 - 1,600 -900 - 1,800 + 22,700 + 15,900

- 16,000 - 3,500 - 3,000 $7,000

P2-5A. Accounting Equation (LO2) a. [$450,000 - $326,000] = $ 124,000 b. [$618,000 - $225,000 - $165,000] = $228,000 c. [$400,000 + $200,000 + $185,000] = $785,000

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P2-6A. Transaction Analysis (LO2) (a) Increase assets (Cash) Increase stockholders’ equity (Revenue) (b) Increase assets (Office supplies) Increase liabilities (Accounts payable)

(c) Increase assets (Cash) Increase stockholders’ equity (Common stock) (d) Decrease liabilities (Accounts payable) Decrease assets (Cash) (e) Increase assets (Cash) Increase liabilities (Notes payable) (f) Increase assets (Accounts receivable) Increase stockholders’ equity (Revenue) (g) Increase assets (Office equipment) Decrease assets (Cash) (h) Decrease stockholders’ equity (increase Interest expense) Decrease assets (Cash) (i) Decrease stockholders’ equity (increase Utilities expense) Increase liabilities (Accounts payable)

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P2-7A. Transaction Analysis Template (LO2) BALANCE SHEET

Assets a b

Liabilities

6,000

INCO M E STATE M E NT +

Stockholders' Equity

Revenues

−

Expenses

= Net Income

6000

-2,000 2,000

c d

3,500

-5,000 5,000

e f

1,000 500

1,000

-500

Note that transactions (b), (d) and (f) both increased and decreased assets.

P2-8A. Determination of Omitted Financial Statement Data (LO2) A. [$12,700 - $ 9,400] = $3,300 (Net change in Stockholders’ Equity) [$3,300 - $2,000 + $5,000] = $6,300 (Net income) [$8,500 + $6,300] = $14,800 (Revenues) B. [$28,000 - $21,000] = $7,000 (Net income) TE(Change STBANinKS ELLEREarnings) .COM [$7,000 - $1,500] = $5,500 Retained [$5,500 + $4,500] = $10,000 (Change in Stockholders’ Equity) [$7,000 + $10,000] = $17,000 (Stockholders’ Equity, ending) [$26,000 - $17,000] = $9,000 (Liabilities, ending) C. [$19,000 - $9,000] = $10,000 (Change in Stockholders’ Equity) [$18,000 - $11,000] = $7,000 (Net income) [$7,000 - $1,000] = $6,000 (Change in Retained Earnings) [$10,000 - $6,000] = $4,000 (Sales of Common Stock) D. [$24,000 - $17,000 - $6,500] = $ 500 (Change in Retained Earnings) [$500 + $3,500] = $4,000 (Change in Stockholders’ equity) [$21,000 - $4,000] = $17,000 (Stockholders’ Equity, beginning) [$17,000 + $9,000] = $26,000 (Assets, beginning)

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P2-9A. Transaction Analysis (LO2) a. [$3,500 + $5,200 + $820 + $9,000] = $18,520 (Total assets) [$3,000 + $600 + $10,920 + $4,000] = $18,520 (Total liabilities plus stockholders’ equity) b. Line 2: Purchased supplies on account for $670. Line 3: Purchased equipment for $5,000, giving a note payable. Line 4: Collected $4,200 on accounts receivable. Line 5: Provided consulting services and billed clients, $7,800. Line 6: Paid $600 on accounts payable. Line 7: Purchased $200 in supplies for cash. Line 8: Paid cash dividend of $4,600 OR paid cash for an expense (ie, rent expense). Line 9: Borrowed $2,000 cash from a bank, giving a note payable. Line 10: Purchased common stock with $750 of equipment. c. [$4,300 + $8,800 + $1,690 + $14,750] = $29,540 (Total assets) [$10,000 + $670 + $11,670 + $7,200] = $29,540 (Total liabilities plus stockholders’ equity)

P2-10A. Transaction Analysis (LO2) a. & b. Cash

$4,400

+ + + + + + + + + + + + +

1. - 800 2. + 4,500 3. + 2,000 4. 5. - 400 6. 7. - 3,800 8. - 430 9. - 2,600 10. - 1,400 - 30 11. $1,440

Accounts receivable $6,900

Equipment

Accounts payable

$0KS = ELLE$600 T+ESTBAN R.CO+ M

- 4,500 + 9,500

$11,900 $14,740

+ + + + + + + + + + + +

+ 1,400 $1,400

= = = = = = = = = = = = =

- 400 + 550

$750

+ + + + + + + + + + + +

Notes payable $1,500

+ + + + 2,000 + + + + + + + + + $3,500 + $14,740

Common stock $9,200

$9,200

+ + + + + + + + + + + + + +

Retained earnings - 800

+ 9,500 - 550 - 3,800 - 430 - 2,600 - 30 $1,290

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P2-11A. Transaction Analysis (LO2) a. & b. Cash

1. $7,000 - 750 2. 3. 4. + 15,000 5. + 1,200 6. 7. - 2,200 - 370 8. - 900 9. 10. - 13,000 - 100 11. $5,880

+ + + + + + + + + + + +

Accounts receivable

+ 6,800

$6,800 $25,680

+ + + + + + + + + + + + +

Land

+ 13,000 $13,000

Accounts payable

= = = = = = = = = = = = =

Notes payable

+ +

$500

Common stock

+ + + $15,000 + + + + + + + + $15,000 + $25,680

+ + + + + + + + + +

$7,000

Retained earnings

+ + + + + + + + + + + + +

- $750 - 500 + 1,200 + 6,800 - 2,200 - 370 - 900 - 100 $3,180

P2-12A. Transaction Analysis and Balance Sheet (LO2) ASSETS

= LIABILITIES

STOCKHOLDERS' EQUITY Retained Earnings

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

Accounts Cash Receivable 16,000 -2,800

Office Supplies

-560 -750

Office Furniture Tax Library and Fixtures =

Accounts Payable

Notes Payable

TESTBANKSELLER.COM 9,800

Common Stock + 16,000

Expense

3,700

Dividend

-300

560 750 7,600 -1,700 -5,900 2,900 300

300 -800 -160 -60

12,170

7,000

3,700

7,600 -1,700 5,900 -2,900

Revenue

800 160 60

1,700

560

3,400

9,800 =

2,000

7,000 +

16,000 +

7,600 -

27,630 =

4,170 -

800 27,630

Mary Aker, Tax Accounting Inc. Unadjusted Balance Sheet June 30, 20XX Assets Cash Account Receivable Office Supplies Tax Library Office Furniture and Fixtures

Total Assets

$12,170 1,700 560 3,400 9,800

$27,630

Liabilities and Stockholders' Equity Accounts Payable Notes Payable

$2,000 7,000

Total Liabilities

9,000

Common Stock Retained Earnings

16,000 2,630

Total Stockholders' Equity

18,630

Total Liabilities and Stockholders' Equity

$27,630

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PROBLEMS—SET B P2-1B. Transaction Analysis (LO2) (a) Collected $7,500 cash on accounts receivable. (b) Purchased $400 of supplies on account. (c) Sold $8,000 in goods and services on account. (d) Paid $800 on accounts payable. (e) Paid cash dividends of $4,900. (f) Paid $300 cash for supplies. (g) Took out a $3,200 loan at a bank, signing a note payable.

P2-2B. Transaction Analysis (LO2) a. Total assets = $19,900 = Total liabilities + Stockholders’ equity. b. (2) Borrowed $2,000, signing a note payable. (3) Collected $6,100 on accounts receivable. (4) Purchased $980 in supplies on account. (5) Provided $6,800 in services on account. (6) Paid $300 on accounts payable. (7) Provided $1,500 in services and the TESTB ANcollected KSELLE R.cash. COM (8) Paid an $800 cash dividend OR paid cash for an expense (ie, rent expense). (9) Purchased $750 of office equipment for cash. (10) Paid $2,500 towards settlement of the outstanding note payable. c. Total assets = $27,580 = Total liabilities + Stockholders’ equity.

P2-3B. Transaction Analysis (LO2) a. and b.

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

Cash

$8,700 - 1,000 + 9,800 - 900 + 1,600 + 8,000

+ + + + + + + + + + + + +

- 4,500 - 6,000 - 9,800 - 150 $5,750

Accounts receivable $16,800 - 9,800

+11,100

$18,100 $33,650

Automobile

+ + + + + + + + + + + + +

= = = = = = = = = = = = = =

+ 9,800 $9,800

Accounts payable $3,600

- 900

+ 410

$3,110

+ + + + + + + + + + + + + +

Notes payable $6,500

+ + + + + + 8,000 + + + + + + + $14,500 + $33,650

Common stock $15,400

$15,400

+ + + + + + + + + + + + + +

Retained earnings $0 - 1,000

+ 1,600 +11,100 - 4,500 - 410 - 6,000

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P2-4B. Transaction Analysis (LO2) a. and b. Cash 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

$80,000 - 5,500 - 1,900 - 2,800 + 25,000 - 1,500 + 13,200 - 16,000 - 5,000 $85,500

Accounts receivable

+ 18,900

= = = = = = = = = = = = =

+ + + + + + + + + + + + +

$91,200

- 13,200

$5,700

Accounts payable

+ 2,600

- 1,500

+ 3,500 $4,600

+ + + + + + + + + + + + + +

Common stock $80,000

$80,000

+ + + + + + + + + + + + + +

Retained earnings - 5,500 - 2,600 - 1,900 - 2,800 + 25,000 + 18,900

- 16,000 - 3,500 - 5,000 $6,600

$91,200

P2-5B. Accounting Equation (LO2) a. [$480,000 - $330,000] = $ 150,000. b. [$675,000 - $225,000 - $165,000] = $285,000 c. [$500,000 + $300,000 + $255,000] = $1,055,000.

TESTBANKSELLER.COM P2-6B. Transaction Analysis (LO2) (a) Increase assets (Cash) Increase stockholders’ equity (Revenue) (b) Increase assets (Office supplies) Increase liabilities (Accounts payable) (c) Increase assets (Cash) Increase stockholders’ equity (Common stock) (d) Decrease liabilities (Accounts payable) Decrease assets (Cash) (e) Increase assets (Cash) Increase liabilities (Notes payable) (f) Increase assets (Accounts receivable) Increase stockholders’ equity (Revenue) (g) Increase assets (Office equipment) Decrease assets (Cash) (h) Decrease stockholders’ equity (increase Interest expense) Decrease assets (Cash) (i) Decrease stockholders’ equity (increase Utilities expense) Increase liabilities (Accounts payable) ©Cambridge Business Publishers, 2020 Solutions Manual, Chapter 2

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P2-7B. Transaction Analysis Template (LO2) BALANCE SHEET

Assets a b

10,000

c d

15,000

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

Revenues

−

Expenses

= Net Income

10000

-1,000 1,000 15,000

-10,000 10,000

e f

20,000 12,000

20,000

-12,000

Note that transactions (b), (d) and (f) both increased and decreased assets.

P2-8B. Determination of Omitted Financial Statement Data (LO2) A. [$12,700 - $ 19,400] = -$6,700 (Net change in Stockholders’ Equity) [-$6,700 - $2,000 + $5,000] = -$3,700 (Net loss) [$8,500 - $3,700] = $4,800 (Revenues)

TESTBANKSELLER.COM

B. [$28,000 - $21,000] = $7,000 (Net income) [$7,000 - $1,500] = $5,500 (Change in Retained Earnings) [$5,500 + $4,500] = $10,000 (Change in Stockholders’ Equity) [$7,000 + $10,000] = $17,000 (Stockholders’ Equity, ending) [$36,000 - $17,000] = $19,000 (Liabilities, ending) C. [$26,000 - $18,000] = $8,000 (Change in Stockholders’ Equity) [$18,000 - $11,000] = $7,000 (Net income) [$7,000 - $1,000] = $6,000 (Change in Retained Earnings) [$8,000 - $6,000] = $2,000 (Issuance of Common Stock) D. [$24,000 - $17,000 - $6,500] = $ 500 (Change in Retained Earnings) [$500 + $3,500] = $4,000 (Change in Stockholders’ Equity) [$25,000 - $4,000] = $21,000 (Stockholders’ Equity, beginning) [$21,000 + $9,000] = $30,000 (Assets, beginning)

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P2-9B. Transaction Analysis (LO2) a. [$3,500 + $5,200 + $820 + $12,000] = $21,520 (Total assets) [$3,000 + $600 + $10,920 + $7,000] = $21,520 (Total liabilities plus stockholders’ equity) b. (2) Purchased supplies on account for $670. (3) Purchased equipment for $6,000, giving a note payable. (4) Collected $4,200 on accounts receivable. (5) Provided consulting services and billed clients, $7,800. (6) Paid $600 on accounts payable. (7) Purchased $200 in supplies for cash. (8) Paid cash dividend of $4,600; OR paid June expenses of $4,600 (9) Borrowed $3,000 cash from a bank, giving a note payable. (10) Purchased $750 of equipment with cash. c. [$4,550 + $8,800 + $1,690 + $18,750] = $33,790 (Total assets) [$12,000 + $670 + $10,920 + $10,200] = $33,790 (Total liabilities plus Stockholders’ Equity)

P2-10B. Transaction Analysis (LO2) a. & b.

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

Cash

$6,400 - 900 + 6,500 + 5,000

+ + + + + + + + + + + + +

- 400 - 4,800 - 230 - 2,600 - 1,400 - 130 $7,440

Accounts receivable

Equipment

Accounts payable

Notes payable

TE+ STBAN$0KS=ELLER$900 .CO+M

$8,900

- 6,500 + 8,500

$10,900 $19,740

+ + + + + + + + + + + +

+ 1,400 $1,400

= = = = = = = = = = = = =

- 400 + 750

$1,250

+ + + + + + + + + + + +

$3,500

+ + + + 5,000 + + + + + + + + + $8,500 + $19,740

Common stock $10,000

$10,000

+ + + + + + + + + + + + + +

Retained earnings $900 - 900

+ 8,500 - 750 - 4,800 - 230 - 2,600 - 130 - $10

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P2-11B. Transaction Analysis (LO2) a. & b. Cash

1. $9,000 - 950 2. 3. 4. + 25,000 5. + 4,200 6. 7. - 3,200 - 370 8. - 900 9. 10. - 23,000 - 100 11. $9,680

+ + + + + + + + + + + +

Accounts receivable

$9,800

$9,800 $42,480

+ + + + + + + + + + + + +

Land

Accounts payable

= = = = = = = = = = = = = =

$23,000 $23,000

$800

Notes payable

+ + + + + + + + + + + +

Common stock

+ + + $25,000 + + + + + + + + $25,000 + $42,480

$9,000

Retained earnings

+ + + + + + + + + + + +

- 950 - 800 + 4,200 + 9,800 - 3,200 - 370 - 900 - 100 $7,680

P2-12B. Transaction Analysis and Trial Balance (LO2) ASSETS

Office Supplies

Office Furniture Tax Library and Fixtures =

LIABILITIES

STOCKHOLDERS' EQUITY Retained Earnings

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

Accounts Cash Receivable 20,000 -2,800 -560 -950

Accounts Payable

Notes Payable

9,800 560

Common Stock + 20,000

Expense

950 17,600 -1,700 -15,900 4,900 300

300 -800 -160 -60

800 160 60

1,700

560

5,400

9,800 =

4,000

7,000 +

20,000 +

17,600 -

6,370 -

41,430 =

Assets Cash Account Receivable Office Supplies Tax Library Office Furniture and Fixtures

Total Assets

$23,970 1,700 560 5,400 9,800

$41,430

800 41,430

William Groff, Tax Accounting Inc. Unadjusted Balance Sheet June 30, 20XX Liabilities and Stockholders' Equity Accounts Payable Notes Payable

$4,000 7,000

Total Liabilities

11,000

Common Stock Retained Earnings

20,000 10,430

Total Stockholders' Equity

30,430

Total Liabilities and Stockholders' Equity

$41,430

©Cambridge Business Publishers, 2020 2-24

Dividend

-300

17,600

23,970

5,700 5,700 TE STBANKSELLE R.COM -300

-1,700 15,900 -4,900

Revenue

7,000

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SERIAL PROBLEM: ANGEL CITY GREETINGS SP2 ASSETS

LIABILITIES

STOCKHOLDERS' EQUITY Retained Earnings

Accounts Cash Receivable 1 10,000 2 NO ENTRY 3 -50 4 -4,800 5 6 NO ENTRY 7 NO ENTRY 8 9 5,000 10 11 -1,850 12 -1,200 13 14 -1,000

6,100

Supplies Inventory

Prepaid Insurance

Equipment

Accumulated Depreciation =

Accounts Payable

Notes Payable

Common Stock + 10,000

Revenue

Expense

Dividend

50 4,800 350

350

1,500

1,500 5,000

-1,750

1,750 -1,850 1,100

100 100 1,000

-100

100

1,100

4,800

-100 =

10,000 +

5,000 -

3,000 -

12,000 =

12,000

Angel City Greetings Balance Sheet September 30 Assets Cash Account Receivable Supplies Inventory Prepaid Insurance Equipment Accumulated Depreciation

Total Assets

Liabilities and Stockholders' Equity

6,100 Payable T$EST BANKSELLER.COMAccounts Notes Payable 100 1,100 4,800 (100)

12,000

Total Liabilities

Common Stock Retained Earnings

10,000 2,000

Total Stockholders' Equity

12,000

Total Liabilities and Stockholders' Equity

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EXTENDING YOUR KNOWLEDGE REPORTING AND ANALYSIS EYK2-1. Financial Reporting Problem: Columbia Sportswear Company a. Increase to Common stock: Purchase of common stock by an investor Increase to Accounts payable: Purchase of supplies on account Increase to Accounts receivable: Render services to client on account. Increase to Inventories: Purchase of inventory Increase to Prepaid expenses: Payment of rent in advance Increase to Property, plant and equipment: Purchase of equipment Increase to Net sales: Sales to customer b. 1. Sales revenue is increased. 2. Cash is decreased. 3. Cash or accounts receivable are increased.

EYK2-2. Comparative Analysis Problem: Columbia Sportswear Company vs. Under Armour, Inc. a. 1. 2. 3. 4.

Inventory is decreased. Cash is increased. TESTBANKSELLER.COM Cash is increased. Income tax expense (or provision for income taxes) is increased.

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TESTBANKSELLER.COM ASSETS =

LIABILITIES

STOCKHOLDERS' EQUITY Retained Earnings

Payable

Accounts

Notes

EYK2-3.Cash Business Decision = to Artists Payable Problem Payable 1 2 3 4 5 6 7 1 8 2 9 3 10 4 11 5 12 6 13 7 14 8

9 10 11 12 13 14

6,500 10,000 = ASSETS LIABILITIES 10,000 + 95,000 66,500 -54,000 -54,000 -900 Payable Accounts Notes -4,900 = to Artists Cash Payable Payable + -500 6,500 350 10,000 10,000 1,700 95,000 66,500

-54,000 -900 -4,900 -500

Common Stock + 6,500

Expense

Dividend

Revenue

Retained Earnings 900 4,900 Expense

Rent expense

Dividend Wages expense 500 Utilities expense Shipping expense

350 1,700

28,500

-54,000 900 4,900

Rent expense Wages expense 500

350 1,700 51,200 =

STOCKHOLDERS' EQUITY 28,500

12,500

2,050

350 1,700 10,000 +

6,500 +

28,500 -

Utilities expense Shipping expense

7,850 -

500

51,200 =

51,200

Note:51,200 The =proper rent expense for March is6,500 $900. 12,500 2,050 10,000 + + (a)

Revenue

28,500 -

7,850 -

500

51,200 =

51,200

WILDLIFE PICTURE GALLERY Income Statement For Month Ending March 31, 2019 Revenues Commissions earned $28,500 Expenses TESTBANKSE$LL900 ER.COM Rent expense Wages expense 4,900 Utilities expense 350 Shipping expense 1,700 Total expenses 7,850 Net income $20,650

(b) WILDLIFE PICTURE GALLERY Statement of Stockholders’ Equity For Month Ending March 31, 2019

Stockholders’ equity, March 1, 2019 Add: Capital contributed in March Net income for March Less: Dividends in March Stockholders’ equity, March 31, 2019

Common Stock $ -06,500

$ 6,500

Retained Earnings $-020,650 -500 $20,150

Total $ -06,500 20,650 -500 $26,650

continued

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$51,200

Liabilities Payable to artists Notes payable Accounts payable Total Liabilities Stockholders’ Equity Common stock Retained earnings Total Stockholders’ Equity

Total Assets

$51,200

Total Liabilities & Stockholders’ Equity

$12,500 10,000 2,050 $24,550

$6,500 20,150 26,650

$51,200

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CRITICAL THINKING EYK2-4. Accounting Research Problem 1. When the effect of a single transaction causes receivables to increase, it is likely that there is also an increase to revenues. 2. When the effect of a single transaction causes accounts payable to decrease, it is likely that there is also a decrease in cash. 3. When the effect of a single transaction causes revenues to increase, it is likely that accounts receivable or cash is increased.

EYK2-5. Accounting Communication Activity Dear Mr. Jones, An economic event is an event that affects any of the elements of the accounting equation and is an accounting transaction which must be recorded in the company’s accounting records. A business event such as bidding on a contract is not an accounting transaction until it results in a change to an asset, liability or stockholders’ equity. I hope this explanation clears up your confusion. Sincerely Your Name.

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EYK2-6. Accounting Ethics Case Andy faces a dilemma when he prepares his expense reimbursement request. He has, in essence, been asked by his supervisor to join him in overcharging expenses to the company. Should Andy not file a reimbursement request for the Luxury Inn lodging costs, the company may question why he and his supervisor stayed at different locations. Discussion of this case should focus on the options available to Andy. The options include the following: 1. File an expense reimbursement request for the Luxury Inn and, therefore, minimize the likelihood of jeopardizing his relationship with his supervisor. 2. File an expense reimbursement request for the Spartan Inn and let future events take whatever course they follow. 3. Report the situation to his supervisor's boss. 4. Discuss the situation with his supervisor and indicate that he (Andy) is not comfortable with filing the Luxury Inn receipt. Perhaps encourage the supervisor to seek a change in company policy to provide daily allowances for lodging and meal costs rather than reimbursing actual costs. 5. Leave the employ of the company. ©Cambridge Business Publishers, 2020 Solutions Manual, Chapter 2

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EYK2-7. Corporate Social Responsibility Problem Student answers will vary depending on the firms selected.

EYK2-8. Forensic Accounting Problem The forensic accountant should investigate revenue reported to be earned near the end of the year by tracing the reported amounts to source documents that support the revenue. For example, shipping invoices could support when a sale was made. The forensic accountant should carefully examine the dates of these source documents to be sure they are being recorded in the proper year.

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Chapter 3 Accrual Basis of Accounting QUESTIONS 1.

Many of the transactions reflected in the accounting records through the first two steps of the accounting cycle affect the net income of more than one period. Therefore, adjustments to the account balances are ordinarily necessary at the end of each accounting period to record the proper amount of revenue and to match expenses with revenue. This process is also intended to achieve a more accurate picture of financial position by adjusting balance sheet amounts to show unexpired costs, up-to-date amounts of obligations, and so on.

1. Allocating assets to expense to reflect expenses incurred during the period. Example: Recording supplies used by increasing Supplies Expense and decreasing Supplies. 2. Allocating revenues received TESTBinAadvance NKSELLtoErevenue R.COMto reflect revenues earned during the period. Example: Recording service fees earned by decreasing Unearned Service Fees and increasing Service Fees Earned. 3. Accruing expenses to reflect expenses incurred during the period that are not yet paid or recorded. Example: Recording unpaid wages by increasing Wages Expense and increasing Wages Payable. 4. Accruing revenues to reflect revenues earned during the period that are not yet received or recorded. Example: Recording commissions earned by increasing Commissions Receivable and increasing Commissions Earned.

3. BALANCE SHEET

Assets P repai d i n s u ran c e

-78

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

-78

Net Revenues

−

Expenses In s u ran c e expen s e

= Income

-78

In s u ran c e expen s e f or t he mon t h of Jan u ary $1,872/24 mon t hs

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A contra account is an account that is related to, and deducted from, another account when financial statements are prepared or when book values are computed. Accumulated depreciation is deducted from the cost of a depreciable asset in computing and portraying the asset's book value.

a. Supplies Expense ($825 + $260 − $630 = $455) for the period is omitted from the income statement, overstating net income by $455. b. Both Supplies and Stockholders’ Equity are overstated by $455 on the January 31 balance sheet.

6. BALANCE SHEET

Assets

Cas h

Liabilities

Advan c es f rom c u s t omers

9,720

INCO M E STATE M E NT +

Stockholders' Equity

Net Revenues

−

Expenses

= Income

9,720

Rec ei pt of t wo-year s u bs c ri pt i on s i n advan c e.

Advan c es f rom c u s t omers

-405

405

Su bs c ri p t i on reven u e

TESTBANKSELLER.COM Su bs c ri pt i on reven u e earn ed du ri n g Jan u ary $9,720/24 mon t hs

405

7. BALANCE SHEET

Assets

INCO M E STATE M E NT

Liabilities Wages payabl e

190

Stockholders' Equity

Net Revenues

−

Expenses Wages expen s e

-190

= Income

190

-190

Ac c ru e wage expen s e f or Jan u ary 30-31 ( $475/5) x2

8. BALANCE SHEET

Assets In t eres t rec ei vabl e

Liabilities

360

INCO M E STATE M E NT +

Stockholders' Equity

360

Net Revenues In t eres t i n c ome

−

Expenses

= Income

360

In t eres t earn ed du ri n g Jan u ary.

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A permanent account is an account that is presented in the balance sheet. Its distinguishing feature is that any balance in the account at the end of an accounting period is carried forward to the next period. Cash, Accounts, Receivable, Notes Payable, and Accounts Payable are examples of permanent accounts. The permanent stockholders’ equity accounts in a corporation are Common Stock and Retained Earnings.

10.

A temporary account is an account used to accumulate information for a specific accounting period; at the end of the period, the account's balance is transferred to a permanent stockholders’ equity account. All revenue, expense, and dividend accounts are temporary accounts. Specific examples include Professional Fees Earned and Advertising Expense.

11.

The temporary accounts—sometimes called nominal accounts—are closed at year-end. They consist principally of the income statement accounts, but the Dividends account is also included. Closing of the temporary accounts to a zero balance allows the account to be ready to start accumulating data for the next accounting period.

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SHORT EXERCISES SE3-1. Revenue Recognition (LO1) Revenue is earned when services are provided. Revenue recognized = $5,000

SE3-2. Accrual Accounting (LO1) 2019 $90,000 60,000 $30,000

Revenue Expenses Profit

2020 $0 0 $0

SE3-3. Adjusting Accounts (LO2) a. Accrued rent expense that remains unpaid. b. Revenue that is earned and should be transferred to Revenue account. c. Subscriptions are delivered and the prepaid amount should be transferred to expense. d. Periodic depreciation allocation should be recorded.

SE3-4. Adjustment for Depreciation TESTBANKSELLER.COM (LO2) BALANCE SHEET

Assets

Ac c u mu l at ed deprec i at i on

Liabilities

-4,000

INCO M E STATE M E NT +

Stockholders' Equity

-4,000

Net Revenues

Expenses

−

Deprec i at i on expen s e

= Income

4,000

Adjustment to record yearly depreciation expense:

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-4,000

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SE3-5. Adjustment for Prepaid Insurance (LO2) Year-end adjustment for Prepaid Insurance: BALANCE SHEET

Assets

P repai d i n s u ran c e

INCO M E STATE M E NT

Liabilities

Stockholders' Equity

-600

Net Revenues

Expenses

−

In s u ran c e expen s e

-600

= Income

600

-600

Insuance expense incurred ($3,600/3) x 1/2 = $600

SE3-6. Accrual Adjustments (LO2) BALANCE SHEET

Assets

Sal ari es payabl e In t eres t payabl e

a. b. c.

Liabilities

Ac c ou n t s rec ei vabl e

3,500

INCO M E STATE M E NT +

Stockholders' Equity

2,500

-2,500

1,200

-1,200

Net Revenues

−

Expenses Sal ary expen s e In t eres t expen s e

TESTBANKSEL3,500 LER.CReven OMu e

= Income

2,500

-2,500

1,200

-1,200

3,500

SE3-7. Analyze Adjustments (LO2) a. Insurance expense b. Depreciation expense c. Supplies expense d. Earned revenue e. Interest expense

SE3-8. Prepare an Income Statement from Adjusted Balances (LO3) CENTURY COMPANY Income Statement For Year Ended December 31 Sales $ 20,000 Less: Cost of goods sold $8,000 Selling & administrative expense 3,000 Interest expense 1,500 Total expenses 12,500 Net income $ 7,500

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SE3-9. Closing to Retained Earnings (LO4) Ending Retained Earnings = [$8,500 + $7,500 - $2,000] = $14,000

SE3-10. Revenue Recognition (LO1) Revenue recognized in the current period = $6,000 ($18,000/3)

SE3-11. Revenue Recognition (LO1) Revenue recognized = $2,000 SE3-12. Expense Recognition (Matching) (LO1) Supplies expense in the current period = $400 ($500-$100). Under accrual accounting, the supplies expense is matched with the revenue it generates regardless of when the cash is paid. There would be no difference in the expense amount if the supplies had been paid for with cash.

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EXERCISES—SET A E3-1A. Transaction Analysis and Adjustments (LO2) BALANCE SHEET

Assets

Cas h

Liabilities

20,100

Advan c es f rom c u s t omers

Net Revenues

Expenses

−

= Income

20,100

Advan c es f rom c u s t omers

INCO M E STATE M E NT

Stockholders' Equity

-3,350

3350

Servi c e f ee reven u e

3,350

570

Servi c e f ee reven u e

570

Jan u ary s ervi c e f ees earn ed $20,100/6 = $3,350 Fees c. rec ei vabl e

570 Ac c ru e s ervi c e f ees 30hrs x $19 = $570

E3-2A. Transactions Analysis and Adjustments (LO2) BALANCE SHEET

INCO M E STATE M E NT

TESTBANKSELLER.COM

Assets

Prepaid insurance

Liabilities

-185

Stockholders' Equity

Net Revenues

Expenses

−

= Income

-185

Insurance expense

185

-185

-1,080

Supplies expense

1,080

-1,080

-62

$6,660/36 months = $185

Supplies

-1,080 $1,930 - $850 = $1,080

d. e.

Accumulated depreciation

-62

Depreciation expense

-62 $5,952 /96 = $62 Unearned rent revenue Salaries payable

-875

875

490

-490

Rent revenue

875

875 Salary expense

490

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E3-3A. Transaction Analysis and Adjustments (LO2) BALANCE SHEET

INCO M E STATE M E NT

Net Assets

Liabilities

Stockholders' Equity

Revenues

Accumulated

a. depreciation

-610

b. Supplies

-1,890 $2,990 - $1,100 = $1,890 Accounts payable 390

c. d. Prepaid rent

-700 Unearned premium revenue -468 ($624/12) x 9 = $468 Wages payable 965

f. Interest g. receivable

Depreciation expense Supplies expense

-610

-1,890

610

-610

1,890

-1,890

Utilities expense

390

-390

-700

Rent expense

700

-700

Premium revenue

468

-965 300

Wage expense Interest income

E3-4A. Statement of Stockholders’ Equity (LO3) STRIFE & COMPANY Statement of Stockholders’ Equity TFor ESYear TBAEnded NKSEL LER.CO31M December Common Stock Balance, January 1 $70,000 Add: Capital contributed during the year 6,000 Net income for the year Less: Dividends paid Balance, December 31

= Income

-390

468

300

Expenses

−

$76,000

975

300

-965 300

Retained Earnings $48,000 29,900 (9,700)

Total $118,000 6,000 29,900 (9,700)

$68,200

$144,200

E3-5A. Transaction Analysis and Adjustments (LO2) BALANCE SHEET

INCO M E STATE M E NT

Net Assets

Liabilities

Stockholders' Equity

Revenues

Accumulated

a. depreciation

b. c. Prepaid rent

-200 $12,000 /60 = $200 Accounts payable 545 -2,000

-200

Depreciation expense

-545

Utilities expense

-2,000 $8,000 / 4 = $2,000 Advances from customers -1,200

1,200

Expenses

−

Rent expense

Rental fees

= Income

200

545

-545

2,000

-2,000

1,200

$3,600 / 3 = $1,200

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-200

1,200

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E3-6A. Transaction Analysis and Adjustments (LO2) BALANCE SHEET

INCO M E STATE M E NT

Net Assets

a. Inventory

Liabilities

Stockholders' Equity

-7,800

c. Interest d. receivable

900

Cost of goods sold

E3-7A. Financial Statement Effect (LO2) a. Assets (Supplies) Stockholders’ Equity Expenses (Supplies expense)

Tutoring revenue

400

7,800

-7,800

900 Wages expense

Interest income

= Income

900

-1,800

400

Expenses

−

-7,800 $8,900 + $6,000 - $7,100 = $7,800 Advances from customers -900 $5,400 / 6 = $900 Wages payable 1,800

Revenues

1,800

400

Overstated Overstated Understated

b. Liabilities (Wages payable) Understated Stockholders’ Equity Overstated Expenses (Wages expense) TESTBANUnderstated KSELLER.COM c. No financial statement effect (no transaction)

E3-8A. Analysis of Adjusted Data (LO2) a. Balance, January 1 = $960 + $800 − $620 = $1,140. b. Amount of premium = $82  12 = $984. Therefore, five months' premium ($984 − $574 = $410; $410 / $82 = 5) has expired by January 31. The policy term began on September 1 of the previous year. c. Wages paid in January = $3,200 − $500 = $2,700. d. Monthly depreciation expense = $8,700/60 months = $145. Coyle has owned the truck for 18 months ($2,610/$145 = 18).

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-1,800

3-9

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E3-9A. Analysis of the Impact of Adjustments on Financial Statements (LO2) Stockholders' Assets Liabilities Equity Reported amounts Depreciation Unrecorded revenue Accrued wages Corrected amounts

$60,000 (1,000) 1,500 ______ $60,500

$20,000

250 $20,250

Net Income

$40,000 (1,000) 1,500 (250) $40,250

$9,000 (1,000) 1,500 (250) $9,250

E3-10A. Closing Process (LO4) All of these accounts are temporary with the exception of Common Stock and Retained Earnings. The balance of the Retained Earnings account after the closing process is $72,700 ($57,700 + $92,500 + 2,200 – 41,800-4,300-8,700-9,900 − $15,000).

E3-11A. Revenue Recognition (LO1) a. At time of sale. b. At delivery in September. c. At time of delivery in October.

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EXERCISES—SET B E3-1B. Transaction Analysis and Adjustments (LO2) BALANCE SHEET

Assets

Cas h

Liabilities

Advan c es f rom c u s t omers

30,000

Net Revenues

−

Expenses

= Income

30,000

Advan c es f rom c u s t omers

INCO M E STATE M E NT

Stockholders' Equity

-5,000

5,000

Servi c e f ee reven u e

5,000

Servi c e f ee reven u e

750

Jan u ary s ervi c e f ees earn ed $30,000/6=$5,000

Fees rec ei vabl e

750

750 Ac c ru e s ervi c e f ees 30hrs x $25 = $750

E3-2B. Transaction Analysis and Adjustments (LO2) BALANCE SHEET

INCO M E STATE M E NT

TESTBAStockholders' NKSELLER.COM

Assets

P repai d ren t

Liabilities

-475

Equity

Net

Revenues

−

Expenses

= Income

-475

Ren t expen s e

475

-475

-210

Advert i s i n g expen s e

210

-210

-1,900

Su ppl i es expen s e

1,900

-1,900

$5,700/12 = $475

P repai d advert i s i n g

-210 $630/3 = $210

Su ppl i es

-1,900 $3,000-$1,100 = $1,900

Fees rec ei vabl e

800 Advan c e f rom c u s t omer $600/2 = $300

-300

800

Fees reven u e

800

300

Fee reven u e

300

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E3-3B. Transaction Analysis and Adjustments (LO2) BALANCE SHEET

Assets

INCO M E STATE M E NT

Liabilities

Stockholders' Equity

Net Revenues

Accumulated

a. depreciation b. Supplies c. d. Prepaid rent

-900

400

-700 $2,800/4 = $700 Unearned premium revenue -468 ($624/12) x 9 = $468 Wages payable 600

f. Interest g. receiveable

-2,000 Utilities payable

Depreciation expense Supplies expense Utilities expense Rent expense

-900

-2,000

500

-400 -700

468

Premium revenue

E3-4B. Statement of Stockholders’ Equity (LO3) A. MILLER & COMPANY Statement of Stockholders’ Equity TEFor STYear BANK SELL ER.COM31 Ended December Common Stock Balance, January 1 $60,000 Add: Capital contributed 7,000 Net income for the year Less: Dividends Balance, December 31 $67,000

900

-900

2,000

-2,000

400 700

-400 -700

468 Wages expense

Interest income

= Income

468

-600 500

Expenses

−

600

500

Retained Earnings $50,000 30,000 (5,700) $74,300

500

Total $110,000 7,000 30,000 (5,700) $141,300

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-600

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E3-5B. Transaction Analysis and Adjustments (LO2) BALANCE SHEET

Assets

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

Net Revenues

−

Accumulated

a. depreciation

-250 $12,000/48 = $250 Utilities payable 475

b. c. Prepaid rent

-3,000

-250

Depreciation expense

-475

Utilities expense

-3,000 $12,000/4 = $3,000 Advances from customers -2,800

Expenses

2,800

Rent expense

Rental fees

= Income

250

-250

475

-475

3,000

-3,000

2,800

$8,400/3 = $2,800

E3-6B. Transaction Analysis and Adjustments (LO2) BALANCE SHEET

Assets a. Inventory

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

-9,000

Net Revenues

−

Cost of goods sold

-9,000

$8,000 + $6,000 - $5,000 = $9,000 Advances from customers -1,000

1,000

$6,000/6 = $1,000 Wages payable 2,400

-2,400

Expenses

= Income 9,000

-9,000

TESTBANKSELLER.C OM Tutoring

Interest d. receivable

350

E3-7B. Financial Statement Effect (LO2) a. Assets (Interest receivable) Stockholders’ equity Revenue (Interest income)

350

Fees

1,000

1,000 Wages expense

Interest income

2,400

350

Understated Understated Understated

b. Assets (Accumulated depreciation) Stockholders’ equity Expenses (Depreciation expense)

Overstated Overstated Understated

c. Liabilities (Advances from customers) Stockholders’ equity Revenues (Web design fees)

Overstated Understated Understated

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E3-8B. Analysis of Adjusted Data (LO2) a. Balance, January 1 = $1,960 + $800 − $620 = $2,140 b. Amount of premium = $182  12 = $2,184 Therefore, seven months' premium ($2,184 − $910 = $1,274; $1,274 / $182 = 7) has expired by January 31. The policy term began on July 1 of the previous year. c. Wages paid in January = $3,200 − $500 = $2,700 d. Monthly depreciation expense = $8,700/60 months = $145 Parris has owned the truck for 18 months ($2,610/$145 = 18)

E3-9B. Analysis of the Impact of Adjustments on Financial Statements (LO2) Stockholders’ Assets Liabilities Equity Reported amounts $80,000 $30,000 $50,000 Depreciation -3,000 -3,000 Unbilled revenue 1,500 1,500 Accrued wages ______ 250 -250 Corrected amounts $78,500 $30,250 $48,250

Net Income $11,000 -3,000 1,500 -250 $9,250

TESTBANKSELLER.COM E3-10B. Closing Process (LO4) All of these accounts are temporary with the exception of Common Stock and Retained Earnings. The balance of the Retained Earnings account after the closing process is $72,700 ($57,700 + $97,500+5,200 - $49,800- 4,300 – 8,700 – 9,900 − $15,000).

E3-11B. Expense Matching (LO1) a. Recognize expense for three tables in April and two tables in May. b. Expense as used in August. c. Expense at the time of the August sale.

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PROBLEMS—SET A P3-1A. Transaction Analysis and Adjustments (LO2, 3) a. BALANCE SHEET

INCO M E STATE M E NT

Net Assets 1 Supplies

Liabilities

Stockholders' Equity

Revenues

Accumulated depreciation 3 truck

= Income

-800 $1,200 - $400 = $800

-800

Supplies expense

800

-800

-120 $2,880 / 24 = $120

-120

Insurance expense

120

-120

-125

Depreciation expense

125

-125

-35

Depreciation expense

-35

Prepaid

2 insurance

Expenses

−

-125 $6,000 / 48 = $125

Accumulated depreciation 4 equipment

-35 $2,940 /84 = $35 Advances from customers

-450

450

Roofing fee revenue

450

$1,800 / 4 = $450

Ladd Roofing Service Income Statement For the month of April Roofing Fee Revenue (9,500+450) Fuel expense Advertising expense Wages expense Supplies expense Insurance expense Depreciation expense (125 + 35) Total Expenses Net income

TESTBANKSELLER.COM $9,950 $75 100 2,500 800 120 160 3,755 $6,195 Ladd Roofing Service Balance Sheet April 30

Cash Accounts receivable Supplies (1,200 - 800) Prepaid insurance (2,880 - 120) Truck Less: Accumulated depreciation

5,645 4,600 400 2,760 6,000 (125)

Equipment Less: Accumulated depreciation Total Assets

2,940 (35) $ 22,185

Accounts payable Advances from customers (1,800 - 450) Common Stock Retained earnings

$ 3,140 1,350 11,500 6,195

Total Liabilites and Stockholders' equity

$ 22,185

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P3-2A. Cash Basis versus Accrual Basis (LO1)

Armor Company Accrual Basis Income Statements May June Sales Revenue (a) $ 32,000.00 $ Cost of good sold (b) (16,000) 0 Compensation expense (c) (4,800) 0 Net income (loss)

$ 11,200.00 $

(a) Revenue is earned when the items are shipped in May. $32,000=((400,000/500,000)x$20,000)x2 (b) The cost of the 400,000 pencils sold is expensed in May. The balance of the pencils (500,000 - 400,000) are held in inventory on the balance sheet. $16,000=((400,000/500,000)x$20,000 (c) $4,800=$32,000x15%

P3-3A. Transaction Analysis and Adjustments (LO2) BALANCE SHEET

INCO M E STATE M E NT

Net Assets 1 Fees receivable Accumulated 2 depreciation

3 4 Prepaid rent

5 Prepaid 6 insurance

7 Supplies

Liabilities

Stockholders' Equity

Revenues

TESTBANKSELLER.COMPhotography

925 -2,280 $22,800 / 10 = $2,280 Accounts payable -6,300 $12,600 / 12 = $6,300 Unearned photography fees

925

= Income

925

-2,280

Depreciation expense

2,280

-2,280

400

-400 -6,300

Utilities expense Rent expense

400 6,300

-400 -6,300

-2,600

2,600

-990 $2,970 / 3 = $990 -2,730 $4,250 - $1,520 = $2,730 Wages payable

fees earned

Expenses

−

375

Photography fees earned

2,600

-990

Insurance expense

990

-990

-2,730

Supplies expense

2,730

-2,730

-375

Wages expense

375

-375

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P3-4A. Transaction Analysis and Adjustments (LO2, 3) a.

BALANCE SHEET

INCO M E STATE M E NT

Net Assets 1 Prepaid rent

Liabilities

Stockholders' Equity

-775

Revenues

Expenses

−

-775

Rent expense

= Income 775

-775

1,700

-1,700

-74

210

-210

300

-300

$3,100/ 4 = $775

2 Supplies

-1,700

Supplies expense

-1,700

$2,520 - $820 = $1,700 Accumulated

3 depreciation

-74

Depreciation expense

-74

$4,440 / 60 = $74 Wages payable Utilities payable

4 5 6

Fees Receivable

210

-210

300

-300

380

Service fees earned

380

Dole Carpet Cleaners Income Statement For the month of June Service fees earned ($4,650+$380) Wage expense ($1,020+$210) Rent expense Supplies expense Depreciation expense Utilities expense Total Expenses Net income

Wages expense Utilities expense 380

380

$5,030 $1,230 775 1,700 74 300

TESTBANKSELLER.COM 4,079 $951 Dole Carpet Cleaners Balance Sheet June 30

Cash Accounts receivable Fees receivable Prepaid rent ($3,100-$775) Supplies ($2,520-$1,700) Equipment Less: Accumulated depreciation Total Assets

1,180 450

Accounts payable Wages payable

380 2,325 820 4,440 (74) 9,521

Utilities payable Common Stock Retained earnings ($5,000+$951-$200) Total Liabilites and Stockholders' equity

300 2,500 5,751

$ 9,521

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P3-5A. Transaction Analysis and Adjustments (LO2) BALANCE SHEET

INCO M E STATE M E NT

Net Assets

Liabilities

Stockholders' Equity

Salaries payable 720 ($1,800 / 5) x 2 = $720 Interest payable 200

2 3 Fees receivable

900

Prepaid 4 maintenance Prepaid 5 advertising

Revenues

Salaries expense

720

-720

-200

Interest expense

200

-200

Printing revenue

900

$900 / 3 = $300 Rent payable

160

900 90

-90

-300

Maintenance expense Advertising expense

300

-300

-160

Rent expense

160

-160

-90

-300

= Income

-720

900

-90

Expenses

−

(.80 x $400) x 1/2 = $160 Interest

7 receivable

Accumulated 8 depreciation

-2,175

Interest income

38 Depreciation expense

-2,175

2,175

-2,175

P3-6A. Adjustments (LO2) BALANCE SHEET

Assets

INCO M E STATE M E NT

Stockholders' Equity

Net

TESTB+ ANKSELLER.COMRevenues

Liabilities

Prepaid

1 advertising

-400

2 Prepaid 3 insurance

Advertising expense

-400 $1,200 - $800 = $400 Wages payable 1,300

-1,140

Expenses

−

Wages expense Insurance expense

-1,300 -1,140

= Income 400

-400

1,300

-1,300

1,140

-1,140

$3,420 - $2,280 = $1,140 Unearned service fees

-2,400

2,400

Service fees earned

2,400

1,000

Rental income

1,000

$5,400 - $3,000 = $2,400

5 Rent receivable

1,000

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P3-7A. Adjustments (LO2) BALANCE SHEET

Assets

INCO M E STATE M E NT

Liabilities

Stockholders' Equity

Net Revenues

Prepaid

1 maintenance

-1,800

−

Expenses

= Income

-1,800

Maintenance expense

1,800

-1,800

-5,200

Supplies expense

5,200

-5,200

$2,700 x 4/6 = $1,800

2 Supplies

-5,200 $8,400 - $3,200 = $5,200 Unearned commission fees -4,500

4,500

Commission fees earned

4,500

2,800

Commission fees earned

2,800

$8,500 - $4,000 = $4,500

4 5

Commissions receivable

2,800 Rent payable 913 1% x ($84,000 + $4,500 + $2,800) = $913

-913

Rent expense

913

P3-8A. Financial Statements (LO3) FINE CONSULTING SERVICE Income Statement For Year TESTBAEnded NKSEDecember LLER.C31 OM Revenue Service fees earned Expenses Rent expense Salaries expense Supplies expense Insurance expense Depreciation expense—Equipment Interest expense Total expenses Net income

$58,400 $12,000 33,400 4,700 3,250 720 630 54,700 $ 3,700

FINE CONSULTING SERVICE Statement of Stockholders’ Equity For Year Ended December 31 Balance, January 1 Add: Net income Less: Dividends paid Balance, December 31

Common Stock $ 2,000

$ 2,000

Retained Earnings $ 5,205 3,700 (2,900) $ 6,005

Total $ 7,205 3,700 (2,900) $ 8,005

Continued

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FINE CONSULTING SERVICE Balance Sheet December 31 Liabilities $ 2,700 Accounts payable 3,270 Long-term notes payable 3,060 Total Liabilities 1,500 $ 6,400 Stockholders’ Equity 1,080 5,320 Common stock Retained earnings Total stockholders’ equity Total Liabilities and $15,850 Stockholders’ Equity

Assets Cash Accounts receivable Supplies Prepaid insurance Equipment Less: Accum. depreciation

Total Assets

845 7,000 7,845

2,000 6,005 8,005 $15,850

P3-9A. Revenue Recognition (LO1) Jensen Publishing Accrual Basis Income Statements

Subscription revenue (a)

Year 1 Year 2 Year 3 $200,000 $200,000 $200,000

TESTBANKSELLER.COM

Depreciation expense (b) Printing supplies expense Salaries expense Net income (loss)

20,000 25,000 90,000 $65,000

(a) Revenue is recognized when earned regardless of when cash is received. $600,000/3years=$200,000 per year. (b) Depreciation allocates the cost of equipment over periods benefitting from their use. $100,000/5 years=$20,000 per year.

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P3-10A. Financial Statements (LO3) R. LADD & COMPANY Income Statement For Month Ended January 31 Revenue Fees earned Expenses Maintenance expense Advertising expense Office rent expense Supplies expense Utilities Expense Salaries expense Total Expenses Net income

$16,470 $ 460 350 800 760 200 4,480 7,050 $ 9,420

R. LADD & COMPANY Statement of Stockholders’ Equity For Month Ended January 31 Common Stock Balance, January 1 TESTBANKSE$20,000 LLER.COM Add: Net income for the month Less: Dividends paid Balance, January 31

$20,000

Retained Earnings $9,000 9,420 (1,100)

Total $29,000 9,420 (1,100)

$17,320

$37,320

Land

R. LADD & COMPANY Balance Sheet January 31 Liabilities $ 7,300 Accounts payable 8,200 1,640 Stockholders' Equity 17,140 Common stock Retained earnings 21,000 Total Stockholders’ Equity

Total Assets

$38,140

Assets Cash Accounts receivable Supplies Total current assets

Total Liabilities & Stockholders’ Equity

820

20,000 17,320 37,320

$38,140

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P3-11A. Financial Statements (LO3) MORGAN'S WATERPROOFING SERVICE Income Statement For Month Ended January 31 Revenue Service fees earned Expenses Advertising expense Interest expense Rent expense Salaries expense Supplies expense Utilities expense Total Expenses Net income

$25,760 $

420 50 1,700 8,000 10,250 320 20,740 $ 5,020

MORGAN'S WATERPROOFING SERVICE Statement of Stockholders’ Equity For Month Ended January 31 Balance, January 1 Add: Stock issued Net income Less: Dividends paid

Common Stock Retained Earnings $0 $0 TESTBANK29,740 SELLER.COM 5,020 (3,000)

Balance, January 31

$29,740

$2,020

MORGAN'S WATERPROOFING SERVICE Balance Sheet January 31 Assets Liabilities Cash $10,400 Accounts payable Accounts receivable 21,000 Notes Payable Supplies 8,960 Total Liabilities Stockholders’ Equity Common stock Retained earnings Total Stockholders’ Equity

Total Assets

$40,360

Total $0 29,740 5,020 (3,000) $31,760

$ 2,600 6,000 8,600

29,740 2,020 31,760

Total Liabilities & Stockholders’ Equity $40,360

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PROBLEMS—SET B P3-1B. Transaction Analysis and Adjustments (LO2, 3) a. BALANCE SHEET

INCO M E STATE M E NT

Net Assets 1 Prepaid rent

Liabilities

-575

Rent expense

= Income 575 -575

-73

Insurance expense

-73

-45

Depreciation expense

-45

120

-120

Utilities expense

120

-120

-185

185

Stockholders' Equity

-575

Revenues

Expenses

−

$3,450 / 6 = $575 Prepaid

2 insurance

-73 $876 / 12 = $73

Accumulated depreciation 3 equipment

-45 $2,700 / 60 = $45 Utilities payable Advances from customers

Fee revenue

185

$535 / 3 =$185

Huang Karate School Income Statement For the month of June Fee revenue (2,200+185) Advertising expense

TESTBANKSE$2,385 LLER.COM

Repairs expense Wages expense Rent expense Insurance expense Depreciation expense Utilities expense Total Expenses

$225 275 650 575 73 45 120

1,963

Net income

$422 Huang Karate School Balance Sheet June 30

Cash

Accounts receivable Prepaid rent (3,450+575) Prepaid insurance (876-73) Equipment Less: Accumulated depreciation Total Assets

3,679

400 2,875 803 2,700 (45) $ 10,412

Accounts payable

2,000

Utilities payable 120 Advances from customers (555-185) 370 Common Stock 7,500 Retained earnings 422 Total Liabilities and Stockholders' equity $ 10,412

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P3-2B. Cash Basis versus Accrual Basis (LO1)

Armor Company Accrual Basis Income Statements May Sales Revenue (a) $ 300,000 $ Cost of goods sold (b) (200,000) Compensation expense (30,000) Net income (loss)

June

70,000 $

0 0 -

(a) Revenue is earned when the items are shipped in May (4,000 x $75). (b) The cost of the 4,000 bicycles sold is expensed in May (4/5 x $250,000). The balance of the bicycles (5,000 - 4,000) are held in inventory on the balance sheet.

P3-3B. Transaction Analysis and Adjustments (LO2) BALANCE SHEET

Assets

INCO M E STATE M E NT

Stockholders' Equity

TESTBANKSELLER.COM

Liabilities

Prepaid

1 advertising

-1,540

Revenues

Net −

Expenses

= Income

-1,540

Advertising expense

1,540

-1,540

-5,280

Depreciation expense

5,280

-5,280

325

-325

1,200

-1,200

4,750

-4,750

$1,680 x 11/12 = $1,540 Accumulated depreciation 2 equipment

-5,280 $42,240/8 years = $5,280 Utilities payable 325 Wages payable 1,200

3 4 5 Supplies

6 7

-4,750 $6,270 - $1,520 = $4,750 Interest payable 450 Rent payable 430 1/2% x $86,000 = $430

-4,750

Utilities expense Wages expense Supplies expense

-450

Interest expense

450

-450

-430

Rent expense

430

-430

-325 -1,200

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P3-4B. Transaction Analysis, Adjustments and Financial Statements (LO2, 3) a.

BALANCE SHEET

INCO M E STATE M E NT

Net Assets 1 Prepaid rent

Liabilities

Stockholders' Equity

-795

Revenues

Expenses

−

-795

Rent expense

= Income 795 -795

$4,770/6 months = $795

2 Supplies

-1,980

Supplies expense

-1,980

1,980

-1,980

335

-335

560

-560

390

-390

$3,700 - $1,720 = $1,980 Accumulated

3 depreciation

-335 $36,180/108 months = $335 Wages payable 560 Utilities payable 390 Unearned Service revenue -500

4 5

Depreciation expense

-335

-390 Service revenue

500

The Wheel Place, Inc. Income Statement For the month of March Service revenue(12,360+500) Wages expense(3,900+500) Rent expense Supplies expense Depreciation expense Utilities expense Total Expenses Net income

Wages expense Utilities expense

-560

500

$12,860

$4,460 TESTBA795 NKSELLER.COM 1,980 335 390 7,960 $4,900 The Wheel Place, Inc. Balance Sheet March 31

Cash Accounts receivable(4,770-795) Prepaid rent Supplies Equipment Less: Accumulated depreciation Total Assets

1,900 3,820 3,975

Accounts payable Wages payable Utilities payable

1,720 36,180 (335)

Advances from customers Common Stock Retained earnings Total Liabilites and Stockholders' equity

$ 47,260

2,510 560 390 500 38,400 4,900

$ 47,260

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P3-5B. Transaction Analysis and Adjustments (LO2) INCO M E STATE M E NT

BALANCE SHEET

Assets

Liabilities

Stockholders' Equity

Net Revenues

−

-195

Insurance expense

195

-195

-980

Wages expense

980

-980

Prepaid

1 insurance

-195 $2,340 x 3/36 = $195 Wages 980 payable $1,225 x 4/5 = $980 Unearned -1,200 service fees $3,600/3 = $1,200

1,200

Service fees

1,200

450

Commission revenue

450

Commissions

4 receivable

450 $9,000 x .05 = $450 Utilities 495 payable

5 6 Supplies

$16,900 - $3,500 = $13,400 Interest 75 payable

Unearned -2,500 parking fees $10,000/4 = $2,500

495

-495

-13,400

Utilities expense Supplies expense

13,400

-13,400

-75

Interest expense

-75

-495

-13,400

= Income

Expenses

2,500

Parking fees

2,500

TESTBANKSELLER.COM P3-6B. Adjustments (LO2) BALANCE SHEET

Assets

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

Net Revenues

Prepaid

a. advertising

-1,400

b. Prepaid c. insurance

-3,140

Wages expense Insurance expense

-1,700 -3,140

$5,420 - $2,280 = $3,140 Unearned service fees -3,400

Expenses Advertising expense

-1,400 $2,200 - $800 = $1,400 Wages payable 1,700

−

= Income 1,400

-1,400

1,700

-1,700

3,140

-3,140

3,400

Service fees

3,400

3,500

Rental revenue

3,500

$5,400 - $2,000 = $3,400

e. Rent receivable

3,500

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P3-7B. Adjustments (LO2) BALANCE SHEET

Assets

INCO M E STATE M E NT

Liabilities

Stockholders' Equity

Net Revenues

Prepaid

1 maintenance

-2,000

Expenses

−

= Income

-2,000

Maintenance expense

2,000

-2,000

-7,200

Supplies expense

7,200

-7,200

$3,000 x 4/6 = $2,000

2 Supplies

-7,200 $10,400 - $3,200 = $7,200 Unearned commission fees -6,500

6,500

Commission revenue

6,500

3,500

Commission revenue

3,500

$10,500 - $4,000 = $6,500

Fees receivablae

3,500 Rent payable

1,070

-1,070

Rent expense

1,070

1% x ($97,000 + $6,500 + $3,500) = $1,070

P3-8B. Financial Statements (LO3) OUTDOORS, INC. Income Statement For TEYear STBEnded ANKSDecember ELLER.31 COM Revenue Subscription revenue Advertising revenue Total Revenues Expenses Salaries expense Printing and mailing expense Rent expense Supplies expense Insurance expense Depreciation expense Income tax expense Total Expenses Net income

Balance, January 1 Add: Net income Balance, December 31

$188,300 49,700 $238,000 $120,230 85,600 8,800 6,100 1,860 5,500 1,600 229,690 $ 8,310

OUTDOORS, INC. Statement of Stockholders’ Equity For Year Ended December 31 Common Stock Retained Earnings $ 25,000 $ 23,220 8,310 $ 25,000 $31,530

Total $ 48,220 8,310 $56,530

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-1,070

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OUTDOORS, INC. Balance Sheet December 31 Assets Cash

$ 5,400

Accounts receivable Supplies Prepaid insurance Office equipment Less: Accum. depreciation

18,600 4,200 930 $66,000 (13,000)

Total Assets

53,000

$82,130

Liabilities Accounts payable Unearned subscription revenue Salaries payable Total Liabilities

$12,100 10,000 3,500 25,600

Stockholders’ Equity Common Stock Retained Earnings Total Stockholders’ Equity

$25,000 31,530

Total Liabilities & Stockholders’ Equity

56,530

$82,130

P3-9B. Revenue Recognition (LO1)

Jensen Publishing Accrual Basis Income Statements

TESTBANKSYear ELL1ER.COM Year 2 Subscription revenue (a)

$300,000

Year 3 $300,000

Depreciation expense (b) Printing supplies expense Salaries expense Net income (loss)

24,000 25,000 100,000 $151,000

(a) Revenue is recognized when earned regardless of when cash is received. $900,000 / 3 years = $300,000 (b) Depreciation allocates the cost of equipment over periods benefitting from their use. $120,000/5 years = $24,000

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P3-10B. Financial Statements (LO3) THE DOG WHISPERER, INC. Income Statement For Month Ended January 31 Revenue Fees earned Expenses Maintenance expense Advertising expense Office rent expense Supplies expense Utilities expense Salaries expense Total Expenses Net income

$16,470 $ 460 350 800 760 200 4,480 7,050 $ 9,420

THE DOG WHISPERER, INC. Statement of Stockholders’ Equity For Month Ended January 31 Common Stock TESTBANKSELLER.CO$0M Balance, January 1 Add: Capital contributed 39,000 Net income Less: Dividends paid

Retained Earnings $0

(1,100)

Total $0 39,000 9,420 (1,100)

Balance, January 31

$8,320

$47,320

Assets Cash Accounts receivable Supplies Total current assets Facilities

Total Assets

$39,000

9,420

THE DOG WHISPERER, INC. Balance Sheet January 31 Liabilities $ 7,300 Accounts payable 8,200 1,640 Stockholders’ Equity 17,140 Common stock Retained earnings 31,000 Total Stockholders’ Equity

$48,140

820

$39,000 8,320 47,320

Total Liabilities & Stockholders’ Equity $48,140

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P3-11B. Financial Statements (LO3) COLUMBUS SERVICE COMPANY Income Statement For Month Ended January 31 Revenue Service fees earned Expenses Advertising expense Interest expense Rent expense Salaries expense Supplies expense Utilities expense Total Expenses Net income

$51,520 $

840 100 3,400 16,000 20,500 640 41,480 $ 10,040

COLUMBUS SERVICE COMPANY. Statement of Stockholders’ Equity For Month Ended January 31 Common Stock TESTBANKSELLER.CO$0M Balance, January 1 Add: Capital contributed 59,480 Net income Less: Dividends paid

Retained Earnings $0 10,040 (6,000)

Total $0 59,480 10,040 (6,000)

Balance, January 31

$59,480

$4,040

$63,520

Cash Accounts receivable Supplies Total current assets

COLUMBUS SERVICE COMPANY Balance Sheet January 31 $20,800 Accounts payable 42,000 Notes payable 17,920 Total Liabilities 80,720 Stockholders’ Equity Common stock Retained earnings Total Stockholders’ Equity

Total Assets

$80,720

Total Liabilities & Stockholders’ Equity

$ 5,200 12,000 17,200

59,480 4,040 63,520 $80,720

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SERIAL PROBLEM: ANGEL CITY GREETINGS SP3. a.

BALANCE SHEET

INCO M E STATE M E NT

Net Assets

Liabilities

Stockholders' Equity

Revenues

Expenses

−

= Income

No financial statement 1 effect

2 Cash

450

1,500

Accounts

3 receivable 4 Cash

-250

5 Cash

500

6 Cash

-200

7 8 Cash Supplies

Teaching revenue Greeting card revenue

1,500

1,500 250

-250

200

-200

100

-100

800

-800

100

-100

100 1,000

-100 -1,000

-85

500

-100

Wages expense Wages expense

-800

Cost of goods sold

-200 Wages payable

450

Utilities expense

-250 Advances from customers

450

100

-1,000 1,000

9 Supplies

-800 Beginning supplies inv. + purchases - ending supplies inv. = $100+$1,000-$300=$800 Accumulated

10 depreciation

-100

Prepaid insurance 11 Cash 12 Cash

-100 -1,000 -500

TESTBANKSELLER-100 .COM -100 -1,000 -500 Accounts payable

-85

Depreciation expense Insurance expense Wage expense Utilities expense

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Angel City Greetings Income Statement For the month of October Service revenue (1,500+450) Wages expense (200+100+1,000) 1,300 Cost of goods sold 800 Depreciation expense 100 Insurance expense 100 Utilities expense (85+250) 335 Total Expenses Net income

$ 1,950

2,635 $ (685)

Angel City Greetings Balance Sheet October 31 Cash* Accounts receivable Prepaid insurance (1,100-100) Supplies (100+1,000-800) Equipment Accumulated depreciation

Total Assets

4,100 1,500 1,000 300 4,800 (200)

Accounts payable Wages payable Note payable Advances from customers Common Stock Retained earnings**

and TESTBANKSELLERTotal .CLiabilities OM $ 11,500

Stockholders' equity

85 100 0 500 10,000 815

$ 11,500

*(6,100+450-250+500-200-1,000-100-500) **(2,000-685-500)

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EXTENDING YOUR KNOWLEDGE REPORTING AND ANALYSIS EYK3-1. Financial Reporting Problem: Columbia Sportswear Company a. Prepaid expenses b. Accrued liabilities (accrued salaries, accrued product warranties) c. Depreciation (and amortization) expense = $59,945,000 (from the Statement of Cash Flows). This accrual is likely part of Property, plant, and equipment, net for the depreciation portion and Intangible assets, net for the amortization portion. d. All of the income statement accounts, and dividends. These accounts will be closed to the retained earnings account.

EYK3-2. Comparative Analysis Problem: Columbia Sportswear Company vs. Under Armour, Inc. a. Columbia: Accounts receivable/ Sales Prepaid expenses/A combination of expenses including advertising and insurance Accounts payable/Cost of goods sold Accrued liabilities/A combination of expenses, mostly compensation expense b. Under Armour:

Prepaid expenses/A ofCexpenses including TESTBANcombination KSELLER. OM advertising and insurance Accounts receivable/ Sales Accounts payable/Cost of goods sold Deferred income taxes/ Income tax expense Accrued expenses/compensation expense and marketing

expense

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EYK3-3. Business Decision Problem The following analysis shows how the relevant information affects total assets, liabilities, and stockholders’ equity of the firm:

Per Original balance sheet 1. Recognition of insurance expense ($4,500  1/2 = $2,250) 2. Depreciation correction (5%  $68,500 = $3,425) 3. No adjustment 4. Unbilled services performed Advance consulting fee earned ($11,300  1/2 = $5,650) 6. Recognition of supplies expense ($13,200 − $4,800 = $8,400) Revised totals

Assets $88,500

Liabilities $45,900

Stockholders’ Equity $42,600

-2,250

3,425

6,000

-8,400 $87,275

-5,650

5,650

$40,250

-8,400 $47,025

a. Revised debt-to-equity ratio: $40,250/$47,025 = 0.86. Apparently, the loan agreement has not been violated. b. The loan agreement contained the debt-to-equity provision as a loan covenant to constrain the behavior of the management of the firm. Loan covenants help lenders insure that a business doesn’t make itself riskier, and thereby put in jeopardy its ability to pay interest or TESTBANKSELLER.COM repay principal.

EYK3-4. Financial Analysis Problem a. The FASB was established in 1973. b. As reported on the FASB Website, “The collective mission of the FASB, [the Governmental Accounting Standards Board (GASB) and the FAF] is to establish and improve financial accounting and reporting standards to provide useful information to investors and other users of financial reports and educate stakeholders on how to most effectively understand and implement those standards.” c. “The FASB is recognized by the Securities and Exchange Commission as the designated accounting standard setter for public companies. FASB standards are recognized as authoritative by many other organizations, including state Boards of Accountancy and the American Institute of CPAs (AICPA). The FASB develops and issues financial accounting standards through a transparent and inclusive process intended to promote financial reporting that provides useful information to investors and others who use financial reports.The Financial Accounting Foundation (FAF) supports and oversees the FASB.” d. The answer to this part will vary by student and by when the question is assigned. Current projects include: Current Taxonomy Projects and FASB Activities Related to IASB Projects.

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CRITICAL THINKING EYK3-5. Accounting Research Problem a. Assets that indicate General Mills uses the accrual basis of accounting include (1) receivables, (2) prepaid expenses and (3) buildings and equipment. The accrual adjustment for receivables affects the sales revenue account. The accrual adjustment for prepaid expenses affects various expense accounts. The accrual adjustment for buildings and equipment affects depreciation expense. b. Liabilities that indicate General Mills makes accrual-type adjustments are (1) accounts payable and (2) deferred income taxes. The adjustment for accounts payable affects various expense accounts. The adjustment for deferred income taxes affects income tax expense.

EYK3-6. Accounting Communication Activity To whom it may concern: The concept of accrual accounting is often misunderstood, and as such is often less favored than a simple cash basis of accounting. The cash basis accounting is very similar to a basic checkbook. It simply records the inflows and outflows of cash. Accrual accounting, in contrast, attempts to better match the actual economic performance of a company in a given accounting period without respect to its actual cash inflows and outflows. It does this by reporting revenues when they are earned, regardless of the timing of the cash receipt. Expenses are then matched against the revenue that has been recognized in the same period, again regardless of the cash expenditure timing. A simple example can demonstrate how the accrual method can better TESTBANKSELLER.COM measure performance in a given period. Assume that a company purchases a large building and equipment in a given year for cash. This building and equipment will generate significant increased sales in the future periods. Under the cash basis of accounting, the entire cash payment would be subtracted from the current period, resulting in a poor current period performance, while future periods would benefit from this expenditure but not be assigned any of its cost. Under the accrual basis, the building and equipment will be capitalized as an asset in the current period so that its entire cost does not unfairly get assigned to the current period. Through depreciation, this cost will be assigned to future periods and matched to the sales that are generated from this expenditure. Sincerely Your name.

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EYK3-7. Accounting Ethics Case Discussion of this case may consider the following ethical considerations facing Kravetz: 1. Balancing the long-run interests of the firm (securing the international contract) against the short-run requirements to present accurately the financial data of the company for the current year (recording $150,000 adjusting entry). 2. Compromising the confidentiality of the contract negotiations (by disclosing the contract negotiations to additional persons) versus compromising her professional responsibilities (by omitting a significant year-end adjusting entry). 3. Jeopardizing her position with the firm (by revealing information the president wants kept secret) versus risking possible future legal action by parties relying on the firm's financial statements (by not revealing a significant accrued expense and accrued liability in the financial statements). Discussion of this case should also note that outside auditors frequently access confidential data and disclosing the contract negotiations to the auditor should not represent a significant breach of confidentiality. Perhaps Kravetz can achieve a reasonable solution to her dilemma by suggesting that an adjusting entry be recorded and described in very general terms (for example, labeling the liability Payable to Consultants and indicating it is for marketing research and development). Such an adjustment would permit the disclosure of the significant liability without revealing important details to anyone else within or outside the company.

EYK3-8. Corporate Social Responsibility Problem a. Subjective areas within the financial statements include all data items that must be estimated by management, to include the expected useful life of depreciable and amortizable assets, TESTBANKSELLER.COM the estimate of doubtful accounts, the estimate of product warranty costs, the estimate of product returns, and the estimate of income taxes due, among others. b. Because the accrual basis of accounting permits (a) the recognition of revenue that has not been collected and (b) the reporting of expenses of expenses that have not been paid, financial reporting requires that certain estimates be made. Thus, some subjectivity must occur within the financial accounting framework. In the case of CSR, by definition, this system attempts to measure aspects of company behavior that are not easily quantified, thus requiring a subjective measurement of such behavior (i.e. environmental friendliness and workforce diversity).

EYK3-9. Forensic Accounting Problem Since wages in kind depends on the employees’ perception that they are justified in committing fraud, the employer must confront this judgment from a moral and legal perspective. Additionally, educating employees as to the repercussions involved may reduce the likelihood of such occurrences. Good personnel policies are also important in preventing this type of fraud. These policies should include (1) adequate personnel screening procedures, (2) antifraud training, and (3) equitable employee compensation.

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Chapter 4 Understanding Accounting Information QUESTIONS 1.

The asset subgroups found on the classified balance sheet include current assets, property, plant and equipment, intangible assets, and other noncurrent assets.

Current assets are cash and other assets that will be converted to cash or used up during the normal operating cycle of a business or one year, whichever is longer. The normal operating cycle of a business is the average period of time between the use of cash to provide a service or buy inventory for resale and the subsequent collection of cash from customers.

The following are current assets: cash, prepaid expense, accounts receivable, and inventory.

TESTBANKSELLER.COM

Corporate social responsibility is often associated with three components, an economic component, a social component, and an environmental component. In order to act in a socially responsible way, a corporation is expected to balance the needs of stakeholders across these three dimensions

The current ratio, calculated as current assets divided by current liabilities, is a measure of firm liquidity. The debt-to-total assets ratio, calculated as total debt divided by total assets, is a measure of firm solvency. The profit margin, calculated as net income divided by net sales, is a measure of firm profitability.

Socially responsible investing (SRI), also known as sustainable investing, considers a firm’s environmental stewardship, consumer protection, human rights, and diversity, in addition to its financial performance when deciding whether or not to invest in a company.

d. Both a. liquidity and b. solvency

b. The current ratio is a measure of firm liquidity.

b. Income statement

10.

b. Means investing in companies that adhere to environmental and social policies in their operations.

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SHORT EXERCISES SE4-1. Preparing a Classified Balance Sheet (LO3) DINO COMPANY Balance Sheet January 31 Assets Current Assets: Cash Accounts receivable Inventory Total Current Assets

Noncurrent Assets: Property, plant & equipment Total Noncurrent Assets

Total Assets

400 1,200 2,500 4,100

Liabilities & Stockholders' Equity Current Liabilities: Accounts payable $ 800 Other current liabilities 600 Total Current Liabilities

1,400

10,000 10,000

Noncurrent Liabilities: Long-term notes payable Total Liabilities

8,000 9,400

$14,100

Stockholders' equity Total Liabilities & Stockholders’ Equity

4,700 $14,100

TESTBANKSELLER.COM SE4-2. Evaluating Firm Profitability (LO6) Smith Company

$10,000 / $50,000 =

Profit margin 20.0%

Wesson Company

$100,000 / $400,000 =

25.0%

The Wesson Company is more profitable not only in an absolute sense ($100,000 vs. $10,000) but also in a relative sense—Wesson’s return on sales is 25 percent versus Smith’s 20 percent.

SE4-3. Evaluating Firm Liquidity (LO5) Drucker Company Ito Company

$250,000/$100,000 =

Current ratio 2.50

$50,000/$15,000 =

3.33

The Ito Company appears to have better liquidity than the Drucker Company based on a current ratio of 3.33 versus Drucker’s current ratio of 2.50.

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SE4-4. Evaluating Firm Solvency (LO5) Lambeth Company

$350,000/$550,000 =

Debt-to-Total assets 63.6%

Maritza Company

$850,000/$1,000,000 =

85.0%

Lambeth Company has a lower debt-to-total assets ratio, and thus, it would be considered to be more solvent than the Maritza Company.

SE4-5. Statement of Cash Flows (LO8) c. Total Assets does not appear on the statement of cash flows.

SE4-6. Debt-to-Total Assets Ratio (LO5) b. $25,000 / $40,000 = 2.5:4 or 0.625:1 or 62.5%

SE4-7. Profit Margin (LO6) d. ($3,500,000 – $2,800,000) $3,500,000

= 20%

TESTBANKSELLER.COM SE4-8. The Multi-Step Income Statement (LO4) Dino Company Income Statement For Month Ended January 31 Net sales Cost of goods sold Gross profit Operating expenses Operating income Other income Income before income tax Income tax expense Net income

$10,000 4,000 6,000 3,000 3,000 500 3,500 1,200 $ 2,300

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EXERCISES—SET A E4-1A. Preparing a Classified Balance Sheet (LO3) BERKLY WHOLESALERS Balance Sheet December 31 Assets Current Assets Cash Accounts receivable Inventory Office supplies Total Current Assets

$26,000 40,000 117,000 2,000 185,000

Noncurrent Assets Land Building Total Noncurrent Assets

45,000 67,000 112,000

Total Assets

$297,000

TESTBANKSELLER.COM

Liabilities & Stockholders' Equity Current Liabilities Accounts payable Salaries payable Total Current Liabilities Long-term Liabilities Mortgage payable Total Liabilities

$ 43,000 7,000 50,000

78,000 128,000

Stockholders' Equity Common stock Retained earnings Total Stockholders’ Equity

111,000 58,000 169,000

Total Liabilities & Stockholders’ Equity

$297,000

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E4-2A Multi-Step Income Statement (LO4) Karlman Distributors Income Statement For the Year Ended December 31 Sales revenue Cost of goods sold Gross profit on sales Selling, general, and administrative expenses Income from operations Other income and expense Interest expense Income before income tax Income tax expense Net income

$550,000 330,000 220,000 186,000 34,000 3,000 31,000 10,000 $21,000

E4-3A. Evaluating the Liquidity and Solvency of a Company (LO5, LO6) a. True b. False. Return on assets is the rate of return on a dollar invested in assets. c. False. The profit margin is a measure of firm’s profitability. d. False. It is a measure of a firm’s solvency. E4-4A. Classified Balance SheetTESTBANKSELLER.COM (LO3) WERTHMAN COMPANY Balance Sheet December 31 Assets Liabilities & Stockholders' Equity Current Assets: Current Liabilities: Cash $ 17,000 Accounts payable $ 21,000 Accounts receivable 15,000 Other current liabilities 18,000 Inventory 65,000 Total Current Liabilities 39,000 Other current assets 25,000 Total Current Assets 122,000 Noncurrent Liabilities: Long-term liabilities 55,000 Noncurrent Assets: Total Liabilities 94,000 Property, plant & equipment 200,000 Other long-term assets 40,000 Stockholders' Equity Total Noncurrent Assets 240,000 Common stock 95,000 Retained earnings 173,000 Total Stockholders' Equity 268,000

Total Assets

$362,000

Total Liabilities & Stockholders’ Equity

$362,000

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E4-5A. Profitability, Liquidity, and Solvency Ratios (LO5, LO6) 1. Profit margin = $25,200/ $180,000 = 0.140 = 14.0% 2. Current ratio = $40,500/$27,000 = 1.50 3. Debt-to-total assets ratio = $97,500/$130,000 = 0.750 = 75.0% 4. Return on assets ratio = $25,200/$130,000 = 0.194 = 19.4%

E4-6A. Return on Assets (LO4) a. 2017

2016

ROA =

$48,351 $375,319

$45,687 $321,686

12.9%

14.2%

b. Apple’s performance, as measured by its return on assets, decreased from 14.2% in 2016, to 12.9% in 2017. E4-7A. Statement of Stockholders’ Equity (LO7) MAXX COMPANY Statement of Stockholders’ Equity TES TBYear ANKEnded SELLDecember ER.COM 31 For

Balance at beginning of year Issuance of common stock Net income Less: Dividends Balance at end of year

Common Stock $5,000 400 _____ $5,400

Retained Earnings $7,500 2,500 ( 250) $9,750

Total Stockholders’ Equity $12,500 400 2,500 ( 250) $15,150

E4-8A. Profit Margin (LO6) Prior year profit margin = 10% = Net income / $100,000. Therefore prior year net income was $10,000. Current year net income = $10,000 x 1.05 = $10,500 Current year sales = $100,000 x 1.10 = $110,000 Current year profit margin = $10,500 / $110,000 = 9.5%

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E4-9A. Statement of Stockholders’ Equity (LO7) Total stockholders’ equity = $80,000 + $175,400 + $32,250 - $8,500 + $15,000 = $294,150

E4-10A. Statement of Cash Flows (LO8) a. False. The income statement reveals if a firm is profitable. b. True. The statement of cash flows reveals a firm’s cash flow health. c. True. The statement of cash flows reveals a firm’s liquidity from operations. d. False. The statement of cash flows is only for the current period and does not reveal future cash flows.

TESTBANKSELLER.COM

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EXERCISES—SET B E4-1B. Preparing a Classified Balance Sheet (LO3) BALFORD WHOLESALERS Balance Sheet December 31 Assets Current Assets Cash Accounts receivable Inventory Office supplies Total Current Assets

$40,000 54,000 142,000 2,000 238,000

Noncurrent Assets Land Building and equipment Total Noncurrent Assets

58,000 91,000 149,000

Total Assets

$387,000

Liabilities & Stockholders' Equity TESTBANKSELLER.COM Current Liabilities Accounts payable Salaries payable Total Current Liabilities

$ 52,000 8,000 60,000

Long-term Liabilities Mortgage payable Total Liabilities

100,000 160,000

Stockholders' Equity Common stock Retained earnings Total Stockholders’ Equity

136,000 91,000 227,000

Total Liabilities & Stockholders’ Equity

$387,000

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E4-2B Multi-Step Income Statement (LO4) KOKOMO WHOLESALE Income Statement For the Year Ended December 31 Sales revenue $658,000 Cost of goods sold Gross profit on sale Selling, general, and administrative Income from operations Other income and expense: Interest expense Income before income tax Income tax expense Net income

400,000 258,000 223,000 35,000 4,000 31,000 8,000 $ 23,000

E4-3B. Evaluating the Liquidity and Solvency of a Company (LO5, LO6) a. False. The current ratio is a measure of liquidity. b. False. Return on assets is the rate of return on a dollar invested in assets. c. False. The profit margin is a measure of firm’s profitability. d. True. E4-4B. Classified Balance SheetTESTBANKSELLER.COM (LO3) CAMBRIDGE COMPANY Balance Sheet December 31 Assets Current Assets: Cash Accounts receivable Inventory Other current assets Total Current Assets

$ 20,000 15,000 65,000 30,000 130,000

Noncurrent Assets: Property, plant & equipment Other long-term assets Total Noncurrent Assets

200,000 40,000 240,000

Total Assets

$370,000

Liabilities & Stockholders' Equity Current Liabilities: Accounts payable $ 21,000 Other current liabilities 18,000 Total Current Liabilities 39,000 Noncurrent Liabilities: Long-term liabilities Total Liabilities

55,000 94,000

Stockholders' Equity Common stock Retained earnings Total Stockholders' Equity

105,000 171,000 276,000

Total Liabilities & Stockholders’ Equity

$370,000

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E4-5B. Profitability, Liquidity, and Solvency Ratios (LO5, LO6) 1. Profit margin = $75,000 / $280,000 = 0.268 = 26.8% 2. Current ratio = $40,500 / $27,000 = 1.50 3. Debt-to-total assets ratio = $97,500 / $130,000 = 0.750 = 75.0% 4. Return on assets ratio = $75,000 / $130,000 = 0.577 = 57.7 %

E4-6B. Return on Assets (LO4) a. Year 2

Year 1

ROA =

$ 8,400 $61,450

$10,750 $63,900

13.7%

16.8%

b. Daisy Company’s performance, as measured by its return on assets, decreased from 16.8% in Year 1, to 13.7% in Year 2. E4-7B. Statement of Stockholders’ Equity (LO7) PALATIN COMPANY Statement of Stockholders’ Equity TE STYear BANEnded KSELDecember LER.COM For 31

Balance at beginning of year Issuance of common stock Net income Less: Dividends Balance at end of year

Common Stock $45,000 4,000

$49,000

Retained Earnings $17,500 22,500 (9,250) $30,750

Total Stockholders’ Equity $62,500 4,000 22,500 (9,250) $79,750

E4-8B. Return on Sales (LO6) Prior year profit margin = 20% = Net income / $250,000. Therefore prior year net income was $50,000. Current year net income = $50,000 x 1.15 = $57,500 Current year sales = $250,000 x 1.10 = $275,000 Current year profit margin = $57,500 / $275,000 = 20.9%

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E4-9B. Statement of Stockholders’ Equity (LO7) Total stockholders’ equity = $120,000 + $325,500 - $23,750 - $8,000 + $35,000 = $448,750

E4-10B. Statement of Cash Flows (LO8) a. False. The balance sheet reveals if a firm is “rich.” b. True. The statement of cash flows reveals a firm’s cash flow health. c. True. The statement of cash flows reveals a firm’s liquidity from operations. d. False. The statement of cash flows is only for the current period and does not reveal future cash flows.

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PROBLEMS—SET A P4-1A. Preparing a Classified Balance Sheet (LO3) CRANE DISTRIBUTORS Balance Sheet December 31 Assets Current Assets Cash Accounts receivable Inventory Prepaid insurance Supplies Total Current Assets Noncurrent Assets Delivery equipment Less: Accumulated depreciation Total Noncurrent Assets

$ 15,200 110,200 114,000 2,400 6,400 248,200

80,000 35,000 45,000

Total Assets

$293,200

TESTBANKSELLER.COM Liabilities & Stockholders' Equity Current Liabilities Accounts payable

$ 70,000

Stockholders' Equity Common stock Retained earnings Total Stockholders’ Equity

100,000 123,200 223,200

Total Liabilities & Stockholders’ Equity

$293,200

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P4-2A. Preparing a Classified Balance Sheet (LO3) MARSHALL CORPORATION Balance Sheet December 31 Assets Current Assets Cash Accounts receivable Inventory Prepaid insurance Total Current Assets

$ 46,400 95,200 90,000 300 231,900

Noncurrent Assets Furniture and equipment Less: Accumulated depreciation

97,000 38,800

Total Noncurrent Assets

58,200

Total Assets

$290,100 Liabilities & Stockholders' Equity

Current Liabilities Accounts payable

TESTBANKSELLER.COM $ 17,400

Stockholders' Equity Common stock Retained earnings Total Stockholders’ Equity

200,000 72,700 272,700

Total Liabilities & Stockholders’ Equity

$290,100

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P4-3A. Multi-Step Income Statement (LO4) Fletcher Distributors Income Statement For the Year Ended December 31 Sales revenue Cost of goods sold Gross profit on sales Selling, general and administrative expenses Income before income tax Income tax expense Net income

$785,800 513,400 272,400 191,200 81,200 30,000 $51,200

Selling, general and administrative expenses: $191,200 = 118,000+40,000+8,400+4,000+16,000+4,800

P4-4A. Preparing the Financial Statements (LO3, LO8) HUNTINGTON COMPANY Statement of Cash Flows For Year Ended June 30 Cash flow provided by operating activities Cash flow from investing activities Cash flow from financing activities

$ 21,000 (15,300) 1,300

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Increase in cash Cash, beginning of year Cash, end of year

7,000 9,000 $ 16,000

HUNTINGTON COMPANY Balance Sheet June 30 Assets Liabilities & Stockholders’ Equity Current Assets Current Liabilities $ 22,000 Cash $ 16,000 Long-term liabilities 18,250 Accounts receivable 12,200 Total Liabilities 40,250 Inventory 5,500 Other current assets 1,500 Stockholders’ Equity Total Current Assets 35,200 Long-term Assets Common stock 51,000 Retained earnings 10,950 Property, plant & equipment 40,000 Total Stockholders’ Equity 61,950 Intangible assets 9,500 Other long-term assets 17,500 Total Long-term Assets 67,000 Total Liabilities & Total Assets $102,200 Stockholders’ Equity $102,200

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P4-5A. Assessing a Firm’s Profitability, Liquidity, and Solvency (LO5, LO6) 2020 Current ratio

55,000/70,000 = 0.79

Debt-to-total assets ratio Profit margin

112,000/170,000 = 65.9%

2019 35,000/29,000 = 1.21 72,000/120,000 = 60.0% 17,500/132,000 13.3%

25,200/187,000 13.5%

The company’s liquidity, as reflected by the current ratio, declined dramatically from 2019 to 2020. Its solvency, as measured by the debt-to-total assets ratio, decreased over the one year period. And, its profitability, as reflected in its profit margin, increased marginally from 13.3 percent in 2019 to 13.5 percent in 2020.

P4-6A. Profitability and the Income Statement (LO4, LO6) LONGO & COMPANY Income Statement For the current year Net revenue $58,500 Cost of goods sold 12,300 Gross profit 46,200 Operating expenses TESTBANKSE26,000 LLER.COM Operating income 20,200 Other expenses 700 Income before income taxes 19,500 Income tax expense 5,400 Net income

$14,100

Longo’s profit margin for the current year was 24.1 percent ($14,100/$58,500), and thus, the company’s profitability is increasing since its profit margin in the prior year was only 20 percent.

P4-7A. Preparing the Statement of Stockholders’ Equity (LO7) LIKERT & CO. Statement of Stockholders’ Equity For Year Ended December 31, 2019 Common Stock Retained Earnings Balance, January 1 $50,000 $13,000 Add: Net income for the year 30,000 Less: Dividends paid (12,000) Balance, December 31

$50,000

$31,000

Total $63,000 30,000 (12,000) $81,000

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P4-8A. Interpreting Liquidity, Solvency, and Profitability Ratios (LO5, LO6) Company A’s profitability, as revealed by its profit margin, is superior to that of Company B, but Company A’s liquidity, as revealed by its current ratio, is substantially below that of Company B. Finally, Company A’s solvency is much lower than that of Company B as indicated by its debt-to-total assets ratio. As to which company represents the best investment opportunity, Company A has higher profitability and lower solvency. Assuming that it can use leverage efficiently, Company B may be able to increase its use of debt while also increasing profits. The student may also argue that Company B has better liquidity, better solvency, and its profitability is just slightly less than Company A, so Company B may be the better investment.

P4-9A. Ratio Analysis (LO5, LO6) 1. a. Profit margin b. Current ratio c. Debt-to-total assets ratio

2020 $80,000/$800,000 = 10.0% $200,000/$80,000 = 2.50 $250,000/$750,000 = 33.3%

2019 $65,000/$700,000 = 9.3% $175,000/$100,000 = 1.75 $225,000/600,000 = 37.5%

2. Nafooz Company experienced an improvement in profitability as evidenced by improvements in its profit margin. The company’s liquidity improved as evidenced by an increase in its current ratio. Finally, the decrease in the debt-to-total assets ratio is evidence of an improvement in Nafooz’s solvency.

TESTBANKSELLER.COM P4-10A Multi-Step Income Statement and Adjustments (LO4) a. a.

BALANCE SHEET

Assets Prepaid 1 Insurance

INCO M E STATE M E NT

Liabilities

Stockholders' Equity

Revenues

Expenses

−

Net Income

-4,800

Insurance expense

4,800

-4,800

-1,800

Depreciation expense

1,800

-1,800

-13,000

13,000

-13,000

3,000

-3,000

3,200

-3,200

-4,800 $6,000 - $1,200 = $4,800

Accumulated depreciation furniture and 2 fixtures Accumulated depreciationdelivery 3 equipment

Salaries payable

5 Office Supplies

-3,200

3,000

-3,000 -3,200

Depreciation expense Salaries expense Supplies expense

$4,200 - $1,000 = $3,200

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b. Boston Trading Company Income Statement For the Year Ended December 31 Sales revenue Cost of goods sold Gross profit on sales Selling, general and administrative expenses Income before income tax Income tax expense Net income

Selling, general and administrative expenses: Utilities expense Salaries expense (138,000+3,000) Delivery expense Advertising expense Rent expense Insurance expense Depreciation expense (13,000+1,800) Office supplies expense Total selling, general and administrative expenses

$630,000 404,000 226,000 199,400 26,600 9,000 17,600

4,800 141,000 10,800 5,600 14,400 4,800 14,800 3,200 199,400

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PROBLEMS—SET B P4-1B. Preparing a Classified Balance Sheet (LO3) MCKENSIE & COMPANY Balance Sheet December 31 Assets Liabilities & Stockholders’ Equity Current Assets Current Liabilities Cash $ 30,400 Accounts payable $140,000 Accounts receivable 221,000 Total Current Liabilities 140,000 Inventory 228,000 Prepaid insurance 4,800 Stockholders’ Equity Supplies 12,800 Common stock 200,000 Total Current Assets 497,000 Retained earnings 247,000 Total Stockholders’ Equity 447,000 Noncurrent Assets Delivery equipment 160,000 Less: Accumulated depreciation 70,000 Total Noncurrent Assets 90,000

Total Assets

$587,000

Total Liabilities & Stockholders’ Equity $587,000

TESTBANKSELLER.COM P4-2B. Preparing a Classified Balance Sheet (LO3) ST. JOHN CORPORATION Balance Sheet December 31 Assets Current Assets Cash Accounts receivable Inventory Prepaid insurance Total Current Assets

$ 92,800 190,400 180,000 600 463,800

Noncurrent Assets Furniture & equipment

194,000

Less: Accumulated depreciation Total Noncurrent Assets

Total Assets

Liabilities & Stockholders’ Equity Current Liabilities Accounts payable $ 34,800 Total Current Liabilities 34,800 Stockholders’ Equity Common stock Retained earnings Total Stockholders’ Equity

400,000 145,400 545,400

77,600 116,400

$580,200

Total Liabilities & Stockholders’ Equity $580,200

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P4-3B Multi-Step Income Statement (LO4) Leventhal Corporation Income Statement For the Year Ended December 31 Sales revenue Cost of goods sold Gross profit on sales Selling, general, and administrative expenses Income before income tax Income tax expense Net income

$365,200 214,800 150,400 137,300 13,100 3,000 $10,100

Selling, general and administrative expenses: $137,300 = 92,000+20,800+6,800+1,500+3,200+13,000

P4-4B. Preparing the Financial Statements (LO3, LO8) MANHATTAN COMPANY Statement of Cash Flows For Year Ended June 30 Cash flow provided by operating activities $42,000 Cash flow from investing activities (30,600) Cash flow from financing activities TESTBANKSELLER.COM 2,600 Increase in cash

14,000

Cash, beginning of year Cash, end of year

18,000 $32,000

MANHATTAN COMPANY Balance Sheet June 30 Assets Liabilities & Stockholders’ Equity Current Assets Current liabilities $ 44,000 Cash $ 32,000 Long-term liabilities 36,500 Accounts receivable 24,400 Total Liabilities 80,500 Inventory 11,000 Other current assets 3,000 Stockholders’ Equity Total Current Assets 70,400 Common stock 102,000 Retained earnings 21,900 Total Stockholders’ Equity 123,900 Property, plant & equipment 80,000 Intangible assets 19,000 Other long-term assets 35,000 Total Long-term Assets 134,000 Total Liabilities & Stockholders’ Total Assets $204,400 Equity $204,400

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P4-5B. Assessing a Firm’s Profitability, Liquidity, and Solvency (LO5, LO6) 2020

2019

Current ratio

110,000/140,000 = 0.79

70,000/58,000 = 1.21

Debt-to-total assets ratio

224,000/340,000 = 65.9%

144,000/240,000 = 60.0%

50,400/374,000 13.5%

35,000/264,000 13.3%

Profit margin

The company’s liquidity, as reflected by the current ratio, declined dramatically from 2019 to 2020. Its solvency, as measured by the debt-to-total assets ratio, decreased over the period. And, its profitability, as reflected in its profit margin, increased marginally from 13.3 percent in 2019 to 13.5 percent in 2020.

P4-6B. Profitability and the Income Statement (LO4, LO6) VANPOOL & COMPANY Income Statement For the current year Sales revenue Cost of goods sold Gross profit Operating expenses Operating income Other expenses Income before taxes Income tax expense

$116,500 TESTBANKSE L25,200 LER.COM

Net income

91,300 52,000 39,300 1,000 38,300 10,500 $ 27,800

VanPool’s return on sales was 23.9 percent ($27,800/$116,500), and thus, the company’s profitability is decreasing since its return on sales in the prior year was 26 percent. P4-7B. Preparing a Statement of Stockholders’ Equity (LO7) THOMAS & CO. Statement of Stockholders’ Equity For Year Ended December 31, 2019 Common Stock Retained Earnings Balance, January 1 $100,000 $26,000 Add: Net income for the year 60,000 Less: Dividends paid (24,000)

Total $126,000 60,000 (24,000)

Balance, December 31

$162,000

$100,000

$62,000

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P4-8B. Interpreting Profitability, Liquidity, and Solvency Ratios (LO5, LO6) Company Y’s profitability, as revealed by its profit margin, is superior to that of Company X, but Company Y’s liquidity, as revealed by its current ratio, is below that of Company X. Finally, Company Y’s solvency is much lower than that of Company X as indicated by its debt-to-total assets ratio. As to which firm, Company X or Company Y is the best investment opportunity is open to debate. Each firm has strengths. One critical issue will be whether the solvency of Company Y at 59 percent places it at any risk of default or reduced future earnings.

P4-9B. Ratio Analysis (LO5, LO6) 1. a. Profit margin b. Current ratio c. Debt-to-total assets ratio

2020 $160,000/$1,600,000 = 10.0% $400,000/$160,000 = 2.50 $500,000/$1,500,000 = 33.3%

2019 $195,000/$1,700,000 = 11.5% $525,000/$200,000 = 2.63 $675,000/2,400,000 = 28.1%

2. Ruby Company experienced a drop in profitability as evidenced by a lower profit margin. The company’s liquidity also worsened as evidenced by a decrease in its current ratio. Finally, the increase in the debt-to-total assets ratio is evidence of a worsening in Ruby’s solvency.

P4-10B Multi-Step Income Statement and Adjustments (LO4) a. TESTBANKSELLER.COM a.

BALANCE SHEET

Assets Prepaid 1 insurance

INCO M E STATE M E NT

Liabilities

Stockholders' Equity

Revenues

Expenses

−

Net Income

-4,800

Insurance expense

4,800

-4,800

-2,000

Depreciation expense

2,000

-2,000

-10,000

10,000

-10,000

1,600

-1,600

3,000

-3,000

-4,800 $7,200 - $2,400 = $4,800

Accumulated depreciation furniture and 2 fixtures Accumulated depreciationdelivery 3 equipment

Salaries payable

5 Office Supplies

-3,000

1,600

-1,600 -3,000

Depreciation expense Salaries expense Supplies expense

$4,800 - $1,800 = $3,000

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b. Oregon Distributors Income Statement For the Year Ended December 31 Sales revenue Cost of goods sold Gross profit on sales Selling, general, and administrative expenses Income before income tax Income tax expense Net income

Selling, general and administrative expenses: Utilities expense Salaries expense (180,000+1,600) Delivery expense Advertising expense Rent expense Insurance expense Depreciation expense (2,000+10,000) Office supplies expense Total selling, general and administrative expenses

$1,154,000 821,200 332,800 303,000 29,800 11,000 $18,800

8,600 181,600 36,800 26,200 30,000 4,800 12,000 3,000 303,000

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SERIAL PROBLEM: ANGEL CITY GREETINGS SP4. a. Sentiments’ income statement will inform Kate about the firm’s profitability, whereas its statement of cash flow will reveal the principal sources and uses of cash. Sentiments’ balance sheet will reveal the company’s overall financial health. b. Kate would want to look at Sentiments’ balance sheet to calculate the current ratio, which reveals the company’s ability to pay off its current liabilities using its available current assets. Kate would also want to consider the cash flow from operations on the statement of cash flows. c. Kate would want to review Sentiments’ balance sheet and calculate its debt-to-total assets ratio that will provide some evidence regarding the company’s long-term survivability. d. Kate will want to review Sentiment’s income statement and also calculate the company’s profit margin to help her assess its profitability. e. Kate can assess Sentiments’ outstanding debt by reviewing the noncurrent liability section of the balance sheet. To determine whether the company will be able to meet its interest and principal payments will involve a review of (1) its current profitability (Is it currently meeting its interest payments?), the and (3) the debt-to-total TESTB(2)AN KScash ELLflow ERfrom .COoperations M assets ratio (Is the company excessively levered already?). f.

Kate can determine whether the company is currently paying a dividend by reviewing the statement of stockholders’ equity and/or the statement of cash flows.

g. Kate might want to check on the company’s reliability in paying its design suppliers by checking with one or more other card companies regarding their experience with Sentiments.

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EXTENDING YOUR KNOWLEDGE REPORTING AND ANALYSIS EYK4-1. Financial Reporting Problem: Columbia Sportswear Company a. 2017 2016 Total liabilities $561 million $432 million Stockholders’ equity 1,652 million 1,582 million Total 2,213 million 2,014 million b. Total Assets is exactly equal to the total of Liabilities and Stockholders’ Equity. This result is not a coincidence; rather it is by design of the basic accounting equation. c. In 2017 and 2016 Columbia’s largest asset was cash and cash equivalents, valued at $673 million and $551 million respectively. Cash represents liquidity to the company. d. Accrued liabilities amounted to $182.2 million in 2017, and were composed of: Accrued salaries Accrued product warranties Accrued import duties Other

$79.5 million 12.3 million 12.4 million 78.0 million

TESTBANKSELLER.COM EYK4-2. Comparative Analysis Problem: Columbia Sportswear Company vs. Under Armour, Inc. a. Columbia Under Armour 1. Current ratio $1,649/454 = 3.63 $2,338/1,060 = 2.21 2. Debt-to-total assets ratio $561/2,213 = 25.4% $1,988/4,006 = 49.6% 3. Profit margin $105/2,466 = 4.3% $(48)/4,977 = (0.1)% b. On the profitability measure (profit margin), Columbia reports better results. Columbia also reports a better liquidity measure (current ratio) and solvency measure (debt-to-total assets). In 2017, Under Armour reported a $124 million charge for restructuring and asset impairment resulting in a net loss.

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EYK4-3. Business Decision Problem a. 1. Current ratio 2. Debt-to-total assets ratio 3. Profit margin

2017 11,056/4,344=2.55 18,442/29,860=61.8% 397/19,093=2.1%

2016 12,584/6,949=1.81 21,717/32,862=66.1% 242/12,994=1.9%

b. Western Digital’s profitability (profit margin) increased slightly over the two years. The company’s liquidity (current ratio) improved over the period and its solvency improved, since the debt-to-total assets ratio decreased from 66.1% to 61.8%. c. Overall, Western Digital looks like a reasonable candidate for a loan however, there have been significant changes in their balance sheet and more research should be completed.

EYK4-4. Financial Analysis Problem All of Walley’s financial indicators improved from 2019 to 2020: • • • •

Liquidity improved (current ratio increased from 1.5 to 2.2). Solvency improved (debt-to-total assets ratio decreased from 63% to 55%). Profitability increased, albeit only marginally (profit margin increased from 9.1 to 9.3 percent). Net income was up 15 percent

Without more information it is difficult to determine if Walley’s is a good lending opportunity, ESTBAN KSELLinEthe R.right COMdirection. but its financial indicators areTdefinitely trending

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CRITICAL THINKING EYK4-5. Accounting Research Problem – General Mills, Inc. 1. 2017 2016 Profit margin

1,658/15,620=10.6%

2015

1,697/16,563=10.2%

1221/17,630=6.9%

There is a generally positive trend over the three-year period, increasing from 6.9% to 10.6%. 2. Current ratio

2017

2016

4,061/5,331=0.76

3,937/5,015=0.79

The company’s current ratio declined slightly from year to year. 3. Debt-to-total assets

2017 16,216/21,813=74.3%

2016 15,560/21,712=71.7%

The company’s use of debt financing has increased over the two years. EYK4-6. Accounting Communication TESTActivity BANKSELLER.COM Memo to V.J. Simmons: The three ratios are indicators of a firm’s profitability (profit margin = net income/net sales), liquidity (current ratio = current assets/current liabilities) and solvency (debt-to-total assets ratio = total debt/total assets). A higher measure of firm profitability and liquidity are good, whereas a higher measure of solvency may indicate that a business is too reliant on debt financing.

EYK4-7. Accounting Ethics Case Consider the following three items: 1. If you treat your employees ethically and fairly, they may be more loyal and more willing to pursue the companies’ vision. They may be more inclined to work harder to move the company in the direction it needs to go. Simply look at Fortune’s “Top 100 Companies To Work For” and notice how many of these companies are also successful financially. 2. If you treat your customers ethically and fairly, they may be more inclined to continue to buy from you. Reputation and “word of mouth” marketing are powerful drivers of financial performance. 3. If you are ethical and fair in your financial reporting, capital providers, such as shareholders and bankers, may be more willing to invest in your company. Trust is crucial in gaining financing.

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EYK4-8. Forensic Accounting Problem a. Debra is undertaking a form of “skimming” by ringing up only part of each transaction and pocketing the excess cash. b. One possible control is to rotate the individuals working the cash register such that no one individual always has control of the cash. Another control increasingly being used by businesses is “going cashless”—that is, only accepting debit and credit cards and eliminating or reducing the risk of employee skimming. Another control could be to encourage customers to ask for a receipt by offering them a free item if their receipt does not match what they paid.

EYK4-9. Working with the Takeaways 1. Profit margin: 3/31/2017: $206/2,221 = 9.3 percent 3/31/2016 $119/2,018 = 5.9 percent This trend is improving. Logitech went from earning 5.9 cents of net income for each dollar of sales revenue for year ended 2016 to earning 9.3 cents on each dollar of sales revenue for year ended 2017. 2. Current ratio: 3/31/2017: $1,028/$507 = 2.03 3/31/2016: $926/$415 = 2.23

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Logitech appears to be sufficiently liquid despite the company’s slight decline in liquidity. 3. Debt-to-total-assets ratio: 3/31/2017: $643/$1,499 = 42.9 percent 3/31/2016: $564/$1,324 = 42.6 percent Logitech financed a little under one-half of its assets with debt. This percentage may be high however it does not appear that Logitech is exposed to any solvency risk based on its improving profitability. 4. As a consequence of the differing fiscal year-end, the information in Apple’s financial statements contains six months of activity not reflected in the financial statements of Logitech. Thus, if economic conditions differed dramatically during this time period, it would significantly reduce the comparability of the two companies’ financial data.

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Chapter 5 Internal Control and Cash QUESTIONS 1.

The three elements of the fraud triangle are (1) a perceived pressure, (2) some way to rationalize the fraudulent act, and (3) a perceived opportunity. These relate to each other since all are required for fraud, however not in any set level. Reducing one of the three means that more of the other two will need to be present. Therefore fraud prevention should work on all of the three, not just one area such as placing more controls to reduce opportunity.

Supervision is an important internal control. The existence of an identified supervisor is a preventive control. Employees know that the supervisor is evaluating their performance; consequently, they are more likely to perform according to a company’s established policies and rules. Supervision is also a detection control. A supervisor is likely to discover errors or TEreviews STBANthe KSwork ELLperformance ER.COM of employees. irregularities when he or she

A prevention control is a measure undertaken by a company to deter problems before they arise. A detection control is a measure undertaken by a company to discover problems soon after they arise. Prevention controls are preferred over detection controls.

The three types of work functions that must be separated to improve internal control are authorization functions, recording functions, and custody functions.

Requiring Janet to take vacations of at least one week in duration may also disclose errors or irregularities when another employee performs her duties. Janet would not be able to “cover-up” any fraudulent actions if she is away on vacation.

The three rules relative to use of control numbers that should be followed when designing printed documents are to (1) have a commercial printer place the control numbers on the documents when the printer prints the documents, (2) use the documents in strict numerical sequence, and (3) periodically account for all the numbers in the sequence to make sure all of them were processed.

A major provision of the Act requires that senior management and the external auditor of any publicly-held company certify the adequacy of the company’s system of internal control. Factors which are required to be reported on include the controls to prevent or detect fraud and the controls over the financial reporting process.

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A financial statement audit is an examination of a company's financial statements by a firm of independent certified public accountants that issues a report that expresses an opinion on the financial statements. An operational audit is an evaluation of activities, systems, and internal controls within a company to determine their efficiency, effectiveness, and economy. A financial statement audit can only be done by an independent CPA, whereas an operational audit can be done internally by the Internal Audit Department or by an independent CPA depending on the scope and objectives of the company. In addition, the purposes of the two types of audits are different. The financial statement audit provides assurances to investors and creditors of the financial information provided (by virtue of the auditors independence), while the operational audit helps management to improve the overall operation of the company, thereby potentially reducing errors/fraudulent activity and perhaps increasing profitability.

Cash includes coins, currency (paper money), checks, money orders, travelers’ checks, and funds on deposit at a bank in checking accounts and savings accounts. The two important characteristics of an item of cash are that (1) it is acceptable to a bank for deposit and (2) it is free from restrictions that would prevent its use for paying debts.

10.

Paper money, travelers checks, funds in a checking account, and money orders are considered to be cash. Certificates of deposit are securities and postdated checks are not equivalent to cash until the actual calendar date of the check.

11.

Electronic funds transfer (ETF) involves sending an electronic message from one computer to another to cause a transfer of money from one financial institution to another.

12.

Comparing the bank's record of cash transactions with the firm's record and accounting for differences by means of a bank reconciliation helps to determine whether any errors or irregularities have occurred in handling cash transactions.

13.

(a) To determine deposits not recorded on the bank statement, we compare the deposits shown in the accounting records with the list of deposits on the bank statement. Often, deposits made near the end of the period do not appear on the bank statement; these are listed on the bank reconciliation as Deposits in Transit.

TESTBANKSELLER.COM

(b) To determine the outstanding checks, we compare the record of checks written in the company's records with the checks paid by the bank. The checks that have not yet cleared the bank are listed on this period's reconciliation as Outstanding Checks. 14.

a. b. c. d. e. f.

(4) deducted from the ledger account balance (4) deducted from the ledger account balance (1) added to the bank statement balance (2) deducted from the bank statement balance (1) added to the bank statement balance (4) deducted from the ledger account balance

15.

While internal controls over cash should be tailored to the firm’s particular financial reporting system, all strong cash internal control systems include written policies and procedures, as well as segregation of duties.

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16.

An imprest petty cash fund is a fund of fixed amount, established for paying small expenditures. The fund is established by writing a check for the desired amount. When the fund requires replenishment, a check is written for the amount necessary to bring the fund to its original established level.

17.

a. The going concern concept states that, in the absence of evidence to the contrary, a business entity is assumed to have an indefinite life. In this case, the loss of 50 to 55 percent of gross profit may force the company into a loss position. This could threaten its continued existence. b. The full disclosure principle indicates that the loss of business from Mega-Mart should be disclosed in a note to the financial statements. This is important information necessary for the users' understanding of the financial statements. c. The independent auditor must determine whether the firm is a going concern and state his or her opinion accordingly. Further, the auditor must make sure that the notes to the financial statements include a disclosure of the situation with Mega Mart.

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SHORT EXERCISES SE5-1. The Fraud Triangle (LO1) c. concealment SE5-2. Segregation of Duties (LO2) d. increases the potential of fraud SE5-3. Internal Control (LO2) c. guarantee the accuracy of the accounting records SE5-4. Auditors (Appendix 5A) (LO6) b. Internal audits provide appraisals of a company’s internal control SE5-5. Financial Statement Audit (Appendix 5A) TESTBANKSELLER.COM (LO6) c. Conducted by auditors overseen by the Public Company Accounting Oversight Board SE5-6. Cash (LO3) a. a postdated check SE5-7. Restricted Cash (LO3) d. is reported separate from unrestricted cash SE5-8. Electronic Funds Transfer (LO4) b. computers SE5-9. Cash Management (LO5) d. Conduct internal audits. SE5-10. COSO Framewor4 (LO2) a. Segregation of duties. ©Cambridge Business Publishers, 2020 5-4

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EXERCISES—SET A E5-1A. Internal Control (LO2, LO4) a. Canceling the documentation supporting a cash disbursement eliminates the possibility that the documentation could be used again to support another (duplicate or fraudulent) cash disbursement. b. Giving the cash register receipt to the store's customers necessitates the correct "ringing up" of sales on the cash register and discourages clerks from pocketing receipts. c. Tearing admission tickets and giving one-half to the patrons reduces the possibility of collusion between the ticket taker and the box office clerk to resell tickets and keep the proceeds. (The daily box office receipts are proved by multiplying the number of tickets sold by the admission price. The number of tickets sold is determined by comparing beginning and ending serial numbers on tickets.) d. The practice of prohibiting alterations on guest checks reduces the possibility that servers will deliberately reduce amounts on the guest checks and pocket cash equal to such reductions.

E5-2A. Internal Controls for Cash TEReceived STBANKon SEAccount LLER.COM (LO4) While internal controls over cash should be tailored to the firm’s particular financial reporting system, all strong cash internal control systems include written policies and procedures, as well as segregation of duties.

E5-3A. Bank Reconciliation (Appendix 5B) (LO7) YOUNG COMPANY Bank Reconciliation June 30 Ending balance from bank Cash balance from statement $7,300.25 general ledger Add: Check for $250 Add: Deposits in transit 725.00 recorded as $520 Bank error ̶ Yertel Company check charged against Young Company's account 550.00 Less: Outstanding checks 1,260.45 Less: Service charge Reconciled cash balance per bank

$7,314.80

Reconciled cash balance per books

$7,055.80 270.00

11.00

$7,314.80

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E5-4A. Bank Reconciliation Components (Appendix 5B) (LO7) a. $57,300 − ($55,900 − $1,400) = $2,800 b. $50,300 − ($49,200 − $2,100) = $3,200 c. $38,000 − ($37,100 − $800 − $1,300) = $3,000

E5-5A. External versus Internal Audit (Appendix 5A) (LO6) External auditors are required to be independent of the company they audit. Rather than report to company management or even the Board of Directors as is done by internal auditors, the external auditors are overseen by the Public Company Accounting Oversight Board (PCAOB), a quasi-governmental agency established by the Sarbanes-Oxley Act. This independent relationship provides a better environment for the auditor to provide an opinion that can be relied upon by outside users of the financial statements.

E5-6A. Operational Audits (Appendix 5A) (LO6) An operational audit is an evaluation of activities, systems, and internal controls within a company to determine their efficiency, effectiveness, and economy. Operational auditing goes beyond accounting records and financial statements to obtain a full understanding of the operations of a company. Operational audits can be performed by either internal audit departments or independent audit firms.

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E5-7A. Cash and Cash Equivalents (LO3) a. cash (C) b. cash equivalent (CE) c. cash (C) d. neither (N) e. cash (C)

E5-8A. Internal Control (LO2) a. This control function, known as the segregation of duties, requires that when allocating various duties within the accounting system, management should make sure that no employee is assigned too much responsibility. The separation of work functions will reduce the likelihood of fraud occurring because committing a fraud when work duties are separated requires collusion among multiple employees. b. Because people are the most important element of an accounting system, it is vital that a company hire competent personnel. Competent personnel means the employee has sufficient education, training, and experience for the job.

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c. Plans and budgets provide a basis with which actual results can be compared. Variances represent potential red flags to possible problems, including errors or fraudulent activities. When variances between actual and budgeted amounts are observed, those variances should be investigated by management. d. Use of control numbers on all business documents helps to ensure that a company records all transactions and does not record a transaction multiple times.

E5-9A. Effective Cash Management (LO5) a. Managing accounts receivable is designed to increase the rate at which cash is collected from customers to help fund operations or pay debt. b. Managing inventory is designed to keep inventory as low as possible to limit the amount of cash tied up in inventory without losing any sales for lack of product to sell. c. Managing accounts payable is designed to keep a company’s cash as long as possible without incurring interest charges. This activity, however, often involves a trade-off involving lost purchase discounts. d. Invest excess cash is designed to maximize the rate of return on any cash not currently needed to fund operations.

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EXERCISES—SET B E5-1B. Internal Control (LO2, LO4) a. Using company copy machines for personal use is a problem for many businesses. This policy is intended to minimize employee misuse of the machines because a record of each employee's use is compiled. In addition to curbing misuse of the machines, the policy will assist management in identifying employees (and related business activities) where usage is high. Management may want to review the procedures being used in those areas that create the high usage. b. The signature card helps protect the company's cash. Although the bank will not confirm the signature on every check, it may confirm the signature on unusually large checks. Also, if a company disputes the authenticity of a check that was presented for payment, the bank will check the signature; if the signature is not on file, the company should prevail in its dispute. c. This policy is intended to use the customer as a monitor to see that sales are entered into the cash register. Once sales are recorded in the cash register, the employees are accountable for the related amounts of cash and the possibility that receipts will be taken by employees is reduced. d. Requiring employees to take a vacation should reduce inappropriate and/or dishonest behavior by employees inTtheir else will be performing the ESTwork. BANKKnowing SELLEthat R.Csomeone OM employee's functions and accessing the employee's records at some point during the year should make the employee more conscientious in the performance of his or her duties. Occasionally, requiring an employee to take a vacation triggers the discovery of a misappropriation of funds because the employee is not around to control or manipulate the records.

E5-2B. Internal Controls for Cash Received from Retail Sales (LO4) While internal controls over cash should be tailored to the firm’s particular financial reporting system, all strong cash internal control systems include written policies and procedures, as well as segregation of duties.

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E5-3B. Bank Reconciliation (Appendix 5B) (LO7) DILLON COMPANY Bank Reconciliation April 30 Ending balance from bank Cash balance from general statement $6,300.28 ledger $6,042.10 Add: Check for $130 incorrectly Add: Deposits in transit 650.00 recorded as $310 180.00 Bank error ̶ Dillard Company check charged against Dillon Company's account 400.00 7,350.28 6,222.10 Less: Outstanding checks

1,140.18

Less: Service charge

Reconciled cash balance per bank

$6,210.10

Reconciled cash balance per books

12.00

$6,210.10

E5-4B. Bank Reconciliation Components (Appendix 5B) (LO7) a. $91,200 - ($88,000 - $2,400) = $5,600 TE-S$2,000) TBANK ELLER.COM b. $63,100 - ($66,200 - $1,600 =S $500 c. $68,700 - ($67,200 - $2,600) = $4,100

E5-5B. External versus Internal Audit (Appendix 5A) (LO6) The external audit is designed to allow the independent auditor the ability to express an opinion on the financial statements taken as a whole. This often means relying on the work done by internal audit, however, the external auditor must conduct their own work so as to satisfy themselves that the financial statements fairly present the results of operations, cash flows, and financial position of a company. In contrast, while internal audits can provide appraisals of a company’s financial statements, they are generally intended to appraise the company’s internal control and its operations.

E5-6B. The External Audit and Fraud (Appendix 5A) (LO6) The primary purpose of a financial statement audit is not the discovery of fraudulent acts by management or employees of the company. Many audit procedures use statistical samples of transactions and data rather than examining the complete population of transactions. The auditors use samples to minimize the time required to conduct the audit and its cost. As a result, there is the possibility that some errors or irregularities will exist in the transactions and data that the auditors do not review or evaluate. However, these errors or irregularities should not be material.

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E5-7B. Cash and Cash Equivalents (LO3) a. cash equivalent (CE) b. cash (C) c. neither (N) d. cash (C) e. cash (C)

E5-8B. Internal Control (LO2) a. Internal auditing provides appraisals of the company's financial statements, its internal control, and its operations. Such appraisals can identify problems that need to be remedied. b. When a company assigns authority to an employee to perform certain functions, it also makes that employee responsible for accomplishing certain objectives. This structure provides the overall framework for planning, directing, and controlling the company's operations. It informs employees about who is in charge of which functions and to whom each person reports. c. Many internal control procedures require the comparison of physical assets to the accounting records. This procedure can help identify missing, or incorrectly recorded, assets. In order to make such comparisons it is necessary for the company to maintain an adequate set of accounting records.

TESTBANKSELLER.COM d. Physical and electronic controls help to guard company assets from theft or improper use. Physical controls can take many forms such as locked doors or safes. Electronic controls include electronic cash registers that record transactions along with the salesperson making the sale, and security cameras that can monitor operations.

E5-9B. Effective Cash Management (LO5) a. The major source of cash for Los Altos is cash receipts from customers ($13,275). b. The major uses of cash include (a) net capital expenditures ($30,000), (b) cash payments for operating activities ($11,131), (c) the repurchase of common stock ($7,300), and (d) the payment of cash dividends ($6,000). c. The cash account declined by $41,296 during the month of December.

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PROBLEMS—SET A P5-1A. Internal Control (LO2, LO4) a. Regent Company has not properly segregated the duties of accounting for cash and handling cash. The person who opens the mail (custody function) should not have access to the accounting records (recording function). Two different people should perform these functions. b. Regent Company evidently does not have an adequate system of authorization and recording procedures to control merchandise acquisitions. The firm should follow a policy that permits authorizing payment for goods only if there is a receiving report to support the payment approval. Furthermore, the person who authorizes a purchase order should not be the person who confirms receipt of merchandise or authorizes payment for the goods. c. This situation, like that in part (b), reveals the deficiency in Regent's system of authorization and recording procedures. Payment should be approved only after the receiving report has been compared with the invoice and purchase order. The receiving report and purchase order should be attached to the first invoice to prevent matching the second invoice. d. This situation indicates a lack of supervision. All employees should be supervised, with the supervisor reviewing the work accomplished periodically. This situation also suggests that the firm's training procedures may be inadequate. The training program should be reviewed and, if necessary, revised.TESTBANKSELLER.COM P5-2A. Internal Control (LO2, LO4) a. 1. The misappropriation would probably be revealed when Customer A received a statement showing $200 unpaid and past due. The customer would surely complain to someone, possibly to the store manager. 2. Reconciliation of the accounts receivable control account with the total of the subsidiary ledger balances would reveal a $200 discrepancy. 3. A statement mailed to the fictitious customer would be returned, marked "no such addressee or address." This might call an assistant's attention to the spurious account, unless Flynn intercepted the returned item. Even if he did, statements would be sent as long as the balance remained in the account, and Flynn would have to continue his interception of returned statements. 4. Flynn would want to open the mail so he could intercept the returned statements. 5. If Flynn had authority to write off accounts against the Allowance for Uncollectible Accounts, he could conveniently eliminate the fictitious balance.

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b. The procedure focuses specific attention (of other employees, customers, and, possibly, the manager) on an employee's failure to offer a customer a cash register receipt. The procedure encourages employees to ring up sales and thus reduces the possibility that cash will be stolen. Once sales are rung up on the cash register, the employees are accountable for the related amounts of cash. c. A firm should use a purchase order for ordering supplies and a receiving report for recording the receipt of supplies. Before an invoice is paid, it should be compared with the purchase order and receiving report to confirm that the supplies billed conform to what was ordered and received. The swindle should not succeed because purchase orders or receiving reports to support the false invoices do not exist. d. The internal control weakness is that the cashier has the opportunity to avoid ringing up some sales on the cash register and to pocket the related cash. Internal control may be strengthened by separating the recording of the food cost from the customer's payment for the food. The food costs may be rung up on a register at the end of the food line and a record of the amount owed given to the customer. The customer then pays the cashier on the way out of the cafeteria. Other ways to encourage the ringing up of sales include these: (a) Incorporating a procedure to motivate customers to obtain a cash register receipt, such as offering a free dessert or beverage if a certain symbol appears on the receipt. (b) Incorporating a procedure TEStoTdraw BANattention KSELLto ERthe .Cfailure OM to ring up sales, such as offering a free dessert or beverage if the customer does not receive a cash register receipt.

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P5-3A. Bank Reconciliation (Appendix 5B) (LO7) a. SULLIVAN COMPANY Bank Reconciliation July 31 Ending balance from bank Balance from general statement $ 9,098.55 ledger Add: Deposits in transit 3,576.95 Add: Proceeds of note Bank error ̶ Solomon Check for $109 Company check charged recorded as $1,090 against Sullivan Company's account 325.00 13,000.50 Less: Outstanding checks

1,467.90

Reconciled cash balance per bank

$11,532.60

$ 7,216.60 4,000.00 981.00

12,197.60

Less: Service charge NSF Check

25.00 640.00

Reconciled cash balance per books

$11,532.60

b. BALANCE SHEET

INCO M E STATE M E NT

TESTBANKSELLER.COM Assets Cash

= 4,000

Liabilities Notes payable

Stockholders' Equity

Revenues

Expenses

−

Net Income

4,000

Record proceeds of note payable.

Cash

981

Repairs expense

-981

981

-25

Miscellaneous expense

-25

Correct recording of check ($1,090 - $109)

Cash

-25 Record service charge.

Accounts receivable

660

Cash

-640

Sales discount

Reclassify NSF check as an account receivable.

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P5-4A. Bank Reconciliation (Appendix 5B) (LO7) a. WINTON, INC. Bank Reconciliation September 30 Ending balance from bank statement Add: Deposits not credited by bank

$14,784 1,266 16,050

Less: Outstanding checks No. 603 No. 613 No. 615 No. 616

640 310 386 420

Reconciled cash balance per bank

Balance from general ledger Add: Check No. 612 for $674 recorded as $746

$15,286

Less: NSF Check of D. Walker Service charge

1,028 36

72 15,358

1,756 Reconciled cash balance per books $14,294

$14,294

b. BALANCE SHEET

INCO M E STATE M E NT

TESTBANKSELLER.COM Assets

Cash

Liabilities

Stockholders' Equity

Revenues

Expenses

−

Net Income

Advertising expense

-72

-36

Miscellaneous expense

-36

Correct error in recording check no. 612 ($746 - $674) Accounts receivable

1,028

Cash

-1,028 Reclassify NSF check as an account receivable.

Cash

-36 Record bank service charge.

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P5-5A. Reporting Cash (LO3) Cash and cash equivalents total $3,500 + ($25,250 - $2,000) + 6,750 + $500 + $32,400 = $66,400

P5-6A. Internal Control (LO2) 1. Since Lisa is responsible for posting payments, having Bart post payments violates the establishment of clear lines of authority and responsibility. 2. Segregation of duties is violated when Bart opens the mail, records cash receipts, and has custody of cash. This is further violated if he is also posting to the accounts receivables. It would be possible for Bart to post the credit and pocket the cash. 3. The maintenance of proper accounting records is violated when patients do not receive receipts. 4. Bart should be required to take a vacation.

P5-7A. Internal Control (LO2, LO4) 1. 2. 3. 4.

b. Segregation of duties. TESTBANKSELLER.COM g. Provide physical and electronic controls c. Hire competent personnel. f. Maintain adequate accounting records.

P5-8A. Effective Cash Management (LO5) Mick Longo faces several classic problems associated with start-up businesses: (a) building a sustainable client base, (b) covering recurring operating costs, (c) effectively managing accounts receivable and accounts payable. This last problem is the one that Mick can immediately address to help improve his firm’s cash management practices. The first thing that Mick should do is to approach his suppliers (i.e. the utility company and his rental agent) to see about some type of payment structuring that would allow him to pay something while deferring some of the amounts due. The second thing that Mick should do is to establish a credit collection policy to share with his clients to improve his cash inflow. Mick may need to approach his family and friends about getting a personal loan to carry him thru this start-up period. But, in any case, Mick should not give up his weekend job!

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PROBLEMS—SET B P5-1B. Internal Control (LO2, LO4) a. Wheeler Company evidently does not have an adequate system of documentation and approvals supporting the issuance of checks. A purchase order from the purchasing department needs to be compared with the invoice and receiving report before checks are issued. Since no purchase orders were ever issued for any items from Quick Forms, the addition of purchase orders to the supporting documentation for check issuances should prevent any future payments from going to Quick Forms. b. Competent employees who thoroughly understand their job are important to the success of a business and its system of internal control. There is an apparent weakness here either in the training or competence of the employee making after-hour deposits at the bank. The employee should be instructed to make the deposits only in the designated slot built into the bank building. If that depository is not usable for some reason, the company should have some alternate procedures specified for short-term safekeeping of the deposit. c. The deficiency here is the lack of pre-numbered sales invoices. If the sales invoices are prenumbered, the accounting department can account for the sales invoices issued and identify if any are missing. The cashier would then not be able to destroy a sales invoice and have it go undetected.

TESTBANKSELLER.COM P5-2B. Internal Control (LO2, LO4) a. If the ticket-taker admits her friends without a ticket, the turnstile count (showing the number of riders) will exceed the number of tickets sold (from the ticket count). b. If the cashier gives his friends tickets without receiving cash, the cash receipts will not reconcile with the number of tickets sold (the cash receipts will be deficient). c. If the cashier gives too much change, the cash receipts will be deficient when the receipts are reconciled with the number of tickets sold. d. If the ticket-taker and cashier collude to sell the same tickets more than once, the turnstile count will exceed the count of the number of tickets sold (determined by comparing beginning and ending ticket numbers). e. An individual must have a ticket to be admitted to the ride by the ticket taker. Sneaking past the cashier into line will not succeed because the individual has received no ticket and will not be admitted to the ride.

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P5-3B. Bank Reconciliation (Appendix 5B) (LO7) a. WALLACE COMPANY Bank Reconciliation May 31 Balance from general $ 7,933.50 ledger Add: Collection of note 2,709.05 Less: Collection fee 10,642.55 Interest earned

Ending balance from bank statement Add: Deposits in transit

Less: Outstanding checks

3,088.25

Reconciled cash balance per bank $ 7,554.30

$6,122.50 2,400.00 20.00

Less: Service charge NSF check Check for $960 recorded as $690

2,380.00 27.80 8,530.30

20.00 686.00 270.00

Reconciled cash balance per books

976.00

$7,554.30

b. BALANCE SHEET

INCO M E STATE M E NT

TESTBANKSELLER.COM Assets Cash Notes receivable

Liabilities

Stockholders' Equity

Revenues

Expenses

−

Net Income

2,380.00 -2,400.00

-20.00

Collection fee

20.00

-20.00

Record collection of note by bank, less collection fee. Cash

27.80

Interest income

27.80

Record interest earned on bank account.

Cash

-20.00

Miscellaneous expense

-20.00

20.00

-20.00

Record service charge. Accounts receivable

700.00

Cash

-686.00

14.00

Sales discount

14.00

Reclassify NSF check as an account receivable.

Cash

-270.00

Accounts payable

(270.00)

Correct error in recording a check ($960 - $690)

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P5-4B. Bank Reconciliation (Appendix 5B) (LO7) a. SANDLER COMPANY Bank Reconciliation April 30 Ending balance from bank Balance from general statement $14,556 ledger Add: Interest earned Add: Deposit not credited by bank 1,425 15,981 Less: Outstanding checks Less: NSF Check of R. No. 797 450 Koppa No. 812 948 Service charge No. 815 372 Error in recording No. 816 875 2,645 check No. 811 as $272 Reconciled cash balance per bank

$13,870 60 13,930

500 40

Reconciled cash balance per books

$13,336

594

$13,336

b. BALANCE SHEET

INCO M E STATE M E NT

TESTBANKSELLER.COM

Assets Cash

Liabilities

Stockholders' Equity

Revenues 60

Interest income

Expenses

−

Net Income 60

Record interest earned on bank account. Accounts receivable

500

Cash

-500 Reclassify NSF check as an account receivable.

Cash

-40

Miscellaneous expense

-40

-54

Delivery expense

-54

Record bank service charge.

Cash

-54 Correct error in recording check No. 811 ($326 - $272)

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P5-5B. Reporting Cash (LO3) Cash and cash equivalents total $5,500 + ($15,250 - $3,000) + 1,750 + $1,500 + $12,600 = $33,600

P5-6B. Internal Control (LO2) 1. Since Cindy is responsible for posting payments, having Jerry post payments violates the establishment of clear lines of authority and responsibility. 2. Segregation of duties is violated when Bart opens the mail, records cash receipts, and has custody of cash. This is further violated if he is also posting to the accounts receivables. It would be possible for Jerry to post the credit and pocket the cash. 3. The maintenance of proper accounting records is violated when customers do not receive receipts. Jerry could simply pocket this cash without ever recording a sale. 4. Jerry should be required to take a vacation.

P5-7B. Internal Control (LO2, LO4) 1. a. Establish clear lines of authority and responsibility. 2. b. Segregation of duties. TESTBANKSELLER.COM 3. d. Use control numbers on all business documents. 4. e. Develop plans and budgets.

P5-8B. Effective Cash Management (LO5) Janelle Sharp faces several classic problems associated with start-up businesses: (a) building a sustainable client base, (b) covering recurring operating costs, (c) effectively managing accounts receivable and accounts payable. This last problem is the one that Janelle can immediately address to help improve her company’s cash management practices. The first thing that Janelle should do is to approach her suppliers (i.e. the utility company and her rental agent) to see about some type of payment structuring that would allow her to pay something while deferring some of the amounts due. The second thing that Janelle should do is to establish a credit collection policy to share with her clients to improve her cash inflow. Janelle may need to approach her family and friends about getting a personal loan to carry her thru this start-up period. But, in any case, Janelle should not give up her weekend job!

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SERIAL PROBLEM: ANGEL CITY GREETINGS SP5. a. A good approach is to prepare a corrected January 31 bank reconciliation, as follows:

Ending balance from bank statement Add: Deposits in transit

ANGEL CITY GREETINGS Corrected Bank Reconciliation January 31 Balance from general $ 4,843.69 ledger Add: Unrecorded 7,238.40 collection of note 12,082.09

Less: Outstanding checks $1,100.20 No. 2351 No. 2353 1,658.32 969.68 No. 2354 600.00 No. 1432 No. 1458 466.90 No. 1512 253.10 5,048.20 Reconciled cash balance per bank $ 7,033.89

1,200.00 12,093.89

Less: Bank service charge

Reconciled cash balance per books

TESTBANKSELLER.COM

Reconciled cash balance per books Reconciled cash balance per bank Discrepancy

$10,893.89

60.00

$12,033.89

$12,033.89 (7,033.89) $ 5,000.00

Apparently, the amount of funds stolen by the cashier is $5,000.00. b. The cashier concealed the theft by preparing a spurious bank reconciliation, as follows: 1.

Omitted three old outstanding recorded checks: No. 1432 No. 1458 No. 1512

$600.00 466.90 253.10

Understated check No. 2353 by $1,080 in the reconciliation

Understated the amount of outstanding checks in the reconciliation

$1,320.00 1,080.00

200.00

Deducted rather than added $1,200 proceeds of unrecorded note in the reconciliation

2,400.00

Total

$5,000.00

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c. The following suggestions should be made concerning cash control procedures: 1. The cashier should not have access to the books. (The problem states that the cashier had made an entry on the books.) 2. Someone other than the cashier should receive the bank statements and prepare the bank reconciliation. 3. Someone other than the cashier should account for checks by number. 4. Checks should be signed (or countersigned) by someone other than the cashier after reviewing documentary support (invoices, receiving reports, and so on).

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EXTENDING YOUR KNOWLEDGE REPORTING AND ANALYSIS EYK5-1. Financial Reporting Problem: Columbia Sportswear Company a. Cash and cash equivalents. b. Investments with original maturities of 90 days or less at the date of acquisition, primarily consisting of cash, money market funds, time deposits, U.S. government treasury bills and U.S. government backed municipal bonds. c. The management of Columbia Sportswear. d. In the opinion of Deloitte and Touche, Columbia maintained effective internal control over their financial reporting.

EYK5-2. Comparative Analysis Problem: Columbia Sportswear Company vs. Under Armour, Inc.

Columbia

Under Armour

$673,166

$312,483

$2,212,902 TEST$673,166 BANKSE/ L LER.CO=M30.4%

$312,483 / $4,006,367 = 7.8%

$673,166 - $551,389= $121,777

$312,483 - $250,470 = $62,013

$121,777

$62,013

$341,128

$234,063

d. Change in cash Cash provided by operations

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EYK5-3. Business Decision Problem Item 1.

Internal Control Weakness

Internal Controls to be Installed

Anyone in the company can prepare a purchase order.

Only the purchasing department should be allowed to issue purchase orders.

No managerial approval of purchase orders.

Managerial approval should be required for all requests to purchase.

Invoices are compared to only the purchase order.

An invoice should be compared to both the purchase order and the receiving report before approving the invoice for payment.

Qualitec does not have an organization chart.

Qualitec should have an organization chart to define reporting relationships.

Employees are encouraged to work without All employees should be supervised and supervision. have their work reviewed periodically. 3.

Control numbers are not printed on business documents.

No budgets are prepared.

Doors to the building remain unlocked when no employees are working.

All doors should be locked when employees are not working to protect the company's assets.

Employees do not have badges.

Employees should be issued badges so they can be identified readily as employees.

The company is not audited.

An external audit is a highly desirable review and double-check of accounting and finance.

The printer should print control numbers on all business documents.

Budgets should be prepared to enable controlling of balance sheet and income TESTBANKSELLERstatement .COM items.

EYK5-4. Financial Analysis Problem a. According to the PCAOB, the PCAOB “is a nonprofit corporation established by Congress to oversee the audits of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports.” b. AS 2201: An Audit of Internal Control Over Financial Reporting That is Integrated with An Audit of Financial Statements c. The PCAOB submits its rules to the Securities and Exchange Commission and these rules do not take effect unless they are approved by the S.E.C.

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CRITICAL THINKING EYK5-5. Accounting Research Problem – General Mills, Inc. a. $766,100,000 b. $2,400,000 increase ($766,100,000 - $763,700,000)) c. The Consolidated Statements of Cash Flows. 1. $2,313,300,000 2. ($646,900,000) 3. ($1,645,500,000) In addition, there was a $18,500,000 effect of exchange rate changes. d. KPMG LLP e. In their opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of General Mills, Inc. and subsidiaries as of May 28, 2017 and May 29, 2016, and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended May 28, 2017, in conformity with U.S. generally accepted accounting principles. f.

KPMG also audited General Mills, Inc.’s internal control over financial reporting as of May 28, 2017, based on criteria established in “Internal Control—Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission TESTBANKSELLER.COM (COSO).

EYK5-6. Accounting Communication Activity Your letter to the Chairman should stress the concept of “tone at the top,” and how the culture of a company often results from the behavior and philosophy of the company leadership. A strong ethical culture is instrumental in preventing fraud by creating an environment where it is more difficult for an employee to rationalize unethical behavior. Your letter should also mention that it is not just good business practice to provide an ethical culture, Sarbanes-Oxley requires that a lack of an ethics code be disclosed in the financial statements.

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EYK5-7. Accounting Ethics Case The accounting implications if Gina is correct are as follows: 1. 2.

Expenses and the capital account of the owner seeking reimbursement are overstated. Net income and the other owners' capital accounts are understated, as well as taxable income.

Discussion of this case should note the following issues: 1.

Although it is a family-owned business, there is more than one owner. If one owner is charging personal items to the company as business expenses, the other owners are effectively paying for these items. Should the number or dollar amount of these questionable items influence Gina's reaction?

Gina might consider the following alternatives: 1. 2.

Accepting the receipts as approved. She is not certain that there is any problem and they have been properly approved by her supervisor. Discuss her concern with the controller. She will want to approach this in a tactful manner because the controller has already approved the items for reimbursement as business expenses. Ask to be replaced as the petty cash cashier. She may want to ask for other responsibilities and then ask that this task be assigned to someone else.

TESTBANKSELLER.COM EYK5-8. Corporate Social Responsibility Problem The following was presented by the Association of Certified Fraud Examiners, titled Tone at the Top: How Management Can Prevent Fraud in the Workplace. “The connection between fraud and the “tone at the top” of an organization has received international attention over the last few years. Tone at the top refers to the ethical atmosphere that is created in the workplace by the organization's leadership. Whatever tone management sets will have a trickle-down effect on employees of the company. If the tone set by managers upholds ethics and integrity, employees will be more inclined to uphold those same values. However, if upper management appears unconcerned with ethics and focuses solely on the bottom line, employees will be more prone to commit fraud because they feel that ethical conduct is not a focus or priority within the organization. Employees pay close attention to the behavior and actions of their bosses, and they follow their lead. In short, employees will do what they witness their bosses doing.” “The National Commission on Fraudulent Reporting (called the Treadway Commission) released a groundbreaking study in 1987 that reported the casual factors that lead to fraudulent behavior and financial statement fraud. According to the Commission, the tone at the top plays a crucial and influential role in creating an environment in which fraudulent financial reporting is ripe to take place.”

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EYK5-9. Forensic Accounting Problem First, it is probably not even possible to create a system that is absolutely impervious to fraud. Even the most secure bank vaults can be broken into with enough resources and effort. Internal controls are designed to provide reasonable, not absolute, assurance that the objectives of an organization will be met. The concept of reasonable assurance implies a high degree of assurance, however it is constrained by the costs and benefits of establishing incrementally greater levels of control. The concept is based on the economic concept of costs and benefits. While greater levels of control are possible, the cost of doing so becomes far greater than the benefit obtained. For example, having 24 hour armed guards watching over every cash transaction will certainly lessen the chance that an employee will steal any cash, the cost of doing so likely exceeds the amount of cash that would be taken.

EYK5-10. Working with the Takeaways A. The agency’s financial statements may be misstated. In addition, failure to correct these material internal control weaknesses increases the risk of fraud. B. The auditor should recommend the following actions: a. Develop effective policies and procedures that ensure the proper preparation of journal entry forms. b. Develop effective policies and procedures that will strengthen controls over the journal entry review and approval process to ensure that all journal entries are complete, TESTBANKSELLER.COM accurate, properly supported and approved prior to posting in the general ledger. c. Develop effective policies and procedures that will ensure that all routine or recurring journal entries are properly prepared and posted each month and that all journal entries are properly maintained. d. Develop effective policies and procedures to ensure that the preparation of quarterly and annual financial statements, note disclosures, and related information are in compliance with accounting standards. e. Develop effective policies and procedures to review and document the resolution of any abnormal balances and account relationship discrepancies that exist on a monthly basis. f.

Be required to report significant abnormal balances and account relationship discrepancies on a monthly basis including a status of researching and resolving the balances.

g. Develop policies and procedures to determine if any journal entries processed in the current fiscal year have a prior period impact. h. Develop effective policies and procedures to ensure that other Federal agencies that receive material amounts of the HTF budget authority via the allocation transfer process provide sufficient evidence that the transactions processed exist, are accurate and that all transactions have been reported (i.e., completeness).

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Chapter 6 Receivables QUESTIONS 1.

Factoring is the selling of accounts receivable to another company. Discounting is the selling of notes receivable to another company. In both cases, the selling company usually pays a fee to the buying company. Both approaches are used to speed up cash collections.

A credit scoring system is a computerized set of formulas with multiple variables. This system is used to evaluate the creditworthiness of a potential customer. The computer program calculates a score for each potential customer, compares the score to predetermined limits, and recommends how much credit (if any) should be granted.

The allowance method provides for recording estimated credit losses in the period of sale, TESTofBArevenue NKSELL ER. COM thereby complying with the permitting a better matching and expense, matching principle.

Under the allowance method of providing for credit losses, the periodic amount of expense is an estimate made before the accountant knows which specific customer accounts will prove uncollectible. For this reason, and also because an estimate is involved, the contra account Allowance for Doubtful Accounts is credited rather than a specific accounts receivable account.

The percentage of net sales method of estimating bad debts consists of analyzing past losses and credit sales to derive a percentage that can be applied to the current period's credit sales to obtain the estimated expense. The accounts receivable aging method consists of analyzing past experience to determine the average percentage of each accounts receivable age group that is likely to prove uncollectible. These percentages are applied to the aged balances to determine the total amount needed in the allowance account. An entry is made to bring the balance to this amount.

An adjustment of $1,600 ($2,100 - $500) would be required to bring the allowance to the desired balance of $2,100. The net amount of accounts receivable is calculated as $98,000 − $2,100 = $95,900.

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There is no effect on total assets for either the write off or the subsequent recovery due to the use of the allowance method of handling credit losses. BALANCE SHEET

Assets

Nov. 20

Liabilities

Allowance for doubtful accounts Accounts Receivable

INCO M E STATE M E NT +

Stockholders' Equity

Revenues

−

Expenses

Net Income

750 -750 Write off of Dell Company account.

Mar. 10

Accounts Receivable Allowance for doubtful accounts

-750

Cash Accounts receivable

-750

750

Recovery and payment from Dell Company.

8. BALANCE SHEET

Assets Cash

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

648

Revenues Sales

Expenses

−

675

Credit card fee expense

Credit card fee ($675 x .04)

TESTBANKSELLER.COM 9.

May 4.

10.

Accrued interest as of December 31 is $100. ($15,000 x 0.08 x 30/360).

11.

Accounts receivable turnover is computed by dividing net sales for the year by average accounts receivable. This ratio indicates how many times a year a firm collects its average accounts receivable. The higher the ratio is, the faster accounts receivable are being converted into cash. The average collection period is computed by dividing 365 days by accounts receivable turnover.

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12.

(1) Credit losses are incurred in the process of generating sales revenue. Specific losses may not be known until many months after the sale. A company sets up an allowance for doubtful accounts to place the expense of uncollectible accounts in the same accounting period as the sale and to state accounts receivable at its estimated realizable value at the end of the accounting period. (2) The balance sheet presentation shows the gross amount of accounts receivable, the allowance amount, and the difference between the two, the estimated net realizable value. (3) Two basic principles of accounting relate to the analysis and presentation of accounts receivable. First, reporting accounts receivable at their net realizable value relies on the going concern concept. This concept assumes the entity will continue to operate indefinitely and, therefore, will be in business long enough to collect its receivables. Because collection will occur, it is inappropriate to measure accounts receivable at the amount to be received if sold to a financial institution. Second, the matching concept requires that expenses (credit losses) related to a given revenue be matched with and deducted from the revenue in the determination of net income. This dictates the use of the allowance method.

13.

To reinstate a previously written-off account receivable, it is necessary to increase both the account receivable and the allowance for doubtful accounts. The increase to the allowance for doubtful accounts from the reinstatement replenishes the allowance for the amount erroneously removed, since the account proved to be collectible in whole or in part.

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SHORT EXERCISES SE6-1. Accounting for Doubtful Accounts (LO1, LO2) The bad debt expense for the year is $3,500 which increases the allowance for doubtful accounts to $4,000. The net realizable value of accounts receivable is $124,000. ($128,000 - $4,000)

SE6-2. Reinstating Written-Off Accounts (LO2) d. Has no effect on total assets

SE6-3. Estimating the Bad Debts Expense (LO2) b. $3,600 + $1,000 = $4,600

SE6-4. The Financial Statement Effects of Write-Offs (LO1) d. Accounts Receivable and the Allowance for Doubtful Accounts are each reduced by $500. Thus, the net effect on Net Accounts Receivable and Total Assets is zero.

TESTBANKSELLER.COM SE6-5. Recording Dishonored Promissory Notes Receivable (LO4) c. Increase Accounts Receivable; increase Interest Income; decrease Notes Receivable

SE6-6. Accounting for Credit Card Sales (LO3) a. Increase Cash $29,100; increase Credit Card Fee Expense $900.

SE6-7. Calculating Accrued Interest Income on Promissory Notes Receivable (LO4) b. $20,000 x .06 x 60/360 = $200

SE6-8. Calculating Interest on Promissory Notes Receivable (LO4) c. $8,000 x .09 x 6/12 = $360

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SE6-9. Accounts Receivable Turnover (LO5) a. $120,000/[($10,000 + $14,000)/2] = 10.0

SE6-10. Average Collection Period (LO5) a. 365 days/20 = 18.25 days

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EXERCISES—SET A E6-1A. Credit Losses Based on Percentage of Credit Sales (LO2) a. $900,000 x .01 = $9,000 Bad Debt Expense BALANCE SHEET

Assets Allowance for doutful accounts

INCO M E STATE M E NT

Liabilities

Stockholders' Equity

-9,000

Revenues

Expenses

−

Bad debt expense

-9,000

Net Income

9,000

-9,000

Bad debt expense

b. Current Assets: Accounts receivable Less: Allowance for doubtful accounts

$150,000 19,200 ($10,200 + 9,000) $130,800

E6-2A. Credit Losses Based on Accounts Receivable Aging (LO1, LO2) a. $90,000 x 1% = $ 900 20,000 x 2% = 400 TESTBANKSELLER.COM 11,000 x 5% = 550 6,000 x 10% = 600 4,000 x 25% = 1,000 3,450 Less: Balance before adjustment 520 $2,930 b. BALANCE SHEET

Assets Allowance for Doubtful Accounts Accounts Receivable

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

Revenues

−

Expenses

425 -425 Write off Rose Company's account.

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Net Income

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E6-3A. Allowance Method (LO1) a. BALANCE SHEET

Assets Allowance for doubtful accounts Accounts receivable

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

Revenues

Expenses

−

Net Income

900 -900 Write off Gates Company account.

Accounts receivable Allowance for doubtful accounts

400

-400

Cash Accounts receivable

400 -400 Reinstate Gates Company account and remittance

b. There is no difference in the net effect of the subsequent remittance on the financial statements whether payment is made in the current year or in the following year.

E6-4A. Credit Card Sales (LO3)

TESTBANKSELLER.COM

BALANCE SHEET

Assets Cash Accounts Receivable

Liabilities

Stockholders' Equity

INCO M E STATE M E NT

Revenues

Expenses

−

Net Income

1,906 679

2,585

Sales revenue

2,650

Credit card fee expense

2,585

Record cash and credit card sales. ($1,100 x .04 = $44: $1,100 - $44 = $1,056; $700 x .03 = $21; $700 - $21 = $679; $850 + $1,056 = $1,906; $44 + $21 = $65) Cash Accounts receivable - UM

3,978 -3,978 Cash receipt from United Merchants.

E6-5A. Maturity Dates of Notes Receivable (LO4) Maturity Date Interest at Maturity a. December 3 $160 ($6,000 × 0.08 × 120/360) b. August 8 $294 ($16,800 × 0.07 × 90/360) c. December 4 $270 ($24,000 × 0.09 × 45/360) d. September 4 $ 75 ($4,500 × 0.10 × 60/360) e. November 29 $150 ($9,000 × 0.08 × 75/360)

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E6-6A. Computing Accrued Interest (LO4) Maple: $18,000 × 0.10 × 40/360 = $200 Wyman: $14,000 × 0.09 × 18/360 = $63 Nahn: $21,000 × 0.08 × 12/360 = $56

E6-7A. Accounts Receivable Turnover and Average Collection Period (LO5) Year 1 Year 2 a. Accounts receivable turnover 17.68 22.39 b. Average collection period

20.64 days

16.30 days

c. The company’s receivable management improved by 4.34 days.

E6-8A. Credit Losses Based on Percentage of Credit Sales (LO2) a. $1,800,000 x 0.01 = $18,000 BALANCE SHEET

Assets Allowance for doutful accounts

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

TESTBANKSELLE(18,000) R.COM

-18,000

Revenues

Expenses

−

Bad debt expense

18,000

Bad debt expense

b. Current Assets: Accounts receivable Less: Allowance for doubtful accounts

$300,000 38,400 $20,400 + $18,000 $261,600

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Net Income

-18,000

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E6-9A. Credit Losses Based on Accounts Receivable Aging (LO1, LO2) a. $180,000 x 1% = 40,000 x 2% = 22,000 x 5% = 12,000 x 10% = 8,000 x 25% =

$1,800 800 1,100 1,200 2,000 6,900 1,040 $5,860

Less: Balance before adjustment

b. BALANCE SHEET

Assets Allowance for Doubtful Accounts Accounts Receivable

Liabilities

INCO M E STATE M E NT

Stockholders' Equity

Revenues

Expenses

−

Net Income

425 -425 Write off Lyons Company's account.

E6-10A. Credit Card Sales (LO3)

TESTBANKSELLER.COM BALANCE SHEET

Assets a.

Cash Accounts Receivable

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

Revenues

Expenses

−

3,812 1,358

5,170

Sales revenue

5,300

Credit card fee expense

130

Record cash and credit card sales. ($2,200 x .04 = $88: $2,200 - $88 = $2,112; $1,400 x .03 = $42; $1,400 - $42 = $1,358; $1,700 + $2,112 = $3,812; $88 + $42 = $130)

Cash Accounts receivable - UM

7,956 -7,956 Cash receipt from United Merchants.

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5,170

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E6-11A. Maturity Dates of Notes Receivable (LO4) Maturity Date Interest at Maturity a. December 8 $320 ($12,000 × 0.08 × 120/360) b. August 13 $588 ($33,600 × 0.07 × 90/360) c. December 9 $540 ($48,000 × 0.09 × 45/360) d. September 9 $150 ($9,000 × 0.10 × 60/360) e. November 24 $300 ($18,000 × 0.08 × 75/360)

E6-12A. Computing Accrued Interest (LO4) Abel: $36,000 × 0.10 × 45/360 = $450 Baker: $28,000 × 0.09 × 23/360 = $161 Charlie: $42,000 × 0.08 × 12/360 = $112

E6-13A. Accounts Receivable Turnover and Average Collection Period (LO5) Year 1 Year 2 a. Accounts receivable turnover 12.11 13.31 b. Average collection period

30.14 days

27.42 days

c. The company’s receivable management improved by 2.72 days.

TESTBANKSELLER.COM E6-14A. Recognizing Accounts Receivable (LO1) BALANCE SHEET

Assets a.

Accounts receivable

Liabilities

750

INCO M E STATE M E NT +

Stockholders' Equity 750

Revenues Sales

−

Expenses

750

Sale of merchandise.

Cash Accounts receivable

750 -750 Receipt of cash from customer.

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Net Income 750

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EXERCISES—SET B E6-1B. Credit Losses Based on Percentage of Credit Sales (LO2) a. $1,200,000 x .01 = $12,000 BALANCE SHEET

Assets Allowance for doutful accounts

INCO M E STATE M E NT

Liabilities

Stockholders' Equity

-12,000

Revenues

Expenses

−

Bad debt expense

-12,000

12,000

Net Income

-12,000

Bad debt expense

b. Current Assets Accounts receivable Less: Allowance for doubtful accounts

$280,000 13,700 ($1,700 + $12,000) $266,300

E6-2B. Credit Losses Based on Accounts Receivable Aging (LO1, LO2) a. $100,000 x 1% = $1,000 18,000 x 3% = TESTBANK540 SELLER.COM 20,000 x 6% = 1,200 7,000 x 10% = 700 2,000 x 20% = 400 3,840 Less: Balance 840 $3,000 b. BALANCE SHEET

Assets Allowance for Doubtful Accounts Accounts Receivable

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

Revenues

−

Expenses

480 -480 Write off Porter Company's account.

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Net Income

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E6-3B. Allowance Method (LO1) a. BALANCE SHEET

Assets Allowance for doubtful accounts Accounts receivable

INCO M E STATE M E NT

Liabilities

Stockholders' Equity

Revenues

Expenses

−

Net Income

1,000 -1,000 Write off Gates Company account.

Accounts receivable Allowance for doubtful accounts Cash Accounts receivable

700

-700 700 -700 Reinstate Ward Company account and remittance

b. There is no difference in the net effect of the subsequent remittance on the financial statements whether payment is made in the current year or in the following year.

E6-4B. Credit Card Sales (LO3) BALANCE SHEET

INCO M E STATE M E NT

TESTBANKSELLER.COM

Assets a.

Cash Accounts Receivable

Liabilities

Stockholders' Equity

Revenues

Expenses

−

1,820 288

2,108

Sales revenue

2,140

Credit card fee expense

Record cash and credit card sales. ($500 x .04 = $20: $500 - $20 = $480; $300 x .04 = $12; $300 - $12 = $288; $1,340 + $480 = $1,820; $20 + $12 = $32)

Cash Accounts receivable - UM

288 -288 Cash receipt from United Merchants.

E6-5B. Maturity Dates of Notes Receivable (LO4) Maturity Date Interest at Maturity a. October 8 $162 ($7,200 × 0.09 × 90/360) b. August 12 $320 ($12,000 × 0.08 × 120/360) c. September 16 $280 ($11,200 × 0.075 × 120/360) d. July 25 $ 54 ($5,400 × 0.08 × 45/360) e. January 12 $500 ($30,000 × 0.08 × 75/360)

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Net Income

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2,108

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E6-6B. Computing Accrued Interest (LO4) Barton: $10,000 × 0.08 × 27/360 = $60 Lawson: $24,000 × 0.09 × 18/360 = $108 Riley: $9,000 × 0.10 × 12/360 = $30

E6-7B. Accounts Receivable Turnover and Average Collection Period (LO5) Year 1 Year 2 a. Accounts receivable turnover 14.29 16.80 b. Average collection period

25.54 days

21.73 days

c. The company’s receivable management improved by 3.81 days.

E6-8B. Credit Losses Based on Percentage of Credit Sales (LO2) a. $2,700,000 x .01 = $27,000 BALANCE SHEET

Assets Allowance for doutful accounts

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

TESTBANKSELLE-27,000 R.COM

-27,000

Revenues

Expenses

−

Bad debt expense

27,000

Bad debt expense

b. Current Assets: Accounts receivable Less: Allowance for doubtful accounts

$450,000 57,600 (30,600 + 27,000) $392,400

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Net Income

-27,000

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E6-9B. Credit Losses Based on Accounts Receivable Aging (LO1, LO2) a. $270,000 x 1% 60,000 x 2% 33,000 x 5% 18,000 x 10% 12,000 x 25%

= = = = =

$ 2,700 1,200 1,650 1,800 3,000 10,350 1,560 $ 8,790

Less: Balance before adjustment Increase Allowance for doubtful accounts and bad debt expense b. BALANCE SHEET

Assets Allowance for Doubtful Accounts Accounts Receivable

Liabilities

INCO M E STATE M E NT

Stockholders' Equity

Revenues

Expenses

−

Net Income

425 -425 Write off Matthews Company's account.

E6-10B. Credit Card Sales (LO3)

TESTBANKSELLER.COM BALANCE SHEET

Assets a.

Cash Accounts Receivable

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

Revenues

Expenses

−

5,718 2,037

7,755

Sales revenue

7,950

Credit card fee expense

195

Record cash and credit card sales. ($3,300 x .04 = $132: $3,300 - $132= $3,168; $2,100 x .03 = $63; $2,100 - $63 = $2,037; $2,550 + $3,168 = $5,718; $132 + $63 = $195)

Cash Accounts receivable - UM

11,934 -11,934 Cash receipt from United Merchants.

E6-11B. Maturity Dates of Notes Receivable (LO4) Maturity Date Interest at Maturity a. December 18 $480 ($18,000 × 0.08 × 120/360) b. August 16 $882 ($50,400 × 0.07 × 90/360) c. November 24 $810 ($72,000 × 0.09 × 45/360) d. September 11 $225 ($13,500 × 0.10 × 60/360) e. December 7 $450 ($27,000 × 0.08 × 75/360)

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7,755

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E6-12B. Computing Accrued Interest (LO4) a. Delta: $54,000 × 0.10 × 40/360 = $600 b. Echo: $42,000 × 0.09 × 18/360 = $189 c. Foxtrot: $63,000 × 0.08 × 12/360 = $168

E6-13B. Accounts Receivable Turnover and Average Collection Period (LO5) Year 1 Year 2 a. Accounts receivable turnover 15.32 15.62 b. Average collection period

23.83 days

23.37 days

c. The company’s receivable management improved a marginal 0.46 days.

E6-14B. Recognizing Accounts Receivable (LO1) BALANCE SHEET

Assets a.

Accounts receivable

Liabilities

300

INCO M E STATE M E NT +

Stockholders' Equity 300

Revenues Sales

−

Expenses

300

Sale of merchandise.

Cash Accounts receivable

300

TESTBANKSELLER.COM

-300 Receipt of cash from customer.

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Net Income

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PROBLEMS—SET A P6-1A. Allowance Method (LO2) a. Accounts Receivable at the end of Year 3 is $21,900 [$1,105,000 (sales) - $1,074,000 (collections) - $9,100 (write offs)]. Bad Debts Expense is 1.2 percent x $1,105,000 = $13,260. Allowance for Doubtful Accounts at the end of year 3 is $4,160 [$13,260 Total provision for uncollectible accounts - $9,100 Total write-offs]

b. The 1.2 percent rate appears to be too high. A one percent rate would have provided $11,050, which still exceeds the $9,100 of total write-offs by $1,950. This amount provides an adequate margin for future write-offs.

P6-2A. Accounts Receivable and Credit Losses (LO1, LO2) a. Bad debt expense = $1,173,000 x 0.8% = $9,384 b.

TESTBANKSELLER.COM Beginning balance Sales Collections Write-offs Reinstatement Bad debt expense

Accounts Receivable $ 122,000 1,173,000 (1,150,000) (7,500)*

$ 137,500

Allowance for Doubtful Accounts $7,900

(7,500) 600 9,384 $10,384

*($3,600 + $2,400 + $1,500)

c. Accounts receivable Less: Allowance for doubtful accounts

$137,500 10,384 $127,116

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P6-3A. Credit Losses Based on Accounts Receivable Aging (LO1, LO2) a. Current $304,000 × 1% = $ 3,040 0–60 days past due 44,000 × 5% = 2,200 61–180 days past due 18,000 × 15% = 2,700 Over 6 months past due 9,000 × 40% = 3,600 Amount required 11,540 Balance of allowance account 4,200 Adjustment $ 7,340 b. Current Assets Accounts receivable Less: Allowance for doubtful accounts

$375,000 11,540 $363,460

P6-4A. Credit Card Sales (LO3) BALANCE SHEET

Assets

Accounts Receivable

2,376

Cash

1,960

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

Revenues

Net Income

2,376

Sales

2,400

Credit card fee expense

2,376

1,960

Sales

2,000

Credit card fee expense

1,960

TESTBANKSELLER.COM

P6-5A. Accounts and Notes Receivable (LO2, LO4) a. Notes Receivable June 8 Elliot note Aug.7 Payment on Elliot note Sep.1 B. Shore note Dec. 16 C. Judd note Dec. 31 B. Shore write-off Balance at December 31

Expenses

−

$15,000 (15,000) 18,000 14,400 (18,000) $14,400

b. Bad debt expense Allowance for doubtful accounts required Balance in Allowance for doubtful accounts before adjustment Adjustment (bad debt expense)

$19,500 (22,600) $42,100

c. Accrued interest at year end $14,400 x 0.10 x 15/360 = $60

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P6-6A. Allowance Method (LO2) a. Accounts Receivable at the end of Year 3 is $43,800 [$2,210,000 (sales) - $2,148,000 (collections) - $18,200(write offs)]. Bad Debts Expense is 1.2 percent × $2,210,000 = $26,520. Allowance for Doubtful Accounts at the end of year 3 is $8,320 [$26,520 total provision for uncollectible accounts - $18,200 total write-offs] b. The 1.2 percent rate appears to be too high. A one percent rate would have provided $22,100, which still exceeds the $18,200 of total write-offs by $3,900. This amount provides an adequate margin for future write-offs.

P6-7A. Accounts Receivable and Credit Losses (LO1, LO2) a. Bad debt expense = $2,346,000 x 0.8% = $18,768 b.

Beginning balance Sales revenue Collections Write-offs Reinstatement Bad debt expense

Accounts Receivable $ 244,000 2,346,000 (2,300,000) TESTBANKSELLER.COM (15,000) *

$ 275,000

Allowance for Doubtful Accounts $15,800

(15,000) 1,200 18,768 $20,768

*($7,200 + $4,800 + $3,000) c. Accounts receivable Less: Allowance for doubtful accounts

$275,000 20,768 $254,232

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P6-8A Credit Losses Based on Accounts Receivable Aging (LO2) a. Current $608,000 × 1% = $ 6,080 0–60 days past due 88,000 × 5% = 4,400 61–180 days past due 36,000 × 15% = 5,400 Over 6 months past due 18,000 × 40% = 7,200 Amount required 23,080 Balance of allowance account 8,400 Adjustment to bad debt expense $14,680 b. Current Assets Accounts receivable Less: Allowance for doubtful accounts

$750,000 (23,080) $726,920

P6-9A. Accounts and Notes Receivable (LO2, LO4) a. Notes Receivable Jun 8 Albert note $30,000 Aug 7 Albert paid (30,000) Sep 1 Matthews note 36,000 Dec 16 LeRoy note 28,800 Dec 31 Matthews write off (36,000)

TESTBANKSELLER.COM Balance Dec. 31

$28,800

b. Interest Income Albert note $30,000 x .08 x 60/360 Matthews note $36,000 x .09 x 120/360 Accrued interest $28,800 x .10 x 15/360 Total interest income c. Allowance for Doubtful Accounts Balance before adjustment Desired balance Bad debt expense adjustment required

$ 400 1,080 120 $1,600

($45,200) 39,000 $84,200

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PROBLEMS—SET B P7-1B. Allowance Method (LO2) a. Accounts Receivable at the end of Year 3 is $46,400. [$2,599,000 (sales) - $2,535,000 (collections) - $17,600 (write-offs)] Bad Debts Expense for the 3 year period = 1 percent × $2,599,000 = $25,990. Allowance for Doubtful Accounts at the end of year 3 is $8,390. [$25,990 total provision for uncollectible accounts - $17,600 total write-offs]. b. The one percent rate appears to be too high. A 0.8 percent rate would have provided $20,792, which still exceeds the $17,600 total write-off by $3,192. This amount provides an adequate margin for future write-offs.

P6-2B. Accounts Receivable and Credit Losses (LO1, LO2) a. Bad Debt Expense = $811,000 x .01 = $8,110 b.

Beginning balance Sales revenue Collections Write-offs Reinstatement Bad debt expense

Accounts Receivable TESTBANKSELLER.COM $ 126,000 811,000 (794,000) (5,950)*

$ 137,050

Allowance for Doubtful Accounts $6,800

(5,950) 1,000 8,110 $9,960

*($2,800 + $1,000 + $2,150)

c. Accounts receivable Less: Allowance for doubtful accounts

$137,050 9,960 $127,090

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P6-3B. Credit Losses Based on Accounts Receivable Aging (LO1, LO2) a. Current $262,000 × 2% = 0–60 days past due 28,000 × 6% = 61–180 days past due 11,200 × 15% = Over 6 months past due 8,400 × 30% = Amount required in allowance account Balance of allowance account Bad debt expense b. Current Assets Accounts receivable Less: Allowance for doubtful accounts

$ 5,240 1,680 1,680 2,520 11,120 2,800 $ 8,320

$309,600 11,120 $298,480

P6-4B. Credit Card Sales (LOL 3) BALANCE SHEET

Assets

Accounts Receivable

1,176

Cash

4,900

INCO M E STATE M E NT

Liabilities

Stockholders' Equity 1,176

Revenues Sales

P6-5B. Accounts and Notes Receivable (LO2, LO4) a. Notes Receivable May 2 Holt Co. note Jul 1 Holt Co. payment Jul 1 B. Rich Co. note Dec 9 B. Rich Co. write-off Dec 11 W. Maling note Balance Dec. 31 b.

Allowance for Doubtful Accounts Balance before adjustment Necessary balance Bad debt expense (adjustment) Interest Income Holt Company note B. Rich Company note W. Maling note

Sales

Net Income

1,200

Credit card fee expense

1,176

5,000

Credit card fee expense

100

4,900

TESTBANKSELLER.COM 4,900

Expenses

−

$14,400 (14,400) 27,000 (27,000) 21,000 $21,000 ($28,300) 5,800 $34,100 $14,400 x 0.10 x 60/360 $27,000 x 0.10 x 120/360 $21,000 x 0.09 x 20/360 Total interest income

$ 240 900 105 $1,245

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P6-6B. Allowance Method (LO2) a. Accounts Receivable at the end of Year 3 is $92,800 [$5,198,000 (sales) - $5,070,000 (collections) - $35,200 (write-offs)] Bad debts expense for the 3 year period = 1 percent × $5,198,000 = $51,980 Allowance for Doubtful Accounts at the end of Year 3 is $16,780 [$51,980 total provision for uncollectible accounts - $35,200 total write-offs]. b. The one percent rate appears to be too high. A 0.8 percent rate would have provided $41,584, which still exceeds the $35,200 total write-off by $6,384. This amount provides an adequate margin for future write-offs.

P6-7B. Accounts Receivable and Credit Losses (LO1, LO2) a. Bad debt expense = $1,622,000 x .01 = $16,220 b. Accounts Receivable Beginning balance $ 252,000 Sales revenue 1,622,000 Collections (1,588,000) Write-offs (11,900)* Reinstatement TESTBANKSELLER.COM Bad debt expense $ 274,100

Allowance for Doubtful Accounts $13,600

(11,900) 1,000 16,220 $18,920

*($5,600 + $2,000 +$4,300)

c. Accounts receivable Less: Allowance for doubtful accounts

$274,100 18,920 $255,180

P6-8B. Credit Losses Based on Accounts Receivable Aging (LO2) a. Current $524,000 × 2% = 0–60 days past due 56,000 × 6% = 61–180 days past due 22,400 × 15% = Over 6 months past due 16,800 × 30% = Amount required Balance of allowance account Bad debt expense (adjustment) b. Current Assets Accounts receivable Less: Allowance for doubtful accounts

$10,480 3,360 3,360 5,040 22,240 5,600 $16,640

$619,200 22,240 $596,960

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P6-9B. Accounts and Notes Receivable (LO2, LO4) a. Notes Receivable May 2 Haskins Company note Jul 1 Haskins Company payment Jul 1 R. Longo Company note Dec 9 R. Longo write off Dec 11 R. Canal note

$28,800 (28,800) 54,000 (54,000) 42,000

Balance at December 31

$42,000

b. Interest Income Haskins $28,800 x 0.10 x 60/360 R. Longo $54,000 x 0.10 x 120/360 R. Canal $42,000 x 0.09 x 20/360 Total interest income

$480 1,800 210 $2,490

c. Allowance for doubtful accounts Balance before adjustment Necessary balance Bad debt expense (adjustment)

($56,600) 11,600 $68,200

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SERIAL PROBLEM: ANGEL CITY GREETINGS SP6. 1. The primary advantage of offering credit is the additional customer base that will now be available to Kate. Kate may be able to significantly increase her sales by gaining customers such as John, who wish to purchase from Kate, but require financing in order to make the purchase. The primary disadvantage to offering credit is the possibility of not being able to collect all the money that is owed. Determining how much credit to extend is a balancing act between gaining more customers and minimizing the amount of bad debts. 2. Kate will need to determine the credit worthiness of John. In the case of a company, this often means analyzing the financial statements in order to assess the company’s liquidity and solvency. In the case of an individual like John, this usually means looking at the customer’s credit report. 3. BALANCE SHEET

Assets Accounts receivable

Liabilities

INCO M E STATE M E NT +

5,000

Stockholders' Equity

5,000

Revenues

Sales

Expenses

−

Net Income

5,000

Sale of merchandise on account.

Inventory

-4,500 Cost of goods sold.

Cash Accounts receivalbe

Cost of goods sold

-4,500

4,500

-4,500

TESTBANKSELLER.COM

4,900 -5,000

-100

Sales discount

-100

Payment received within discount period.

4. BALANCE SHEET

Assets Cash Accounts receivable

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

Revenues

Expenses

−

Net Income

5,000 -5,000 Payment received after the discount period.

5. BALANCE SHEET

Assets Cash

Liabilities

14,625

INCO M E STATE M E NT +

Stockholders' Equity 14,625

Revenues Sales

Expenses

−

15,000

Credit card fee expense

375

14,625

Cost of goods sold

13,500

-13,500

Credit card sales

Inventory

-13,500

-13,500 Cost of sales

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EXTENDING YOUR KNOWLEDGE REPORTING AND ANALYSIS EYK6-1. Financial Reporting Problem: Columbia Sportswear Company a. ($ in thousands) Accounts receivable Allowance for doubtful accounts

2017 $373,905 $ 9,043

2016 $342,234 $ 8,556

2.4%

2.5%

EYK6-2. Comparative Analysis Problem: Columbia Sportswear Company vs. Under Armour, Inc a. 2017 2016 Columbia Sportswear Accounts receivable turnover $2,466,105 /$364,862 = 6.8 $2,377,045 /$333,678 = 7.1 Average collection period 365/6.8 = 53.7 days 365/7.1= 51.4 days Under Armour Accounts receivable turnover Average collection period

$4,976,553/$609,670 = 8.2 365/8.2 = 44.5days

$4,825,335/$622,685 = 7.7 365/7.7 = 47.4 days

TEScollect TBANtheir KSEreceivables LLER.COinMwell over one month. Columbia’s b. Columbia and Under Armour collections declined slightly in 2017, while Under Armour’s collections improved slightly in 2017. EYK6-3. Business Decision Problem 1. Write-off of worthless receivables; decrease Accounts Receivable and decrease the Allowance for Uncollectible Accounts by $5,000. 2.

Aging of Accounts Receivable $44,000 x .04 = $1,760 31,000 x .08 = 2,480 22,000 x .12 = 2,640 13,000 x .14 = 1,820 9,000 x .20 = 1,800 $10,500

3. Option b is cheaper: Cost of option a: $40,000 x 11% Cost of option b: $40,000 x 6% Expected loss on uncollectible accounts

= = =

$4,400 $2,400 1,600 $4,000

($40,000 x 4%)

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EYK6-4. Financial Analysis Problem a. Accounts receivable turnover: Abbott Laboratories 2016: $20,853/[($3,418 + $3,248)/2] = 6.26 2017: $27,390/[($3,248 + $5,249)/2] = 6.45 Pfizer Inc. 2016: $52,824/[($8,176 + $8,225)/2] = 6.44 2017: $52,546/[($8,225 + $8,221)/2] = 6.39 Average Collection Period: Abbott Laboratories 2016: 365 days/6.26= 58.3 days 2017: 365 days/6.45 = 56.6 days Pfizer Inc. 2016: 365 days/6.44= 56.7 days 2017: 365 days/6.39 = 57.1 days b. The average collection period for Abbott Laboratories was 58.3 days and 56.6 days for the two years, whereas the average collection period for Pfizer Inc., was 56.7 days and 57.1 days for the two years. The two companies have very similar collection periods.

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CRITICAL THINKING EYK6-5. Accounting Research Problem – General Mills, Inc. a. Accounts receivable Allowance for doubtful accounts

2017 $1,454,400,000 $ 24,300,000

2016 $1,390,400,000 $ 29,600,000

1.7%

2.1%

b. c. AR turnover Average collection period

2017 $15,619.8 / $1,430.1 = 10.92 365/10.92 = 33.4 days

2016 $16,563.1 / $1,360.8 = 12.17 365/12.17 = 30.0 days

d. The trend in collection is has worsened over the two years.

EYK6-6. Accounting Communication Activity Memorandum To whom it may concern, Our new policy for compensating salespeople on a commission basis appears to be encouraging increased sales, however, many of these sales are on account. This is leading to a growing accounts receivable balance. We need to be very careful to monitor this situation since accounts receivable is not the same as cash. While we hope to eventually receive the TESTBANKSELLER.COM cash, the receipt will be later than many of our cash expenditures, such as the payment of commissions. In addition, we have many additional cash expenditures such as the materials used to build the furniture. So, even though we can record revenue on an accrual basis for these sales on credit, we need to be mindful of our cash flows. Sincerely, Your Name

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EYK6-7. Accounting Ethics Case The ethical considerations that face Bryan Blanchard are the following: 1. Compromising his professional responsibilities to his company (by not disclosing what he has been told) versus compromising his personal loyalties to his cousin (by disclosing what has been told to him in confidence). 2. Possibly jeopardizing Tractor Motors' financial position (by allowing sales to continue to a firm that is having financial difficulties) versus risking the loss of a good customer (by allowing Tractor Motors to cut off sales to Farmers Cooperative when it is not certain whether or not payment is going to be made). 3. Jeopardizing his promotion (by appearing to bring this information to the company's attention to undercut Ms. Glazer) versus also jeopardizing his promotion (by allowing it to appear that Ms. Glazer has brought in and is maintaining large sales to a good customer). The alternatives that Bryan Blanchard might consider are these: 1. Do nothing until he has documented information that Farmers Cooperative is in financial trouble. 2. Discuss the information that he has with his supervisor. This would have to be done in a tactful manner. 3. Discuss the information with Ms. Glazer. He could then go with her to the supervisor or let her handle the situation as TEshe STfeels BANbest. KSELLER.COM EYK6-8. Corporate Social Responsibility Problem While it may be true that people with a gambling addiction are apt to gamble more and, therefore, lose more money at a casino such as those operated by MGM Resorts International, the potential legal fallout from preying upon these addicts will likely be severe. Possible outcomes could be laws written to hold the gaming establishments responsible for those that are deemed addicted to gambling, along with lawsuits that may claim the gaming establishments contributed to the disease. Since gaming establishments are licensed by the government to operate, it is in their best interest to not do anything to jeopardize their license to operate.

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EYK6-9. Forensic Accounting Problem Lapping usually involves an employee stealing checks from the incoming mail. According to Joseph Wells, author of Principles of Fraud Examination, some basic controls over incoming checks include: • • •

The person opening the mail should be independent of the cashier, accounts receivable clerk, or employees who are authorized to initiate or post journal entries. Unopened mail should not be delivered to employees having access to accounting records. The employee who opens the mail should (1) place restrictive endorsements on the incoming checks; (2) prepare a list of checks received; (3) forward all remittances to the person responsible for preparing and making the bank deposit; and (4) forward the list of checks to a person who can check and see if it agrees with the bank deposit.

EYK6-10. Working with the Takeaways a. Accounts receivable turnover = $10,773,904/[($542,924+ $540,545)/2] = 19.9 b. Average collection period = 365/19.9 = 18.3 days

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Chapter 7 Inventory QUESTIONS 1.

(a) A manufacturer is a firm that converts materials and components into finished products through the application of skilled labor and machine operations. (b) A wholesale distributor is a firm that buys finished products from manufacturing firms in large quantities and sells the products to retailers in smaller quantities. (c) A retailer is a firm that buys products from wholesale distributors and manufacturers and sells them to individual consumers.

Gross profit on sales is calculated by subtracting cost of goods sold from net sales. Gross margin is another name for gross profit on sales.

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The gross profit percentage is calculated by dividing gross profit on sales for the year by net sales for the year. The gross profit percentage is used to compare the profitability of one firm to others in the same industry for the same year, to industry averages, and to prior years for the same firm.

Merchandisers and manufacturers disclose only net sales in annual reports to stockholders (rather than sales less returns and allowances and sales discounts) because the amount of sales returns, allowances, and discounts are typically relatively small. As a result, they do not need to be separately disclosed for the external user to fully understand the financial statements. This limited disclosure is consistent with the full disclosure principle, which states that all information necessary for the users' understanding of the financial statements must be disclosed.

Most manufacturing firms maintain three categories of inventory: raw materials inventory, work-in-process inventory, and finished goods inventory. All three are usually maintained using the perpetual inventory system. The raw materials inventory includes raw materials and components that have been purchased for use in the factory but have not yet been placed into production. The work-in-process inventory consists of units of product that have been started into production in the factory but have not yet been completed. The finished goods inventory includes all product that has been completed and is ready for sale to customers.

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Retailers that use a point-of-sale checkout system often incorporate a quick response system. A quick response system is designed to identify and list fast-selling and slowselling products so the retailer can order more of the fast-selling items and eliminate slowselling items.

Just-in-case inventory is an extra quantity of inventory that is on hand just in case a supplier fails to deliver on a timely basis or just in case a manufacturer decides to produce previously unplanned quantities. Inventory carrying cost is the cost associated with maintaining inventory on hand. Components of inventory carrying cost include casualty insurance, building usage costs, and the cost of the capital invested in the inventory.

The just-in-time manufacturing philosophy seeks to eliminate or minimize just-in-case inventory quantities. A company strictly following the just-in-time manufacturing philosophy would have no inventories on hand at the end of each business day.

Goods flow denotes the physical movement of goods through a firm's operations. Selection of goods for use or sale may be first-in, first-out (perishable goods); haphazard (often nonperishable items that can be used or sold in any sequence); or last-in, first out (nonperishable goods whose recent additions are the most conveniently removed or sold). Cost flow denotes the real or assumed flow that a company deliberately adopts to associate unit costs with goods sold or on hand. Often the cost flow is different from the goods flow.

10.

(a) Specific identification associates the exact cost of each unit with that unit when it is sold. This procedure is typically used when volume is low and unit cost is high.

TESTBANKSELLER.COM (b) Weighted-average cost determines the weighted-average unit cost of all units on hand each time that a purchase is made. The weighted-average unit cost is applied to the units sold to determine cost of goods sold for a sale. (c) First-in, first-out (FIFO) associates the cost of the oldest goods on hand with the units sold. (d) Last-in, first-out (LIFO) associates the cost of the newest goods on hand with the units sold. 11.

Specific identification may be useful when inventory items have a relatively high unit value, are easily identified, and unit sales volume is relatively low. For example, it might be used in the sale of pianos or quality furniture. Weighted-average cost is often used when the goods involved are undifferentiated and are stored in common areas. Liquid fuels, grains, and other commodities are good examples. If cost flows are expected to correspond to physical flows, first-in, first-out pricing would be used with perishable goods such as food, time-dated, or style affected merchandise, whereas last-in, first-out would be used with nonperishable goods so that the last acquisitions are moved first (coal, for example). If physical flow is ignored, FIFO and LIFO may be used with any type of inventory.

12.

If stable purchase prices prevail, the dollar amount of inventories (beginning or ending) tends to be approximately the same under the alternative inventory costing methods, and consequently, the choice of method does not materially affect net income.

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13.

Phantom profits occur during periods of increasing inventory purchase costs when the costing system (principally first-in, first-out) matches the costs of earlier purchases against current selling prices. Because goods sold are replaced at costs higher than shown as cost of goods sold, reported profits include amounts that are not available in cash (i.e., phantom profits).

14.

(a) Last in, first-out (b) Last-in, first-out (c) First-in, first-out (d) First-in, first-out

15.

A significant income tax benefit results from using LIFO when costs are consistently rising. LIFO results in lower pretax income and, therefore, lower taxes payable, than other inventory costing methods.

16.

Merchandise may be valued on the balance sheet at an amount less than its acquisition cost when its net realizable value falls below its cost which may happen with (1) damaged, physically deteriorated, or obsolete merchandise, and (2) when market forces, such as lower demand reduce selling prices.

17.

The lower of cost or net realizable value rule recognizes a loss from inventory value declines in the period in which the decline occurs, rather than in the period in which the inventory is sold. Reported net income is decreased by the amount by which the ending inventory is written down.

18.

Because of the possible T variation and ending inventory from ESTBAinNgross KSELprofit, LER.net COincome, M the use of different inventory costing methods, it is important that a firm use the same costing method from one accounting period to the next. Consistency enhances comparisons of firm performance between periods. Also, a firm should disclose which costing method it is using.

19.

The LIFO inventory reserve is the difference between the value of LIFO ending inventory and the value that the inventory would be valued at using FIFO. The LIFO reserve can be added to LIFO ending inventory to determine its current value, as well as to restate such ratios as the current ratio or the inventory turnover ratio.

20.

The days' sales in inventory is 365/4.51 = 80.9 days.

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SHORT EXERCISES SE7-1. Merchandising versus Service Firm (LO1) a. Merchandising firm b. Service firm c. Merchandising firm d. Merchandising firm e. Both f. Both g. Merchandising firm h. Merchandising firm

SE7-2. Gross Profit Percentage (LO5) Gross profit / net sales = ($6,000/$10,000) = 60 percent

SE 7-3. Departures from Acquisition Cost (LO4) d. ($325 - $15 = $310)

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SE7-4. Inventory Costing Methods (LO2) a. Specific identification.

SE7-5. LIFO Inventory Reserve (LO8 Appendix 7B) c. ($150,000 + $27,000 = $177,000)

SE7-6. Lower of Cost or Net Realizable Value Rule (LO4) (150 units @ $16) = $2,400. SE7-7. Inventory Turnover and Days’ Sales in Inventory (LO6) Year 1 Inventory turnover 4.55 Days’ sales in inventory 80.22 days

Year 2 6.13 59.54 days

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SE7-8. Inventory Costing Methods and the Periodic Method (LO2) Cost of goods sold = (100 units @ $12) + (50 units @ $14) = $1,900. Ending inventory = (150 units @ $14) = $2,100. SE7-9. Inventory Costing Methods and the Periodic Method (LO2) Cost of goods sold = (50 units @ $20) + (100 units @ $22) = $3,200. Ending inventory = (50 units @ $20) = $1,000.

SE7-10. Inventory Costing Methods and the Perpetual Method (LO7 Appendix 7A) Cost of goods sold = (50 units @ $20) + (100 units @ $22) = $3,200. Ending inventory = (50 units @ $20) = $1,000.

SE7-11. Inventory Costing Methods and the Periodic Method (LO2) Weighted-average cost = ($1,500 + $1,800) / (100 units + 100 units) = $16.50 Cost of goods sold = (100 units @ $16.50) = $1,650 Ending inventory = (100 units @ $16.50) = $1,650

SE7-12. Errors in Inventory Count (LO3) TESTBANKSELLER.COM d. Overstating ending inventory will result in an understatement of cost of goods sold in 2019, leading to an overstatement of 2019 net income. This will also lead to an overstatement of 2020 beginning inventory and hence cost of goods available of sale in 2020. If ending inventory is correctly counted in 2020, then cost of goods sold will be overstated, resulting in an understatement of 2020 net income.

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EXERCISES—SET A E7-1A. Profitability Analysis (LO5) Gross profit percentage = ($150,000 - $90,000)/$150,000 = 40 percent Profit margin = ($150,000 - $90,000 - $30,000 + $10,000)/$150,000 = 26.7 percent

E7-2A. Just-in-Time Inventories (LO1) $600,000/300 days = $2,000 raw material used per day 2 days  $2,000 = $4,000 raw materials inventory level

E7-3A. Inventory Costing Methods (LO2) (a) First-in, first-out: Ending inventory: 25 units @ $10 = $250 20 units @ $9 = 180 45 $430 Cost of goods sold: ($240 + $450 + $250) - $430 = $510 (b) Last-in, first-out: Ending inventory:

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30 units @ $8 = $240 15 units @ $9 = 135 45 $375

Cost of goods sold: ($240 + $450 + $250) - $375 = $565 (c) Weighted-average cost: Units available: 30 units @ $8 = $240 50 units @ $9 = 450 25 units @ $10 = 250 105 $940 Weighted-average unit cost: $940/105 units = $8.952 Ending inventory: 45 units x $8.952 = $402.84 = $403 Cost of goods sold: $940 - $402.84 = $537.16 = $537

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E7-4A. Inventory Costing Methods—Perpetual Method (LO7 Appendix 7A) (a) First-in, first-out: 30 units @ $8 = $240 30 units @ $9 = 270 60 $510 (b) Last-in, first-out:

50 units @ $9 = 10 units @ $8 = 60

$450 80 $530

$240 450 $690

Weighted-average unit cost: $690/80 units = $8.625 Cost of goods sold: 60 units  $8.625 = $517.50 = $518

E7-5A. Inventory Costing Methods (LO2) Aug. 1: $1,600/80 = $20.00 Aug. 5: $2,116/100 = 21.16 Aug. 8: $4,416/200 = 22.08 (a) Ending inventory:

200T@ ES$22.08 TBANK=SE$4,416.00 LLER.COM 30 @ $21.16 = 634.80 $5,050.80 = $5,051

Cost of goods sold: ($1,600 + $2,116 + $4,416) - $5,050.80 = $3,081.20 = $3,081 (b) Ending inventory:

50 @ $22.08 = 100 @ $21.16 = 80 @ $20.00 =

$1,104.00 2,116.00 1,600.00 $4,820.00

Cost of goods sold: ($1,600 + $2,116 + $4,416) - $4,820 = $3,312 (c) ($1,600 + $2,116 + $4,416)/(80 + 100 + 200) = $21.40 Ending inventory: 230 @ $21.40 = $4,922 Cost of goods sold: ($1,600 + $2,116 + $4,416) - $4,922 = $3,210

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E7-6A. Inventory Costing Methods—Perpetual Method (LO7 Appendix 7A) Aug. 1: $1,600/80 = $20.00 Aug. 5: $2,116/100 = 21.16 Aug. 8: $4,416/200 = 22.08 (a) Ending inventory:

200 @ $22.08 = 30 @ $21.16 =

$4,416.00 634.80 $5,050.80 = $5,051

(b) Ending inventory:

50 @ $22.08 = 100 @ $21.16 = 80 @ $20.00 =

$1,104.00 2,116.00 1,600.00 $4,820.00

E7-7A. Departures from Acquisition Cost (LO4) a. 300 x $1.40 = $420. The inventory is valued at net realizable value. b. 5 x $150 = $750. The inventory net TESTisBvalued ANKSatEL LErealizable R.COMvalue ($160 - $10 per camera). E7-8A. Inventory Costing Methods (LO2)

Beginning inventory Purchases: February 11 May 18 October 23 Cost of goods available for sale

Units 200 500 400 100 1,200

@ @ @ @

Cost $10 14 16 20

Cost $20

= = = = =

Total $2,000 7,000 6,400 2,000 $17,400

Total $2,000

= =

4,160 $6,160

(a) First-in, first out:

From October 23 purchase From May 18 purchase Ending inventory

Units 100

Cost of goods available for sale Less: Ending inventory Cost of goods sold

260 360

$17,400 6,160 $11,240

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(b) Last-in, first-out: From beginning inventory From February 11 purchase Ending inventory

Units 200

Cost $10

Total $2,000

160

2,240

$4,240

360

Cost of goods available for sale Less: Ending inventory Cost of goods sold

$17,400 4,240 $13,160

(c) Weighted-average cost: Cost of goods available for sale/Total units available for sale = $17,400/1,200 = $14.50 Weighted-average unit cost Ending inventory = 360 x $14.50 =

$ 5,220

Cost of goods available for sale Less: Ending inventory Cost of goods sold

$17,400 5,220 $12,180

TESTBANKSELLER.COM E7-9A. Inventory Costing Methods (LO2) Beginning inventory Purchases: February 11 May 18 October 23 Cost of goods available for sale

Units 200 500 400 100 1,200

@ @ @ @

Cost $10 14 16 20

@ @

Cost $20 16

= = = = =

Total $ 2,000 7,000 6,400 2,000 $17,400

= = =

Total $ 2,000 4,800 $ 6,800

(a) First-in, first out: From October 23 purchase From May 18 purchase Ending inventory Cost of goods available for sale Less: Ending inventory Cost of goods sold

Units 100 300 400

$17,400 6,800 $10,600

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(b) Last-in, first-out: From beginning inventory From February 11 purchase Ending inventory

Units 200 200 400

@ @

Cost $10 14

= = =

Cost of goods available for sale Less: Ending inventory Cost of goods sold

Total $ 2,000 2,800 $ 4,800 $17,400 4,800 $12,600

(c) Weighted-average cost: Cost of Goods Available for Sale/Total Units Available for Sale = $17,400/1,200 = $14.50 Weighted-average unit cost Ending inventory = 400 x $14.50 =

$ 5,800

Cost of goods available for sale Less: Ending inventory Cost of goods sold

$17,400 5,800 $11,600

E7-10A. Inventory Turnover and Days’ Sales in Inventory (LO6) TESTBANYear KSE1LLER.COM Year 2 (a) Inventory (a) Inventory turnover 7.77 8.67 (b) Days’ sal((b) Days’ sales in inventory 46.98 days 42.10 days The Southern Company’s inventory management is much improved from year 1 to year 2, as evidenced by the decline in the days’ sales in inventory of nearly 5 days.

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E7-11A. The LIFO Inventory Reserve (Appendix 7B) (LO8) (a) LIFO inventory reserve = ($2,700,000 - $2,000,000) = $700,000 (b) Current ra(b) Current ratio

(i)FIFO 1.45

(ii)LIFO 1.33

E7-12A. Applying IFRS (LO4, LO6) (a) Increase (b) Decrease (c) Increase

E7-13A. Errors in Inventory Counts (LO3) Beginning inventory Cost of goods purchased Cost of goods available for sale Ending inventory Cost of goods sold

Year 2 $ 70,000 420,000 490,000 50,000 $440,000

Year 1 $ 50,000 400,000 450,000 70,000 $380,000

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EXERCISES—SET B E7-1B. Profitability Analysis (LO5) Gross profit percentage = ($300,000 - $180,000)/$300,000 = 40 percent Profit margin = ($300,000 - $180,000 - $60,000 +$20,000)/$300,000 = 26.7 percent

E7-2B Just-in-Time Inventories (LO1) $1,650,000/275 days = $6,000 raw materials used per day 2 days  $6,000 = $12,000 raw materials inventory level

E7-3B. Inventory Costing Methods (LO2) (a) First-in, first-out: Ending inventory: 160 units @ $36 = 70 units @ $35 = 230

$5,760 2,450 $8,210

Cost of goods sold: ($4,500 + $3,500 + $5,760) - $8,210 = $5,550 (b) Last-in, first-out: Ending inventory:

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150 units @ $30 = 80 units @ $35 = 230

$4,500 2,800 $7,300

Cost of goods sold: ($4,500 + $3,500 + $5,760) - $7,300 = $6,460 (c) Weighted-average cost: Units available: 150 units @ $30 = 100 units @ $35 = 160 units @ $36 = 410

$4,500 3,500 5,760 $13,760

Weighted-average unit cost: $13,760/410 units = $33.561 Ending inventory: 230 units  $33.561 = $7,719.03 = $7,719 Cost of goods sold: ($4,500 + $3,500 + $5,760) - $7,719.03 = $6,040.97 = $6,041

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E7-4B. Inventory Costing Methods—Perpetual Method (Appendix 7A) (LO7) (a) First-in, first-out: 150 units @ $30 = $4,500 30 units @ $35 = 1,050 180 $5,550 (b) Last-in, first-out:

100 units @ $35 = $3,500 80 units @ $30 = 2,400 180 $5,900

(c) Weighted-average cost: Units available: 150 units @ $30 = $4,500 100 units @ $35 = 3,500 250 $8,000 Weighted-average unit cost: $8,000/250 units = $32 Cost of goods sold: 180 units  $32 = $5,760

E7-5B. Inventory Costing Methods (LO2) Mar. 1: $1,590/100 = $15.90 Mar. 6: $3,600/200 = 18.00 Mar. 10: $3,000/150 = 20.00 (a) Ending inventory:

ES$20.00 TBANK LLER.COM 150T@ = SE$3,000 120 @ $18.00 = 2,160 $5,160

Cost of goods sold: ($1,590 + $3,600 + $3,000) - $5,160 = $3,030 (b) Ending inventory:

100 @ $15.90 = 170 @ $18.00 =

$1,590 3,060 $4,650

Cost of goods sold: ($1,590 + $3,600 + $3,000) - $4,650 = $3,540 (c) ($1,590 + $3,600 + $3,000)/(100 + 200 + 150) = $18.20 Ending inventory: 270 @ $18.20 = $4,914 Cost of goods sold: ($1,590 + $3,600 + $3,000) - $4,914 = $3,276

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E7-6B. Inventory Costing Methods—Perpetual Method (Appendix 7A) (LO7) Mar. 1: $1,590/100 = $15.90 Mar. 6: $3,600/200 = 18.00 Mar. 10: $3,000/150 = 20.00 (a) Ending inventory: 150 @ $20.00 = 120 @ $18.00 =

$3,000 2,160 $5,160

(b) Ending inventory: 100 @ $15.90 = 170 @ $18.00 =

$1,590 3,060 $4,650

E7-7B. Departures from Acquisition Cost (LO4) a. 200 x $0.99 = $198. The inventory is valued at net realizable value. b. 4 x $350 = $1,400. The inventory is valued at net realizable value ($360 - $10 per camera).

TESTBANKSELLER.COM E7-8B. Inventory Costing Methods (LO2) Beginning inventory Purchases: January 6 July 15 December 28 Cost of goods available for sale

Units 100 650 550 200 1,500

@ @ @ @

Cost $49 42 38 36

Units 200 150 350

@ @

Cost $36 38

= = = = =

Total $ 4,900 27,300 20,900 7,200 $60,300

= = =

Total $ 7,200 5,700 $12,900

(a) First-in, first out: From December 28 purchase From July 15 purchase Ending inventory Cost of goods available for sale Less: Ending inventory Cost of goods sold

$60,300 12,900 $47,400

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(b) Weighted-average cost: Cost of Goods Available for Sale/Total Units Available for Sale = $60,300/1,500 = $40.20 Weighted-average Unit Cost Ending Inventory = 350 units x $40.20 = $14,070 Cost of goods available for sale Less: Ending inventory Cost of goods sold

$60,300 14,070 $46,230

Units 100 250 350

@ @

Cost $49 42

= = =

Cost of goods available for sale Less: Ending inventory Cost of goods sold

Total $ 4,900 10,500 $15,400 $60,300 15,400 $44,900

E7-9B. Inventory Costing Method (LO2)

TESTBANKUnits SELLER.COM Cost Beginning inventory Purchases: February 11 May 18 October 23 Cost of goods available for sale

200 500 400 100 1,200

@ @ @ @

$12 13 15 18

@ @

Cost $18 15

= = = = =

Total $ 2,400 6,500 6,000 1,800 $16,700

= = =

Total $ 1,800 4,500 $ 6,300

(a) First-in, first out: From October 23 purchase From May 18 purchase Ending inventory Cost of goods available for sale Less: Ending inventory Cost of goods sold

Units 100 300 400

$16,700 6,300 $10,400

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(b) Last-in, first-out: From beginning inventory From February 11 purchase Ending inventory

Units 200 200 400

@ @

Cost $12 13

Cost of goods available for sale Less: Ending inventory Cost of goods sold

= = =

Total $ 2,400 2,600 $ 5,000 $16,700 5,000 $11,700

(c) Weighted-average cost: Cost of Goods Available for Sale/Total Units Available for Sale = $16,700/1,200 = $13.917 Weighted-average unit cost Ending inventory = 400 x $13.917 =

$ 5,566.80 = $5,567

Cost of goods available for sale Less: Ending inventory Cost of goods sold

$16,700.00 5,566.80 $11,133.20 = $11,133

E7-10B. Inventory Turnover and Days’ Sales in Inventory (LO6) TESTBANKSELLER.COM Year 1 Year 2 (a) Inventory turnover 8.13 8.87 (b) Days’ sales in inventory 44.90 days 41.15 days The Northern Company inventory management is improved from Year 1 to Year 2, as evidenced by the decline in the days’ sales in inventory of 3.75 days.

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E7-11B. The LIFO Inventory Reserve (Appendix 7B) (LO8) (a) LIFO inventory reserve = ($4,700,000 - $4,000,000) = $700,000 (b)

(i)FIFO 1.29

Current ratio

(ii)LIFO 1.20

E7-12B. Applying IFRS (LO4, LO6) (a) Increase (b) Decrease (c) Increase

E7-13B. Errors in Inventory Counts (LO3) Beginning inventory Cost of goods purchased Cost of goods available for sale Ending inventory Cost of goods sold

Year 2 $ 30,000 540,000 570,000 105,000 $465,000

Year 1 $ 75,000 500,000 575,000 30,000 $545,000

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PROBLEMS—SET A P7-1A. Profitability Analysis (LO5) Gross profit percentage = ($220,000 - $140,000)/$220,000 = 36.4 percent Profit margin = $40,000/$220,000 = 18.2 percent Gross profit percentage is the percentage of sales remaining after covering the cost of goods sold, available to cover any remaining expenses. The profit margin is the portion of net income remaining from each dollar of sales. Gross profit percentage if new product is made = ($250,000 - $165,000)/$250,000, or 34 percent. Profit margin if new product is made = ($40,000 + $5,000)/$250,000, or 18 percent. Since the gross profit percentage and the profit margin are less with the new product, the new product should not be introduced and manufactured unless there are other advantages for the company by introducing the new product that are not revealed by these two ratios.

P7-2A. Inventory Costing Methods TESTBANKSELLER.COM (LO2) Units Cost Beginning inventory 120 @ $325 Purchases: April 9 40 @ 345 April 23 20 @ 350 Cost of goods available for sale 180

= = = =

Total $39,000 13,800 7,000 $59,800

a. Weighted-average $59,800 / 180 = $332.222 Ending inventory: 60 @ $332.222 = $19,933.32 = $19,933 Cost of goods sold: $59,800 - $19,933.32 = $39,866.68 = $39,867 b. FIFO Ending inventory:

40 @ $345 = 20 @ $350 =

$13,800 7,000 $20,800

Cost of goods sold: $59,800 - $20,800 =

$39,000

c. LIFO Ending inventory: 60 @ $325 = $19,500 Cost of goods sold: $59,800 - $19,500 =

$40,300

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P7-3A. Inventory Costing Methods—Perpetual Method (Appendix 7A) (LO7) a. Weighted-average Purchased Sold Unit Unit Date Units Cost Total Units Cost Total Units April 1 120 9 40 $345 $13,800 160 14 80 $330 $26,400 80 23 20 350 7,000 100 29 40 334 13,360 60 Total $39,760

Balance Unit Cost Total $325 $39,000 330 52,800 330 26,400 334 33,400 334 $20,040

b. FIFO

Date April 1 9

Purchased Unit Units Cost Total

80 20

350

$39,000

Units 120 120 40

Balance Unit Cost Total $325 $39,000 325 52,800 345

Total

$325 $26,000

7,000

TESTBANKSELLER.COM

325

Total

13,000

Units 120 120 40 40 40 40 40 20 40

Balance Unit Cost Total $325 $39,000 325 52,800 345 325 26,800 345 325 345 33,800 350 345 $20,800 350

40 $345 $13,800

14 23

Units

Sold Unit Cost

} }

}

LIFO

Date April 1 9

Purchased Unit Units Cost Total

Total

40 $345 $13,800

14 23

Units

Sold Unit Cost

40 40 20

29 Total

350

$345 $13,800 325 13,000

7,000 20 20

350 325

7,000 6,500 $40,300

}

80 80 20

325 325 350

26,000

} 33,000

325

$19,500

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P7-4A. Inventory Costing Methods (LO2, LO3) Beginning inventory Purchases: April 6 August 9 December 30 Cost of goods available for sale

Units 1,000 1,800 800 1,200 4,800

Cost $ 20,000 39,600 20,800 34,800 $115,200

Units in ending inventory = 4,800 - (400 + 1,600 + 800) = 2,000

a. First-in, first out Units 1,200 800 2,000

December 30 purchase August 9 purchase Ending inventory

@ @

Cost $29 26

= = =

Cost of goods available for sale Less: Ending inventory Cost of goods sold

Total $ 34,800 20,800 $ 55,600 $115,200 55,600 $ 59,600

b. Last-in, first-out: Beginning inventory April 6 purchase Ending inventory

Units Cost 1,000 @ $20 1,000 @ TESTBANKSELLER.COM 22 2,000

Cost of goods available for sale Less: Ending inventory Cost of goods sold

= = =

Total $ 20,000 22,000 $ 42,000 $115,200 42,000 $ 73,200

c. Weighted-average cost: $115,200/4,800 = $24 weighted-average unit cost 2,000 x $24 = $48,000 ending inventory $115,200 - $48,000 = $67,200 cost of goods sold d. 1. Other than specific identification, first-in, first-out in most circumstances represents physical goods flow. This inventory system applies to perishables or to situations in which the earliest items acquired are sold first because of risk of deterioration or obsolescence. 2. Last-in, first-out results in the lowest inventory amount during periods of rising unit costs, which in turn results in the lowest net income and the lowest income tax. 3. First-in, first-out results in the highest inventory amount during periods of rising unit costs and, therefore, results in the largest amount of net income.

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P7-5A. Inventory Costing Methods (LO2) Beginning inventory Purchases: February 11 May 18 October 23 Cost of goods available for sale

Units 1,200 1,500 1,400 1,100 5,200

@ $8 @ 9 @ 10 @ 12

Cost $ 9,600 13,500 14,000 13,200 $50,300

Units in ending inventory = 5,200 - (1,400 + 1,400 + 1,000) = 1,400

(a) First-in, first out: Units 1,100 300 1,400

October 23 purchase May 18 purchase Ending inventory

@ @

Cost $12 10

= = =

Cost of goods available for sale Less: Ending inventory Cost of goods sold (b)

Last-in, first-out:

$50,300 (16,200) $34,100

TESTBANKUnits SELLER.COM Cost

Beginning inventory February 11 purchase Ending inventory Cost of goods available for sale Less: Ending inventory Cost of goods sold

Total $13,200 3,000 $16,200

1,200 200 1,400

@ @

$8 9

= = =

Total $ 9,600 1,800 $11,400 $50,300 (11,400) $38,900

(c) Weighted-average cost: $50,300/5,200 = $9.673 weighted-average unit cost 1,400  $9.673 = $13,542.20 = $13,542 ending inventory $50,300 - $13,542.20 = $36,757.80 = $36,758 cost of goods sold

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P7-6A. Inventory Error (LO3)

Beginning inventory Year 1 Purchases* Goods available for sale Ending inventory, Year 1 Cost of goods sold Year 1

As Reported 14,300 66,700 81,000 14,000 67,000

Beginning inventory Year 2 Purchases * Goods available for sale Ending inventory Year 2

14,000 72,900 86,900 13,400

(2,300) (2,300) 500

11,700 72,900 84,600 13,900

Cost of goods sold Year 2

73,500

(2,800)

70,700

Error

(2,300) 2,300

Corrected 14,300 66,700 81,000 11,700 69,300

* Calculated from amounts given.

b. Year 1: Ending inventory was overstated, cost of goods sold was understated, therefore, net income was overstated by $2,300. Year 2: Beginning inventory was overstated, $2,300 causing cost of goods sold to be ESTBunderstated. ANKSELLEAdditionally, R.COM the understatement of ending overstated and net T income inventory of $500 overstates cost of goods sold and understates net income. The net of the beginning and ending errors results in net income being understated by $2,800.

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P7-7A. Inventory Turnover and Days’ Sales in Inventory (LO6) Year 1 (a) Inventory turnover 3.18 (b) Days’ sales in inventory 114.78 days

Year 2 3.47 105.19 days

The Eastern Corporation’s inventory management is improved from Year 1 to Year 2, as evidenced by the decline in the days’ sales in inventory of nearly 9.6 days.

P7-8A. The LIFO Inventory Reserve (Appendix 7B) (LO8) (a) LIFO inventory reserve ($7,700,000 - $7,000,000) = $700,000 (b) Current ratio

(i) FIFO 1.16

(ii) LIFO 1.12

Gross profit under FIFO = ($10,000,000 + $1,200,000) = $11,200,000.

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PROBLEMS—SET B P7-1B. Profitability Analysis (LO5) Gross profit percentage = ($440,000 – $280,000)/$440,000 = 36.4 percent Profit margin = $80,000/$440,000 = 18.2 percent Gross profit percentage is the percentage of sales remaining after covering the cost of goods sold, available to cover any remaining expenses. The profit margin is the portion of net income remaining from each dollar of sales. Gross profit percentage with new product introduction = ($470,000 – $305,000)/$470,000 = 35.1 percent. Profit margin if new product is made = ($80,000 + $30,000 - $25,000)/$470,000, or 18.1 percent. Since the gross profit percentage and the profit margin are less with the new product, the new product should not be introduced and manufactured unless there are other advantages for the company by introducing the new product that are not revealed by these two ratios.

P7-2B. Inventory Costing Methods TESTBANKSELLER.COM (LO2) Units Cost Beginning inventory 60 @ $40 = Purchases: June 5 40 @ $50 = June 25 30 @ $52 = Goods available for sale 130

Total $2,400 2,000 1,560 $5,960

Units in ending inventory = 130 - (50 + 20) = 60 a. Weighted-average cost: $5,960/130 = $45.846 weighted-average unit cost 60  $45.846 = $2,751 ending inventory $5,960 - $2,751 = $3,209 cost of goods sold b. First-in, first out: June 25 purchase June 5 purchase Ending inventory Cost of goods available for sale Less: Ending inventory Cost of goods sold

Units 30 30 60

@ @

Cost $52 50

= = =

Total $1,560 1,500 $3,060 $5,960 3,060 $2,900

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c. Last-in, first-out: Ending inventory Cost of goods available for sale Less: Ending inventory Cost of goods sold

Units 60

Cost $40

Total $2,400 $5,960 2,400 $3,560

P7-3B. Inventory Costing Methods—Perpetual Method (Appendix 7A) (LO7) a. Weighted-average cost

Date June 1 5 13 25 29 Total

Purchased Unit Units Cost Total 40 30

$50 52

Units

Sold Unit Cost

Total

$44

$2,200

940 $3,140

$2,000 1,560

Units 60 100 50 80 60

Balance Unit Cost Total $40 $2,400 44 4,400 44 2,200 47 3,760 47 $2,820

Units 60 60 40 10 40 10 40 30 30 30

Balance Unit Cost Total $40 $2,400 40 4,400 50 40 2,400 50 40 50 3,960 52 50 $3,060 52

b. First-in, first-out

Date June 1 5

TESTBANKSELLSold ER.COM Purchased Unit Unit Units Cost Total Units Cost Total 40

$50

$2,000

13 25

50 30

29 Total

$40

$2,000

1,560

10 10

40 50

400 500 $2,900

} }

}

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c. Last-in, first-out

Date June 1 5

Purchased Unit Units Cost Total 40

$50

$50 40

$2,000 400

1,560

Balance Unit Units Cost Total 60 $40 $2,400 60 40 4,400 40 50

}

40 10 30

Total

$2,000

13 25

Units

Sold Unit Cost

Total

1,040

50 50 30

40 40 52

2,000

}

50 10

40 52

} $2,520

= = = =

Total $ 66,000 40,000 8,800 $114,800

3,560

$3,440

P7-4B. Inventory Costing Methods (LO2, LO3) Units Cost Beginning inventory 2,600 $104,000 Purchases: March 8 3,000 132,000 September 19 800 40,000 SELLER.C66,000 OM November 23 TESTBANK1,200 Goods available for sale 7,600 $342,000 Units in ending inventory = 7,600 - (1,600 + 2,000 + 1,800) = 2,200 a. First-in, first out: November 23 purchase September 19 purchase March 8 purchase Ending inventory

Units 1,200 800 200 2,200

@ @ @

Cost $55 50 44

Cost of goods available for sale Less: Ending inventory Cost of goods sold

$342,000 114,800 $227,200

b. Last-in, first-out: Ending inventory Cost of goods available for sale Less: Ending inventory Cost of goods sold

Units 2,200

Cost $40

Total $ 88,000 $342,000 88,000 $254,000

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c. Weighted-average cost: $342,000/7,600 = $45 weighted-average unit cost 2,200  $45 = $99,000 ending inventory $342,000 - $99,000 = $243,000 cost of goods sold d. 1. Other than specific identification, first-in, first-out in most circumstances represents physical goods flow. This inventory system applies to perishables or to situations in which the earliest items acquired are sold first because of risk of deterioration or obsolescence. 2. Last-in, first-out results in the lowest inventory amount during periods of rising unit costs, which in turn results in the lowest net income and the lowest income tax. 3. First-in, first-out results in the highest inventory amount during periods of rising unit costs and, therefore, results in the largest amount of net income.

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P7-5B. Inventory Costing Methods (LO2) Units 1,200 1,500 1,400 1,100 5,200

Beginning inventory Purchases: February 11 May 18 October 23 Goods available for sale

@ $18 = @ $19 = @ $20 = @ $22 =

Cost $ 21,600 28,500 28,000 24,200 $102,300

Units in ending inventory = 5,200 - (1,400 + 1,400 + 1,000) = 1,400

a. First-in, first out: Units 1,100 300 1,400

October 23 purchase May 18 purchase Ending inventory

@ @

Cost $22 20

= = =

Cost of goods available for sale Less: Ending inventory Cost of goods sold

Total $ 24,200 6,000 $ 30,200 $102,300 30,200 $ 72,100

b. Last-in, first-out: Ending inventory

Units Cost 1,200 @ $18 TESTBANKS200 ELLER. @COM 19

Cost of goods available for sale Less: Ending inventory Cost of goods sold

= =

Total $ 21,600 3,800 $ 25,400 $102,300 25,400 $ 76,900

c. Weighted-average cost: $102,300/5,200 = $19.673 weighted-average unit cost 1,400  $19.673 = $27,542.20 = $27,542 ending inventory $102,300 - $27,542.20 = $74,757.80 = $74,758 cost of goods sold

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P7-6B. Inventory Error (LO3)

Beginning inventory Year 1 Purchases* Goods available for sale Ending inventory, Year 1 Cost of goods sold Year 1

As Reported 23,000 139,500 162,500 24,500 138,000

Beginning inventory Year 2 Purchases * Goods available for sale Ending inventory Year 2

24,500 145,700 170,200 26,700

4,500 (1,500)

29,000 145,700 174,700 25,200

Cost of goods sold Year 2

143,500

6,000

149,500

Error

4,500 (4,500) 4,500

Corrected 23,000 139,500 162,500 29,000 133,500

* Calculated from amounts given.

b. Year 1: Ending inventory was understated, cost of goods sold was overstated, therefore, net income was understated by $4,500. Year 2: Beginning inventory was understated, $4,500 causing cost of goods sold to be TEnet STB ANKSE LLER.COAdditionally, M understated and income overstated. the overstatement of ending inventory of $1,500 understates cost of goods sold and overstates net income. The net of the beginning and ending errors resulted in net income being overstated by $6,000.

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P7-7B. Inventory Turnover and Days’ Sales in Inventory (LO6) Year 1 (a) Inventory turnover 1.70 (b) Days’ sales in inventory 214.71 days

Year 2 1.56 233.97 days

The Western States inventory management is declined from Year 1 to Year 2, as evidenced by the increase in the days’ sales in inventory of over 19 days.

P7-8B. The LIFO Inventory Reserve (Appendix 7B) (LO8) (a) LIFO inventory reserve ($18,700,000 - $15,000,000) = $3,700,000 (b)

(i)FIFO 1.46

Current ratio

(ii)LIFO 1.35

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SERIAL PROBLEM: ANGEL CITY GREETINGS SP7. Beginning inventory Purchases: Jan. 10 Jan. 17 Jan. 23 Goods available for sale

0 400 500 300 1,200

$ 0 1,200 1,750 1,200 $4,150

Units in ending inventory = 1,200 – 1,160 = 40

(1) First-in, first out: Ending inventory Cost of goods available for sale Less: Ending inventory Cost of goods sold

Units 40

Cost $4

Units 40

Cost $3

Total $ 160 $ 4,150 160 $ 3,990

(2) Last-in, first-out: Ending inventory

TEfor STsale BANKSELLER.COM Cost of goods available Less: Ending inventory Cost of goods sold

Total $ 120 $4,150 120 $ 4,030

(3) Weighted-average cost: $4,150/1,200 = $3.458 weighted-average unit cost 40  $3.458 = $138.32 = $138 ending inventory $4,150 - $138.32 = $4,011.68 = $4,012 cost of goods sold

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EXTENDING YOUR KNOWLEDGE REPORTING AND ANALYSIS EYK7-1. Financial Reporting Problem: Columbia Sportswear a. Columbia’s inventory totaled $457.9 million in 2017 and $488.0 million in 2016, representing 20.7 percent and 24.2 percent of total assets, respectively. b. Inventory turnover

2017

2016

$1,306.1/[($457.9+$488.0)/2] = 2.76

$1,266.7/[($488.0+$473.6)/2] = 2.63

365/2.76 = 132 days

365/2.63 = 139 days

Days’ sales in inventory

c. Columbia’s inventory on hand decreased in absolute dollar amount from 2016 to 2017. Its inventory turnover ratio increased and its days’ sales in inventory decreased over the same time period, indicating that Columbia’s management of this key operating asset improved.

EYK7-2. Comparative Analysis Problem: Columbia Sportswear vs. Under Armour, Inc. a. Under Armour’s ending inventory in 2017 and 2016 was $1,158.5 million and $917.5 million, respectively, as compared to $457.9 million and $488.0 million for the same time periods for Columbia. Under Armour increased the dollar amount invested in inventory from 2016 to TESTBits ANinvestment KSELLEin R.inventory. COM 2017, whereas Columbia reduced

Inventory as % of total assets 2017 Inventory as % of total assets 2016

Columbia 20.7% 24.2%

Under Armour 28.9% 25.2%

Columbia carries less inventory than Under Armour, and Under Armour's inventory is a higher percentage of its total assets than Columbia, for both years. b. Inventory turnover Days’ sales in inventory

Columbia 2017 2016 2.76 2.63 132 139

Under Armour 2017 2016 2.64 3.04 138 120

c. The days’ sales in inventory and inventory turnover reveals that Columbia’s inventory management improved from 2016 to 2017. Under Armour’s inventory management declined from 2016 to 2017.

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EYK 7-3. Business Decision Problem a. Note: Beginning Inventory + Purchases - Cost of Sales = Ending Inventory.

July August September October November December

Beginning Inventory $ 0 60,000 96,000 120,000 150,000 540,000

50% Cost of Sales $180,000 348,000 288,000 330,000 510,000 672,000

Purchases $240,000 384,000 312,000 360,000 900,000 264,000

Ending Inventory $ 60,000 96,000 120,000 150,000 540,000 132,000

b. It appears that Northwestern Corporation did purchase wisely. The higher than usual purchases during November provided extra merchandise during December, which facilitated increased sales. Northwestern Corporation should anticipate a similar pattern (the winter holiday gift-buying season) during all subsequent years.

EYK 7-4. Financial Analysis Problem a. The gross profit percentages for Johnson & Johnson for the three-year period were: Year 3 $74,331 22,746 $51,585

Net sales Cost of goods sold Gross profit

Year 2 $71,312 22,342 $48,970

Year 1 $67,224 21,658 $45,566

TESTBANKSELLER.COM Gross profit percentages: (Gross profit / Net sales)

69.4%

68.7%

67.8%

Year 2 68.7 70.0

Year 1 67.8 70.0

b. Comparison of gross profit percentages:

Johnson & Johnson Assumed averages

Year 3 69.4 70.0

Johnson & Johnson has slightly underperformed the assumed industry averages during the three-year period. The company has maintained a relatively stable gross profit percentage during these three years, although the trend is favorable.

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CRITICAL THINKING EYK7-5. Accounting Research Problem a. In 2017, General Mills’ inventory was valued at $1.484 billion and represented 6.8 percent of total assets. In 2016, the inventory was valued at $1.414 billion and represented 6.5 percent of total assets. b. Inventory turnover Days’ sales in inventory

2017

2016

6.94 53 days

7.26 50 days

c. The company is managing its inventory—the absolute dollar amount of inventory on hand is relatively consistent from year to year as is the company’s days’ sales in inventory. d. Certain domestic inventories are valued using the LIFO method; other inventories, outside the US, are valued using the FIFO method. e. The LIFO inventory reserve is disclosed in the footnote 17. At year-end 2017 the LIFO reserve was $209.1 million.

EYK7-6. Accounting Communication Activity Memo: Dear President Towne,

TESTBANKSELLER.COM

Our current gross profit percentage is 50 percent ($125,000 / $250,000) and our current profit margin is 10 percent ($25,000 / $250,000). If we were to offer the new set of proposed products, we estimate our gross profit percentage will fall to 40 percent ($140,000 / $350,000) and our profit margin will fall to 9 percent (31,500 / 350,000). Net income, however, will improve from $25,000 to $31,500. This occurs because many of our expenses such as administrative expenses and depreciation will not increase with the sales of the new products. Therefore, since our sales will see a large increase, only some of our expenses will see a similar percentage increase, resulting in an increased level of net income. Because our net income will be increasing with the introduction of these new products, I believe it is the best interest of the company to go ahead with the proposed offerings. Sincerely, Your name.

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EYK7-7. Accounting Ethics Case Kohler is viewed as holding a position that favors his personal interests because he is in his last year with the firm, and he participates in a bonus plan that is tied to the firm's income. A switch to LIFO this year will cause a reduction in the bonus amounts available to top management, including Kohler. If the switch to LIFO is delayed a year or two, he will no longer be employed by the firm and would not be affected by the impact of the switch on bonus amounts at that time. To increase his credibility on this issue, Kohler should try to document the possible problems of switching to LIFO when inventory levels are high. A factual data presentation to support his position should be helpful. One potential problem, for example, is that after switching to LIFO, the firm may reduce its inventory levels. In the year this reduction occurs, some of the costs charged to cost of goods sold will come out of the beginning LIFO inventory (a LIFO liquidation). These costs will be old costs and will not achieve a matching of current costs with current revenues in the income statement (or income tax return). A number of companies have experienced this situation after switching to LIFO, and Kohler could use some of them to illustrate the reasons for his position. If Kohler has colleagues in his department who share his view (and are not retiring), he could ask one or more of them to make a presentation at the meeting. Kohler could also volunteer to have his bonus for the year calculated on an income number derived by using LIFO rather than FIFO (even though the firm stays on FIFO). This tactic, somewhat out of the ordinary, should eliminate concerns that Kohler puts his personal interests ahead of the firm's interests.

TESTBANKSELLER.COM EYK7-8. Corporate Social Responsibility Problem Students’ answers will vary as Target documents a very wide range of behavior that can be considered good citizenship. The broad categories include community giving, creating a satisfying work environment, diversity, vendor monitoring for ethical and safety standards, environmental initiatives, and strong corporate governance.

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EYK7-9. Forensic Accounting Problem In 1992 at Comptronix Corporation, an electronics company, profits were overstated by making false entries that increased inventory and decreased cost of goods sold. Managers at Leslie Fay Company overstated income by making $80 million in false entries for 1991 and 1992. Leslie Fay Company overstated inventory and understated the cost of making the inventory in order to overstate profits. In 1990, Laribee Manufacturing Company obtained $130 million in loans using as collateral inventory that either did not exist or was carried on the books in excess of market value. Also, Laribee carried shipments between two locations as inventory at both locations. Fictitious documents were created to support the fictitious inventory. In the widely-publicized Phar-Mor case, managers allegedly embezzled from the company and covered up their actions by making false entries to the inventory records. They hid the embezzlement and the false entries from the auditors by monitoring the auditors' test count procedures. The auditors test-counted five of the 200 Phar-Mor stores and informed management in advance which stores were to be tested. Phar-Mor executives allegedly adjusted the inventory at the stores not tested by the auditors. Some good auditing procedures include: 1. Review auditing procedures 2. Look for Unusual Circumstances During the Risk Assessment Phase 3. Perform More Test Counts 4. Be Skeptical of Management's Claims 5. Do Surprise Counts if T Possible ESTBANKSELLER.COM 6. Establish Control of Shipments Between Locations 7. Use Experienced Auditors on the Inventory Observation Source: Detection of inventory fraud, The National Public Accountant, by Charles Malone, December 1994

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Chapter 8 Property, Plant, and Equipment and Intangible Assets QUESTIONS 1.

Type Property, Plant & Equipment

Examples Building, equipment, tools, furniture & fixtures

Periodic Write-off Depreciation

Land (for site use) Intangible assets

None

copyrights, TESTBAPatents, NKSELL ER.COM

Amortization

Goodwill

None

franchises, leaseholds, trademarks, brand names

Land differs from other property, plant and equipment assets because it usually has an indefinite useful life and therefore, does not require any periodic write-off to expense.

The original measurement of a property, plant and equipment asset should be at its cost, which equals the cash and/or cash equivalent of that which is given up (and of any obligations assumed) to acquire the asset and prepare it for use.

The gradual deterioration as PP&E assets (other than land) are used eventually requires their replacement. In a real sense, they are "used up" over a period of time. The costs related to the use of the long-lived assets must be matched with the revenues that they help to generate. Failure to record periodic depreciation overstates periodic income.

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(a) Straight-line method when the asset provides approximately equal utility for each year of its useful life. (b) Units-of-production method when asset utility is primarily a function of use. (c) Double-declining method when an asset’s value decreases the most in the beginning years.

When a change occurs in the estimate of an asset's useful life or its salvage value, the revision of depreciation expense is handled by allocating the revised undepreciated balance of the asset over the revised remaining useful life. Present and future periods are affected by the revision. Depreciation expense calculated and reported in past periods is not revised.

An asset is considered to be impaired when its book value is not recoverable through future cash flows. An impairment loss is calculated as the difference between the asset's book value and its current fair value.

The primary benefit of accelerating depreciation is that income taxes are postponed, compared with taxes due with the use of straight-line depreciation. The higher depreciation deductions in early periods reduce taxable income and income taxes. This initial large deduction is offset in later periods by smaller deductions that require (relative to straightline depreciation) larger tax payments. In the meantime, the postponed income tax payments are available for use by the firm somewhat as an "interest-free loan."

The two types of revenueT expenditures are ESTBANKS EL(1) LEexpenditures R.COM for ordinary maintenance and repairs, and (2) expenditures to acquire low-cost items that benefit the firm for several periods. Revenue expenditures should be expensed when incurred.

10.

The two types of capital expenditures are (1) initial acquisitions and additions, and (2) betterments. Capital expenditures increase the book value of long-term assets.

11.

The gain or loss on the sale of a PP&E asset is determined by the difference between the asset's book value and the sale proceeds. Sales proceeds in excess of book values create gains; book values in excess of sales proceeds cause losses.

12.

(a) The conveyor system should be depreciated over its eight-year physical life because this life ends before the natural resource is exhausted. (b) The conveyor system should be depreciated over the 10-year excavation period because this period is less than the asset’s physical life and the asset’s usefulness expires when the excavation ends.

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13.

Patent: A legal right lasting 20 years from the date the patent application was filed for the exclusive privilege of using a specific process or making a specific product or selling the invention. Trade name or trademark: A legal right to use a name, term or symbol to identify a product or brand. Franchise: An agreement for a specified or indefinite period covering the right to represent a product or provide a service in a given geographic area. Goodwill: The amount paid by one company in the acquisition of another company that exceeds the amount that can be attributed to the identifiable net assets of the acquired company. Copyright: Protection for an owner against the unauthorized reproduction of a specific written work, recorded work or work of art. The term of copyright protection is the life of the author plus 70 years.

14.

All research and development costs related to a firm's products and production processes must be expensed when incurred.

15.

Goodwill is recorded only when another firm is purchased and the amount paid exceeds the recognized fair market value of the identifiable net assets acquired.

16.

Return on assets is computed as (net income/average total assets). This ratio indicates how effectively and efficiently itsRassets TESaTfirm BANhas KSused ELLE .COMin its operating activities.

17.

The asset turnover ratio is computed by dividing net sales by average total assets. Asset turnover measures the effectiveness of assets in generating sales revenues.

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SHORT EXERCISES SE8-1. Calculate Amount to Capitalize (LO1) Purchase price $10,000 Add: Freight-in 1,500 Installation 570 Testing 250 Total $12,320

SE8-2. Depreciation Expense Using the Straight-Line Method (LO2) Depreciation expense = ($4.5 million - $0.5 million)/40 years = $100,000

SE8-3. Depreciation Expense Using the Double-Declining Balance Method (LO2) Year 1. Depreciation expense = 2 (1/40)[$4.5 million] = $225,000 Year 2. Depreciation expense = 2(1/40)[$4.5 million - $0.225 million] = $213,750

SE8-4. Depreciation Expense Using TESTthe BAUnits-of-Production NKSELLER.COM Method (LO2) Depreciation rate per mile = ($60,000 - $2,000)/200,000 miles = $0.29 Depreciation expense = $0.29 x 40,000 = $11,600

SE8-5. Sale of a Building (LO4) Building Accumulated Depreciation Book Value of Building Proceeds from sale Loss on sale

$12,000,000 (11,550,000) 450,000 400,000 ($50,000)

SE8-6. Goodwill Impairment (LO5) BALANCE SHEET

Assets Goodwill

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

-30,000

Revenues

Expenses

−

Loss on impairment

30,000

Loss on Goodwill Impairment. ($80,000 - $50,000)

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Net Income -30,000

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SE8-7. Amortization Expense (LO5) Amortization expense = $45,000/12 years = $3,750

SE8-8. Return on assets (LO7) Return on assets = $50,000/$450,000 = 11.1 percent

SE8-9. Asset Turnover (LO7) Asset turnover = $520,000/$450,000 = 1.16

SE8-10. Return on Assets and Asset Turnover (LO7) Given that sales remained unchanged, since the asset turnover decreased, total assets had to increase. And if total assets increased, yet the return on assets also increased, then net income had to increase also.

SE8-11. Sale of Equipment (LO4) (1) Equipment $30,000 Accumulated depreciationTESTBANK(25,000) SELLER.COM Book Value of equipment 5,000 Proceeds from sale 3,000 Loss on sale of equipment $ (2,000) (2) Book Value of equipment (above) Proceeds from sale Gain on sale of equipment

$5,000 9,000 $4,000

SE8-12. Financial Statement Placement (LO6) a. BS (Balance Sheet) b. None c. SCF (Statement of Cash Flows) d. IS (Income Statement) e. BS (Balance Sheet) f. IS (Income Statement)

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EXERCISES—SET A E8-1A. Acquisition Cost of a Fixed Asset (LO1) The original cost of the machine should include: Invoice price Less: Cash discount Net invoice price Sales tax Freight Insurance Installation costs Testing and adjusting Total original cost

$20,000 400 19,600 1,200 260 125 1,000 475 $22,660

E8-2A. Depreciation Methods (LO2) (a) Straight line: ($18,000 ‒ $1,500)/4 = $4,125 (b) Double declining balance: Twice straight-line rate = 100 percent/4 x 2 = 50 percent.

TEyear STBANKSELLER.COM $18,000 x 0.5 = $9,000, first ($18,000 ‒ $9,000) x 0.5 = $4,500, second year (c) Units of production: Expense per mile = ($18,000 ‒ $1,500)/125,000 = $0.132 $0.132 x 28,000 = $3,696 second year

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E8-3A. Revenue and Capital Expenditures (LO3) a. Capital expenditure. The $6,000 is a necessary cost incurred to construct the addition. b. Capital expenditure. The $58,000 is a necessary cost incurred to construct the addition. c. Revenue expenditure. Although a nice gesture, the $3,000 is not a necessary cost incurred to construct the addition. d. Revenue expenditure. The $25 is neither a material amount nor a necessary cost incurred to construct the addition. e. Capital expenditure. The $4,100 is a necessary cost incurred to construct the addition with the company logo above the entrance.

E8-4A. Sale of Machinery (LO4) a. Machine Accumulated depreciation Book value at end of Year 5

$68,000 (35,000) $33,000

[($68,000 ‒ $5,000)/9 = $7,000; $7,000 x 5 = $35,000].

TESTBANKSELLER.COM b. i.

Book value Proceeds from sale Gain on sale of machine

$33,000 37,000 $ 4,000

ii. Book value Proceeds from sale No gain/loss

$33,000 33,000 $ 0

iii. Book value Proceeds from sale Loss on sale of machine

$33,000 28,000 $ 5,000

E8-5A. Amortization Expense (LO5) a. Patent amortization $270,000/9 = $30,000 b. Patent amortization $42,300/18 = $2,350 c. Franchise amortization $63,000/4 = $15,750

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E8-6A. Return on Assets Ratio and Asset Turnover Ratio (LO7) Year 2 Average assets (55,676 + 58,734)/2 = 57,205 (a) Return on assets (8,052 / 57,205) = 14.1 percent (b) Asset turnover (39,540 / 57,205) = 0.69

Year 3 (58,734 + 68,128)/2 = 63,431 (6,134 / 63,431) = 9.7 percent (36,117 / 63,431) = 0.57

E8-7A. Financial Statement Presentation (LO6) Property, plant, and equipment (net) $230,000 Goodwill 35,000 Intangible assets (net) 15,000

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EXERCISES—SET B E8-1B. Acquisition Cost of a Fixed Asset (LO1) Invoice price Cash discount Freight Battery Printing of name Initial cost of loader

$28,000 (280) 270 150 240 $28,380

(Note: The costs of insurance coverage and employee training are not part of the loader's initial cost.)

E8-2B. Depreciation Methods (LO2) (a) Straight-line: Year 1: ($145,800 ‒ $5,400)/3 = $46,800; (8/12) x $46,800 = $31,200 Year 2: $46,800 Year 3: $46,800 Year 4: (4/12) x $46,800 = $15,600

TESTBANKSELLER.COM

(b) Double-declining balance: Twice straight-line rate = (100 percent/3) x 2 = 66⅔ percent ($145,800 x 66⅔ percent) = $97,200 Year 1: Year 2: Year 3: Year 4:

(8/12) x $97,200 = $64,800 ($145,800 ‒ $64,800) x 66⅔% = $54,000 ($145,800 ‒ $118,800) x 66⅔% = $18,000 $3,600 Note: ($145,800 ‒ $136,800) x 66⅔% = $6,000 is greater than $3,600. The maximum depreciation in Year 4 is $3,600 because this amount reduces the machine's book value to its salvage value.

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E8-3B. Revenue and Capital Expenditures (LO3) a. Revenue expenditure b. Revenue expenditure c. Capital expenditure d. Revenue expenditure e. Capital expenditure f. Capital expenditure

E8-4B. Sale of Equipment (LO4) a. Equipment Accumulated depreciation Book value at end of year 6

$63,000 (42,000) $21,000

[($63,000 ‒ $7,000)/8 = $7,000; $7,000 x 6 = $42,000]. b. i.

Book value Proceeds from sale Gain on sale of equipment

$21,000 27,000 $ 6,000

ii.

Book value Proceeds from sale No gain/loss

$21,000 21,000 $ 0

iii.

Book value Proceeds from sale Loss on sale of equipment

TESTBANKSELLER.COM

E8-5B. Amortization Expense (LO5) a. Patent amortization b. Patent amortization c. Franchise amortization

$21,000 18,000 $ 3,000

$595,000/7 = $85,000 $84,600/18 = $4,700 $66,400/4 = $16,600

E8-6B. Return on Assets Ratio and Asset Turnover Ratio (LO7) Year 2 Average assets (65,676 + 68,734)/2 = 67,205 (a) Return on assets (18,052/67,205) = 26.9 percent (b) Asset turnover (49,540/67,205) = 0.74

Year 3 (68,734 + 78,128)/2 = 73,431 (16,134/73,431) = 22.0 percent (46,117/73,431) = 0.63

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E8-7B. Financial Statement Presentation (LO6) Property, plant, and equipment (net) $195,000 Goodwill 25,000 Intangible assets (net) 10,000

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PROBLEMS—SET A P8-1A. Acquisition Cost of Property, Plant and Equipment (LO1) Expenditures and Receipts

Land

Cost of land site $165,000 Legal fees 2,100 Mortgage and interest assumed and paid 9,300 Delinquent property taxes assumed and paid 4,000 Cost of razing old building 17,000 Proceeds from sale of salvaged materials (3,800) Grading for drainage flow on land site 1,900 Architect's fees on new building Proceeds from sale of excess dirt Payment to building contractor Special assessment for paving of sidewalks* 18,000 Cost of paving driveway and parking lot Cost of installing parking lot lights Premium for building insurance during TESTBANKSELL ER.COM construction _______ Total $213,500

Building

Land Improvements

$ 300,000 (2,000) 5,000,000

$25,000 9,200 7,500 $5,305,500

______ $34,200

*The special assessment for paving sidewalks is usually added to the Land account because of the relatively permanent nature of the sidewalks (maintenance or replacement, if any, is handled by a local government unit).

The payment of the employee's medical bills is not capitalized, because this payment was not a reasonable and necessary cost of the land, the building, or the land improvements. The cost of the open house party also is not capitalized, because it was not a necessary cost of acquiring the land, constructing the building, or constructing the land improvements.

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P8-2A. Depreciation Methods (LO2) Building Trucks Equipment

[($440,000 ‒ $42,000)/20] x 6/12 = $9,950 ($144,000/4 x 2) x 6/12 = $36,000 [($96,000 ‒ $12,000)/7] x 6/12 = $6,000

P8-3A. Depreciation Methods (LO2) a. Straight-line: ($80,000 ‒ $5,000)/4 years = $18,750/year b. Double-declining balance: Twice straight-line rate = (100%/4) x 2 = 50% Year 1 2 3 4

Book Value $80,000 x 0.5 = ($80,000 - $40,000) x 0.5 = ($80,000 - $60,000) x 0.5 = ($80,000 - $70,000) x 0.5 =

Depreciation Expense $40,000 20,000 10,000 5,000 $75,000

c. Units-of-production: (Cost ‒ Salvage value) / Total production = Depreciation per unit of production ($80,000 ‒ $5,000)/1,000,000 TESunits TBA=NK$0.075/unit SELLER.COM Year 1 2 3 4

Annual Production 200,000 x $0.075 = 350,000 x $0.075 = 260,000 x $0.075 = 190,000 x $0.075 = 1,000,000

Depreciation Expense $15,000 26,250 19,500 14,250 $75,000

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P8-4A. Accounting for Plant Assets (LO1, LO2, LO3) a. Depreciation Expense Year 1: ($14,300 ‒ $2,300)/4 = $3,000 Year 2: Depreciation for first 4 months: [($14,300 ‒ $2,300)/4] x 4/12 =

$1,000

Depreciation for last 8 months: Truck cost ($14,300 + $800) Depreciation already taken: $3,000 + $1,000 = Book value after Year 2 improvement Salvage value Remaining depreciation Remaining useful life ($8,800/32) x 8 = Total Year 2 depreciation

$15,100 4,000 11,100 2,300 $ 8,800 32 months 2,200 $3,200

Year 3: ($8,800/32) x 12 = $3,300 b. Book Value of Delivery Truck Jan. 5 Purchase $14,300 May 1, Yr.2 Installation of parts bins 800 Total cost $15,100 TESTBANKSELLER.COM Accumulated depreciation Year 1 depreciation Year 2 depreciation Year 3 depreciation Accumulated depreciation Book value of truck at end of Year 3

$3,000 3,200 3,300 ( 9,500) $ 5,600

Note that there were several revenue expenditures during year 1: Feb. 20th side view mirrors for $68 which is a low cost item; June 9th tune up for $285 is maintenance and the Aug. 2nd repair bill of $250 is a repair. These would all have been expensed in the period incurred.

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P8-5A. Disposal of Property, Plant & Equipment (LO4) a. Eight months of depreciation expense: [($800,000 - $80,000)/8] x 8/12 = $60,000 b. Cost of airplane Accumulated depreciation ($800,000 - $80,000)/8 x (6 + 8/12) Book Value at disposal date

$800,000

c. Proceeds from sale Book Value of airplane Gain on sales

$215,000 (200,000) $15,000

d. Proceeds from sale Book value of airplane Loss on sale

$195,000 (200,000) ($5,000)

e. Insurance proceeds Book value of airplane Loss on insurance settlement

$190,000 (200,000) ($10,000)

(600,000) $200,000

P8-6A. Accounting for Intangible Assets (LO5) a.

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b. Franchise: The cost to obtain a franchise is amortized over the life the franchise. Berdahl has held the franchise for 10 months. ($45,000/5) x 10/12 = $7,500 Trademark: Berdahl will amortize the cost of designing the trademark for 50 years. The trademark was in use for 6 months in the current year. ($38,000/50) x 6/12 = $380 Advertising: Advertising is expensed when incurred. There is no depreciation or amortization related to this transaction.

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P8-7A. Preparation of Balance Sheet (LO6) DOOLEY COMPANY Balance Sheet December 31 Assets Current assets: Cash Accounts receivable Less: Allowance for doubtful accounts Inventory Total current assets Property, Plant and Equipment Land Building Less: Accumulated depreciation

$ 9,000 $ 22,500 1,500

21,000 206,000 236,000 829,500

Equipment Less: Accumulated depreciation Total property, plant and equipment

439,500 135,000

304,500

600,000 180,000

420,000 1,554,000

Intangible assets: Patent (net of amortization) TESTBANKSELLER.COM Total Assets

120,000 $1,910,000

Liabilities Current liabilities: Accounts payable Wages payable Notes payable (short term) Total current Liabilities

$ 18,000 6,000 131,000 155,000

Long-term liabilities: Notes payable Total Liabilities

785,000 940,000 Stockholders’ Equity

Common stock Retained earnings Total stockholders' equity Total Liabilities and Stockholders’ Equity

900,000 70,000 970,000 $1,910,000

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P8-8A. Accounting for Property, Plant and Equipment (LO1, LO2, LO3)

1 Purchase land with building for $900,000. Based on the assessed valuations land = ($80,000/$800,000) x $900,000 = $90,000 and building = ($720,000/$800,000) x $900,000 = $810,000 2 Parking lot 3 New building entrance 4 Purchase store equipment 5 Freight on store equipment 6 Repair damage to floor is not an acquisition cost. 7 Umbrella stand is not material. Totals

Building

Land

Store equipment

810,000

90,000

30,000 25,000 74,900 220

90,000

Depreciation expense for the first year Cost Salvage Value

TESTBANKSELLER.COM Estimated life Depreciation expense

Land improvements

835,000

30,000

75,120

835,000 60,000 775,000 25 31,000 SL

30,000

75,120 75,120 8 18,780 DDB

30,000 12 2,500 SL

* Recall that double declining balance is based on book value and does not take salvage value into account.

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PROBLEMS—SET B P8-1B. Acquisition Cost of Long-Lived Assets (LO1) Expenditures and Receipts Cost of land site Legal fees Cost of land survey Cost of railroad track removal Delinquent property taxes assumed and paid Proceeds from sale of timber Proceeds from sale of railroad track Grading of land site Cost of basement excavation Architect's fees on new building Payment to building contractor—original price Cost of construction changes Cost of paving driveway and parking lot Special assessment for paving city sidewalks* Cost of fence

Land

Building

Land Improvements

$175,000 4,300 1,100 6,500 6,000 (18,000) (3,500) 4,000 $

3,700 128,000 3,200,000 91,000 $17,000

22,000 _______ TESTBANKSELLER$197,400 .COM

_________ $3,422,700

_16,500 $33,500

The settlement for the mud slide is not capitalized since it was not a reasonable and necessary cost of the land, the building, or the land improvements. The cost of replacing broken windows also is not capitalized since it was not a reasonable or necessary cost of acquiring the land or constructing the building and land improvements.

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P8-2B. Depreciation Methods (LO2) Depreciation expense –building: [($912,000 ‒ $87,000)/15] x 9/12 = $41,250. Depreciation expense – equipment: ($960,000 ‒ $60,000)/9) x 9/12 = $75,000 Depreciation expense – truck: [($144,000/5 x 2) x 9/12] = $43,200

P8-3B. Depreciation Methods (LO2) a. 1. Straight-line: ($218,700 ‒ $23,400)/6 years = $32,550 per year 2. Double-declining balance: Twice straight-line rate = (100 percent/6) x 2 = 33⅓ percent 1 $218,700 x 33⅓ percent = $ 72,900 2 ($218,700 ‒ $ 72,900) x 33⅓ percent = 48,600 3 ($218,700 ‒ $121,500) x 33⅓ percent = 32,400 4 ($218,700 ‒ $153,900) x 33⅓ percent = 21,600 5 ($218,700 ‒ $175,500) x 33⅓ percent = 14,400 6 5,400* $195,300 *Amount necessary to leave salvage value of $23,400.

3. Units-of-production: TESTBANKSELLER.COM (Cost ‒ Salvage value)/Total production = Depreciation per unit of Production ($218,700 ‒ $23,400)/700,000 units = $0.279/unit Year 1 2 3 4 5 6

Annual Production 140,000 180,000 100,000 110,000 80,000 90,000 700,000

x x x x x x

Annual Depreciation $0.279 = $ 39,060 0.279 = 50,220 0.279 = 27,900 0.279 = 30,690 0.279 = 22,320 0.279 = 25,110 $195,300

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b. 1. Straight-line: Year 1 [($218,700 ‒ $23,400)/6 years] x 4/12 = Years 2-6 ($218,700 ‒ $23,400)/6 years = Year 7 [($218,700 ‒ $23,400)/6 years] x 8/12 =

$10,850 $32,550 $21,700

2. Double-declining balance: Twice straight-line rate = (100 percent/6) x 2 = 33⅓ percent 1 $218,700 x 33⅓ percent x 4/12 = $ 24,300 2 ($218,700 ‒ $ 24,300) x 33⅓ percent = 64,800 3 ($218,700 ‒ $ 89,100) x 33⅓ percent = 43,200 4 ($218,700 ‒ $132,300) x 33⅓ percent = 28,800 5 ($218,700 ‒ $161,100) x 33⅓ percent = 19,200 6 ($218,700 ‒ $180,300) x 33⅓ percent = 12,800 7 2,200* $195,300 *Amount necessary to leave salvage value of $23,400.

P8-4B. Accounting for Property, Plant and Equipment (LO1, LO2, LO3) a. a.

BALANCE SHEET

Assets Year 1 Mar. 1 Delivery truck Cash

INCO M E STATE M E NT

Liabilities

Stockholders' Equity

Revenues

Expenses

−

Net Income

TESTBANKSELLER.COM

28,500 -28,500

Purchase of delivery truck.

Mar. 2 Delivery truck

580

Cash

-580 Cost of painting name and logo on truck.

Accumulated

Dec. 31 depreciation

-4,380

Depreciation expense

4,380

Depreciation on delivery truck [($29,080 ‒ $2,800)/5] x 10/12 = $4,380

continued next page

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-4,380

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a. Continued BALANCE SHEET

Assets

Year 2 Jul. 1 Delivery truck

1,808

Cash

-1,808

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

Revenues

Expenses

−

Net Income

Cost of installing air conditioning in truck.

Sept. 7 Cash

-430

Truck maintenance expense

430

-430

-5,448

Depreciation expense

5,448

-5,448

Cost of truck tune up and inspection. Accumulated

Dec. 31 depreciation

-5,448 Depreciation on delivery truck Depreciatoin for first 6 months [($29,080 - $2,800)/5] x 6/12

2,628

Depreciation for last 6 monhts Truck cost (29,080 + 1,808)

30,888

Depr taken ( $4,380 + $2,628)

7,008

Book value after improvement

23,880

Revised salvage value

3,200

Revised remaining depreciation

20,680

Remaing useful life

44 months

6 months ($20,680/44) x 6

2,820

Total year 2 depreciation

5,448

TESTBANKSELLER.COM

BALANCE SHEET

Assets

Liabilities

Stockholders' Equity

INCO M E STATE M E NT

Revenues

Expenses

−

Net Income

Year 3 Sept. 3 Cash

-130

Truck maintenance expense

130

-130

-5,640

Depreciation expense

5,640

-5,640

Depreciation expense

5,640

-5,640

Cost of bumper guards for delivery truck. Accumulated

Dec. 31 depreciation

-5,640 Depreciation on delivery truck Depreciation for 12 months: ($20,680/44) x 12 = $5,640

Year 4 Accumulated

Dec. 31 depreciation

-5,640 Depreciation on delivery truck Depreciation for 12 months: ($20,680/44) x 12 = $5,640

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Book Value of Delivery Truck at the end of year 4. Delivery Accumulated Truck Depreciation 28,500 580 -4,380 1,808 -5,448 -5,640 -5,640 30,888 -21,108

Year 1 Year 2 Year 3 Year 4

Book Value

9,780

P8-5B. Disposal of Property, Plant and Equipment (LO4) BALANCE SHEET

Assets a.

Accumulated depreciation

Liabilities

INCO M E STATE M E NT +

-1,400

Stockholders' Equity

Revenues

Expenses

−

Depreciation expense

-1,400

Net Income

1,400

-1,400

Depreciation expense for four months. [($27,200 - $2,000)/6] x 4/12 = $1,400

Cash Accumulated depreciation

13,200

Truck

-27,200

TESTBANKSELLER.COM

14,000 Sale of truck at book value of $13,200 [($27,200 - $2,000)/6 x 3.333 = $14,000 $27,200 - $14,000 = $13,200

Cash Accumulated depreciation

15,000

Truck

-27,200

14,000

1,800

Gain on sale of truck

1,800

Sale of truck for $15,000 Proceeds less book value = gain/(loss) $15,000 - $13,200 = $1,800

Cash Accumulated depreciation

12,000

Truck

-27,200

14,000

-1,200

Loss on sale of truck

1,200

-1,200

-13,200

Loss on theft of truck

13,200

-13,200

Sale of truck for $12,000 Proceeds less book value = gain/(loss) $12,000 - $13,200 = -$1,200

Accumulated depreciation

14,000

Truck

-27,200 Theft of uninsured truck.

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P8-6B. Accounting for Intangible Assets (LO5) a.

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b. Copyrights: Although the copyrights don’t expire for 40 years, the sales of the novels will cease at 10 years, therefore the amortization of the copyrights should be over 10 years. $90,000/10 = $9,000. Patent: The cost to acquire the patent is amortized over 6 years, the length of time the new process will be utilized. ($270,000/6) x 6/12 = $22,500 Franchise: The cost to obtain a franchise is amortized over the life of the franchise. Continental has held the franchise for 2 months. ($63,000/4) x 2/12 = $2,625

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P8-7B. Preparation of Balance Sheet (LO6) CONLON CORPORATION Balance Sheet December 31 Assets Current assets: Cash Accounts receivable Less: Allowance for doubtful accounts Inventory Total current assets Plant assets: Land Building Less: Accumulated depreciation Equipment Less: Accumulated depreciation Leasehold improvements Less: Accumulated depreciation Total plant assets

$ $ 21,000 1,000

2,000 20,000 137,000 159,000

1,128,000 280,000 70,000 266,000 130,000 140,000 22,000

Intangible assets: Organization costs Patent TESTBANKSELLER.COM Total intangible assets Total Assets

210,000 136,000 118,000 1,592,000

19,000 50,000 69,000 $1,820,000

Liabilities Current liabilities: Accounts payable Interest payable Notes payable (short term) Total current Liabilities Long-term liabilities: Notes payable Total Liabilities Stockholders’ Equity Common stock Retained earnings Total stockholders' equity Total Liabilities and Stockholders’ Equity

13,000 24,000 80,000 117,000

950,000 1,067,000

400,000 353,000 753,000 $1,820,000

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P8-8B P8-8B. Accounting for Property, Plant and Equipment (LO1, LO2, LO3)

Land

Building

Land Store improvements equipment

Purchase land with building for $800,000. Based on the assessed valuations land = ($70,000/$700,000) x $800,000 = $80,000 and building = ($630,000/$700,000) x 1 $800,000 = $720,000 80,000 720,000 2 Parking lot 3 New building entrance 20,000 Purchase store 4 equipment Freight on store 5 equipment Repair damage to floor is not an acquisition 6 cost. TESTBANKSELLER.COM 7 Umbrella stand is not material. Totals

80,000

Depreciation expense for the first year Cost Salvage Value Estimated life Depreciation expense SL

36,000

70,900 220

740,000

36,000

71,120

740,000 60,000 680,000 25 27,200

36,000

71,120 * 71,120 8 17,780

36,000 12 3,000 SL

DDB

* Recall that double declining balance is based on book value and does not take salvage value into account.

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SERIAL PROBLEM: ANGEL CITY GREETINGS SP8. 1. The expenditure for memory and a larger hard disk qualifies as a betterment since it improves the efficiency of the computer. Therefore, the expenditure should be capitalized as part of the computer rather than being expensed in the current year.

2. The additional $420 should be depreciated over the remaining useful live of the asset, which is 42 months. Therefore the new depreciation amount is $110, an increase of $10 per month. 3. Year 1 2 3 4 5 Total

SL ($3,000–500)/5 = $500 ($3,000–500)/5 = $500 ($3,000–500)/5 = $500 ($3,000–500)/5 = $500 ($3,000–500)/5 = $500 $2,500

DDB $3,000 x .4 = $1,200 ($3,000-$1,200) x .4 = $720 ($3,000 - $1,920) x .4 = $432 ($3,000 - $2,352) x .4 = $259 limited to $148 None $2,500

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EXTENDING YOUR KNOWLEDGE REPORTING AND ANALYSIS EYK8-1. Financial Reporting Problem: Columbia Sportswear Company ($ in thousands) a. $737,205 (Note 6) b. $455,811 (Note 6) c. $173,919 / $737,205 = 23.6 percent (Note 6) d. $59,945 (Depreciation and Amortization – Statement of Cash Flows) Less $3,883 (Amortization – Note 7) = $56,062 (Depreciation expense) e. $53,352 (Statement of Cash Flows)

EYK8-2. Comparative Analysis Problem: Columbia Sportswear Company vs. Under Armour ($ in thousands) a. Columbia 1. Return on assets $105,123/[($2,212,902 + $2,013,894)/2] = 5.0% 2. Asset turnover $2,466,105/[($2,212,902+ $2,013,894)/2] = 1.2 Under Armour 1. Return on assets 2. Asset turnover

($48,260)/[($4,006,367 + $3,644,331)/2] = (1.3)% $4,976,553/[($4,006,367 + $3,644,331)/2] = 1.3

TESaThigher BANKROA SELthan LERUnder .COMArmour (5.0% vs. (1.3)%). Under b. Columbia is able to generate Armour is able to generate more sales per dollar of assets (Asset turnover of 1.3 vs. 1.2) than Columbia. EYK8-3. Business Decision Problem The key to this problem is to determine which costs were necessary to the acquisition of Site 1 and, therefore, part of its initial cost. The sales price of Site 1 ($150,000) and the cost of the geological tests for Site 1 ($10,000) are part of that site's initial cost. It is also reasonable to include the cost of the geological tests for Site 2 ($10,000) as part of the cost of Site 1. The tests on Site 2 were necessary to establish that Site 1 was the better site. Therefore, the cost of these tests was a necessary cost incurred to acquire Site 1. The $6,000 fee for the two-week time extension, however, was not a necessary cost to purchase Site 1 and could reasonably have been avoided. The expenditure resulted because Fleming was inefficient in obtaining the geological tests. The $6,000 fee should be expensed immediately. The fee to Gooden should be $25,500 (15% of $170,000).

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EYK8-4. Financial Analysis Problem – MICROSOFT CORPORATION a. 2017: ROA $21,204/[($193,468 + $241,086)/2] = 9.8% Asset Turnover $89,950/[($193,468 + $241,086)/2] = 0.41 2016: ROA Asset Turnover

$16,798/[($176,223 + $193,468)/2] = 9.1% $85,320/[($176,223 + $193,468)/2] = 0.46

b. Microsoft has a relatively high Return on Assets despite its relatively low Asset Turnover. This would be an indication that the asset mix tends toward assets such as cash and shortterm investments which do not generate significant revenues. In fact, Microsoft has about 50% of its assets in cash and short-term investments.

CRITICAL THINKING EYK8-5. Accounting Research Problem a. General Mills' gross cost of land, buildings, and equipment at May 28, 2017, is $9,526.6 million (from Note 17). b. General Mills primarily uses the straight-line depreciation method in its financial statements (from Note 2). c. General Mills' consolidated TEstatements STBANKof SEcash LLEflows R.Creports OM depreciation and amortization expense of $603.6 million for fiscal 2017. d. Accumulated depreciation at May 28, 2017, is 5,838.9 million (from Note 17). e. Expenditures of $218.2 million for research and development were expensed in fiscal 2017 (from Note 17). f.

Fiscal 2017 return on assets is $1,657.5/[($21,812.6 + $21,712.3)/2] = 7.6%.

EYK8-6. Accounting Communication Activity Peggy, At first it may seem like using a separate accumulated depreciation account just adds complexity. There is, however, a good reason to show the cost and the amount of accumulated depreciation separately on the balance sheet. By showing the two amounts separately, the reader can get a rough idea about the average age of the company’s depreciable assets. For example, if the cost of the assets is $200 and the accumulated depreciation is $50, assuming depreciation is being computed on a straight-line basis with no salvage value, we can conclude the assets have been in use for 25 percent of their useful lives. We would not be able to determine this if the annual depreciation was credited directly to the asset account. Sincerely, Your Name

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EYK8-7. Accounting Ethics Case a. If the $1,800,000 purchase price was allocated to the land and building in the relationship suggested by either appraisal, then $1,200,000 (2/3 of $1,800,000) should be allocated to the land and $600,000 (1/3 of $1,800,000) should be allocated to the building. This allocation assigns $150,000 more to the land and $150,000 less to the building than Fister's allocation. Because land is a non-depreciable asset, Fister's allocation will result in $150,000 less building depreciation expense over a 10-year period. b. The goal of improving profits is a desirable goal. It should not, however, override sound accounting analysis of economic events. It is not a sufficient rationale to support Fister's analysis. c. Disagree. It appears as though Fister has selectively utilized information to achieve a result that he believes is desirable. The result, however, is not consistent with the relationships suggested by either appraisal. The allocation of the purchase price is better supported if it relies on the relative values of the land and building contained in either appraisal. d. Actions available to Tristan include the following: 1. Tristan could propose an alternative accounting treatment for the transaction that uses the relative values suggested by either one of the appraisals. This alternative could be supported with references from authoritative literature and textbook illustrations that indicate the objective is to find reasonable evidence of the relative values of the assets acquired in a package purchase. 2. Tristan could suggest T that ESan TBindependent ANKSELLexpert ER.Cbe OMconsulted for advice on the proper way to analyze the transaction. The independent expert could be Ag-Growth's CPA. 3. To encourage Fister's cooperation with either of the preceding alternatives, Tristan might point out that this transaction will probably be reviewed by the firm's CPAs when they conduct their year-end audit. 4. Although it doesn't necessarily resolve her concerns, Tristan could note her concern to Fister (she has already alluded to it in her comments to Fister) and rely on Fister to initiate action to resolve her concerns.

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EYK8-8. Corporate Social Responsibility Problem 1. The following excerpt appears in the Corporate Responsibility page of the Sustainability section of Cummins’ website: “Cummins believes strongly that the Company is only as strong as the communities where our employees live and work and where Cummins does business. One of our six corporate values is to “serve and improve the communities in which we live. The Company’s commitment goes back to Cummins’ founding more than 90 years ago and was perhaps best personified by legendary Chairman and CEO, J. Irwin Miller, who led Cummins for more than 30 years and launched a number of initiatives to improve the Company’s headquarters city of Columbus, Ind.. To have the greatest impact possible, the Company suggests community involvement activities focus on three areas where Cummins has some expertise and the ability to make a difference: education, the environment and social justice/equal opportunity.” 2. The following quote from a prior Cummins’ report: “Our commitment to corporate responsibility also contains an element of self-interest. Cummins operates under the philosophy that corporate responsibility contributes directly to the long-term financial health of our company. Building successful, vibrant communities leads to stronger markets for our products. Being seen as a company that cares about all its stakeholders, in addition to generating strong financial return for shareholders, is essential to our efforts to attract the most talented workers from around the world. Creating a culture that encourages employees to become active in their communities is central to our goal of creating a great place to work, which is the best way we know to retain those talented workers.” The following excerpt appears in the Introduction page of the Sustainability section of Cummins’ website: “We also continue to take a very broad view of sustainability, beyond just the environment and corporate TESTBAresponsibility. NKSELLER.We COMthink factors ranging from good governance and risk management to developing good leadership and skilled employees are critical to a company’s sustainability. There’s a financial component, too. Companies without a firm financial foundation probably won’t be sustainable very long.” The following excerpt appears in the Financial page of the Sustainability section of Cummins’ website: “A truly sustainable company must be successful financially. Without financial success, it’s difficult if not impossible to invest in building stronger communities or reducing a company’s environmental footprint or the research and development necessary to ensure a company’s future financial success.

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EYK8-9. Forensic Accounting Problem 1. The complaint claimed Buntrock was “the driving force behind the fraud. He set earnings targets, fostered a culture of fraudulent accounting, personally directed certain of the accounting changes to make the targeted earnings, and was the spokesperson who announced the company's phony numbers. At the same time, Buntrock posed as a successful entrepreneur. With charitable contributions made with fruits of his ill-gotten gains or money taken from the company, Buntrock presented himself as a pillar of the community. For example, just 10 days before certain of the accounting irregularities first became public, he enriched himself with a tax benefit by donating inflated company stock to his college alma mater to fund a building in his name. He was the primary beneficiary of the fraud and reaped more than $16.9 million in ill-gotten gains from, among other things, performance-based bonuses, retirement benefits, charitable giving, and selling company stock while the fraud was ongoing.” 2. The complaint claimed the following with regard to the company’s accounting: They employed a multitude of improper accounting practices to achieve this objective. Among other things, the complaint charges that defendants: • • • • • • •

avoided depreciation expenses on their garbage trucks by both assigning unsupported and inflated salvage values and extending their useful lives, assigned arbitrary salvage values to other assets that previously had no salvage value, failed to record expenses for decreases in the value of landfills as they were filled with waste, refused to record expenses necessary to write off the costs of unsuccessful and TESTBAprojects, NKSELLER.COM abandoned landfill development established inflated environmental reserves (liabilities) in connection with acquisitions so that the excess reserves could be used to avoid recording unrelated operating expenses, improperly capitalized a variety of expenses, and failed to establish sufficient reserves (liabilities) to pay for income taxes and other expenses.

EYK8-10. Working with the Takeaways Alphabet Inc.: 2017 Asset Turnover: $110,855/[($167,497 + $197,295)/2] = 0.61 2017 Return on Assets: $12,662/[($167,497 + $197,295)/2] = 6.9%

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Chapter 9 Liabilities QUESTIONS 1.

Liabilities are obligations resulting from past transactions that require the firm to pay money, provide goods, or perform services in the future.

Current liabilities are presented at the amount to be paid to settle the liability.

Current liabilities are obligations that require within the coming year or operating cycle, whichever is longer, (1) the use of existing current assets or (2) the creation of other current liabilities.

Hardy Company would use the following formula to calculate the total amount of interest on a note payable that uses add-on interest:

TESTBANKSELLER.COM

Interest = Principal x Interest rate x Time 5.

The financial statement effect of the payment of the note payable: BALANCE SHEET

Assets

Dec reas e

CASH

Liabilities

Dec reas e Dec reas e

Not es payabl e In t eres t payabl e

INCO M E STATE M E NT +

Stockholders' Equity

Revenues

Expenses

−

In t eres t In c reas e expen s e

dec reas e

Accrued interest at December 31 = $24 ($7,200 x 0.08 x 15/360)

(a) When failed units are repaired in the month of sale, the firm increases Product Warranty Expense and reduces Cash, Supplies, and so on, for the cost of the repair.

dec reas e

(b) Product warranty costs for future failures are estimated in the month of the sale; the firm increases Product Warranty Expense and Estimated Liability for Product Warranty for the estimated repair cost. When the repairs are made, the firm reduces Estimated Liability for Product Warranty and Cash, Supplies, and so on, for the repair cost.

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Net Income

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American Paging, Inc., accounts for monthly charges to customers in advance of providing the service as unearned revenues rather than earned revenues. The revenue recognition principle guides American Paging to this accounting. The revenue recognition principle states that, in general, revenue is recognized when services are performed or goods are sold. Revenue must be earned and realized before it may be recorded as revenue. American Paging realizes revenue when it receives the advance payments from its customers. It does not earn the revenue, though, until it provides the paging and dispatch services.

(a) A term loan is a long-term borrowing, evidenced by a note payable, that is arranged with a single lender. (b) Bonds payable are long-term, interest-bearing, debt instruments. They are formally executed and usually negotiable. (c) A trustee is usually a financial institution that represents a group of bondholders. (d) Secured bonds are those whose repayment is secured by other properties. (e) A serial bond is a series of bonds with staggered maturity dates. (f) Bonds with a call provision allow the borrower to call in the bonds for redemption. (g) Convertible bonds can be converted to other types of securities—such as preferred or common stock—under conditions specified by agreement. (h) Face value refers to the TEbond's STBAdenomination, NKSELLERthat .COis,Mthe amount of principal that will be paid on the bond's maturity date. (i) Coupon rate is the interest rate specified on the face of the bond certificate. It is multiplied by the face value of a bond to give the periodic interest payment. (j) Bond discount is the amount below face value for which a bond is sold. (k) Bond premium is the amount above face value for which a bond is sold. (l) Amortization of bond premium or discount is the process of prorating the discount or premium as an adjustment of periodic interest expense over the life of the bond.

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10.

The advantages of issuing bonds are (1) no dilution of ownership interest, (2) tax deductibility of bond interest expense, and (3) potential to increase the income to common stockholders by earning a return that exceeds the cost of borrowing. The disadvantages of issuing bonds are that (1) bond interest expense is a fixed contractual obligation, (2) funds borrowed have a specific repayment date, and (3) the borrowing agreement may restrict company actions.

11.

A bond stipulates a specific face value and a specific coupon interest rate. Bonds sold at face value earn (or have) an effective interest rate equal to the coupon interest rate. Selling the bond at a discount causes the effective interest rate to be higher than the coupon rate, and the monthly interest expense increases over the life of bond as the discount is amortized. Selling the bond at a premium causes the effective interest rate to be lower than the coupon rate, and the monthly interest expense decreases over the life of the bond as the premium is amortized.

12.

Contingent liabilities are obligations that may develop out of existing situations. Whether or not an obligation develops depends on the occurrence of a future event and the measurability of the obligation. Examples of contingent liabilities are credit guarantees, lawsuits, additional income tax assessments, and environmental cleanup costs. A contingent liability should be recorded in the accounts if the future event will probably occur and the amount of the liability can be reasonably estimated.

13.

A finance lease is similar in nature to an installment sale where the control of the asset is transferred to the lessee. An operating lease transfers only the use of the asset to the lessee.

14.

Current Ratio = Current assets / Current liabilities

TESTBANKSELLER.COM Quick Ratio = [Cash and cash equivalents + Short-term investments + Accounts receivable] / Current liabilities Each ratio is used to measure a firm's ability to pay its current liabilities. 15.

The times-interest-earned ratio shows the number of times the fixed interest charges were earned during a year. The ratio helps creditors assess the ability of a firm to meet its annual interest commitments.

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SHORT EXERCISES SE9-1. Contingent Liabilities (LO5) No, the purchase commitment should not be recorded on the face of the balance sheet because it is a contingent liability. It is not a liability until the goods are delivered. If the amount of the commitment is material, it should be disclosed in the notes to the company’s financial statements.

SE9-2. Determining Bond Premium or Discount (LO2) (a) Discount (b) Face value (c) Premium

SE9-3. Contingent Liabilities (LO5) The lawsuit, if material in amount, should be disclosed in the notes to the company’s financial statements. Since the case has not yet been litigated and no judicial outcome has been reached, the liability amount is unknown.

SE9-4. Operating and Finance Leases TESTBANKSELLER.COM (LO4) The lease would probably be accounted for as a financing lease for two reasons. First, the lease contains a purchase option that enables the lessee to acquire the leased asset at a price that makes it reasonably certain to expect the less to exercise the option. Specifically, the asset is expected to be worth $100,000 at the end of the lease, and the purchase option price is $10,000. Second, the lease represents a major portion of the asset’s remaining useful life. Specifically, the term is 9 years out of the 10 remaining years of the asset’s life.

SE9-5. Current ratio (LO6) Current ratio: 2019: $2,100/$2,900 = 0.72 2020: $2,000/$3,000 = 0.67 Los Altos, Inc.’s ability to repay its current liabilities declined marginally from 2019 to 2020.

SE9-6. Quick Ratio (LO6) Quick ratio: 2019: ($400 + $800)/$2,900 = 0.41 2020: ($200 + $900)/$3,000 = 0.37 Los Altos, Inc.’s ability to repay its current liabilities using its quick assets declined marginally from 2019 to 2020. ©Cambridge Business Publishers, 2020 9-4

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SE9-7. Times-Interest-Earned Ratio (LO6) Times-interest-earned ratio: 2019: ($950 + $250 + $400)/$250 = 6.40 2020: ($980 + $300 + $420)/$300 = 5.67 Los Altos, Inc.’s ability to pay its interest charges from operating income decreased from 2019 to 2020

SE9-8. Premium and Discount of a Bond or Debenture (LO2) a. Face value b. Discount c. Discount d. Premium

SE9-9. Bond Interest Expense (LO3) $100,000 x .06 x 4 = $24,000 coupon interest $100,000 - $96,000 = $4,000 bond discount $24,000 + $4,000 = $28,000 total interest expense

SE9-10. Bond Interest ExpenseTESTBANKSELLER.COM (LO3) $400 million ‒ $186.6 million = $213.4 million total interest expense.

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EXERCISES—SET A E9-1A. Liabilities on the Balance Sheet (LO1, LO5) a. Accounts payable, $110,000 (current liability) b. Not recorded as a liability; an accountable transaction has not yet occurred. c. Estimated liability for product warranty, $2,200 (current liability) d. Dividends payable, $70,000 (current liability) e. Bonuses payable, $30,000 (current liability)

E9-2A. Maturity Dates of Notes Payable (LO1) Maturity Date Interest a. December 3 $400 ($15,000 x 0.08 x 120/360) b. August 8 147 ($8,400 x 0.07 x 90/360) c. December 4 135 ($12,000 x 0.09 x 45/360) d. September 4 75 ($4,500 x 0.10 x 60/360) e. November 29 225 ($13,500 x 0.08 x 75/360)

E9-3A. Accrued Interest Payable (LO1) Maple: $18,000 x 0.10 x 40/360 TES=T$200 BANKSELLER.COM Wyman: $14,000 x 0.09 x 18/360 = $63 Nahn: $16,000 x 0.12 x 12/360 = $64

E9-4A. Interest Accruals (LO1) Hyatt Company Bank Note Barr note

$8,000 x 0.09 x 36/360 = $72 $12,000 x 0.10 x 24/360 = $80 $12,000 x 0.10 x 9/360 = $30

E9-5A. Advance Payments for Goods (LO1) BALANCE SHEET

Assets

Cas h

20,800

Liabilities Un earn ed s u bs c ri pt i on reven u e

INCO M E STATE M E NT +

Stockholders' Equity

Revenues

−

Expenses

Net Income

20,800

Rec ord s u bs c ri pt i on s rec ei ved ( $208 x 100 = $20,800)

Un earn ed s u bs c ri pt i on reven u e

-400

400

Su bs c ri p t i on reven u e

400

Su bs c ri pt i on reven u e earn ed ( $20,800/52 weeks = $400)

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E9-6A. Warranty Costs (LO5) October 23,000 0.02 460 460 —0—

Units sold Estimated failure rate Total failures expected Failures already occurred Expected future failures Total future failures expected Average cost per failure Total expected future warranty costs

November 22,000 0.02 440 350 90 +

December 25,000 0.02 500 210 290 = 380

380  $50 $19,000 (Increase Warranty expense and current liability)

E9-7A. Bonds Payable Sold at a Discount; Effective Interest Amortization (LO3) BALANCE SHEET

Assets a.

Cash

750,232

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

Revenues

Expenses

−

Net Income

Bonds payable 800,000 Discount on bonds payable -49,768 Record issuance of bonds sold at a discount.

Discount on -36,000 bonds payable 1,512 -37,512 Record semiannual interest payment and discount amortization on June 30. Coupon Interest = $800,000 x 0.09 x 6/12 = $36,000

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Bond interest expense

37,512

-37,512

Bond interest expense

37,587

-37,587

Effective interest expense = $750,232 X 0.10 x 6/12 = $37,512 Discount amortization = $37,512 - $36,000 = $1,512

Cash

Discount on bonds payable

-36,000

1,587

-37,587

Record semiannual interest payment and discount amortization on December 31. Effective interest expense = ($750,232 + $1,512) x 0.10 x 6/12 = $37,587 Discount amortization = $37,587 - $36,000 = $1,587

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E9-8A. Bonds Payable Sold at a Premium; Effective Interest Amortization (LO3) BALANCE SHEET

Assets a.

Cash

351,780

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

Revenues

Expenses

−

Net Income

Bonds payable 300,000 Premium on bonds payable 51,780 Record issuance of bonds sold at a premium.

Premium on -15,000 bonds payable -929 -14,071 Record semiannual interest payment and premium amortization on June 30. Coupon Interest = 300,000 x 0.10 x 6/12 = $15,000

Bond interest expense

14,071

-14,071

Bond interest expense

14,034

-14,034

Effective interest expense = $351,780 X 0.08 x 6/12 = $14,071 Premium amortization = $15,000 - $14,071 = $929

Cash

-15,000

Premium on bonds payable

-966

-14,034

Record semiannual interest payment and premium amortization on December 31. Effective interest expense = ($351,780 - $929) x 0.08 x 6/12 = $14,034 Premium amortization = $15,000 - 14,034 = $966

E9-9A. Financial Statement Presentation of Bond Accounts (LO1, LO3) TESTBANKSELLER.COM Discount on Long-term Bonds Payable: Deduction from Long-term Bonds Payable; thus, a contra long-term liability in the balance sheet. Mortgage Notes Payable: Long-term liability in the balance sheet. Long-term Bonds Payable: Long-term liability in the balance sheet. Bond Interest Expense: Expense in the other income and expense section of income statement. Bond Interest Payable: Current liability in the balance sheet. Premium on Long-term Bonds Payable: Addition to Long-term Bonds Payable; thus, part of a long-term liability in the balance sheet.

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E9-10A. Installment Term Loan (LO3) BALANCE SHEET

Assets

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

Cash

700,000

Mortgage note payable 700,000 Borrowed $700,000 on a mortgage note payable.

Cash

-50,854

Mortgage note payable -8,854 Record semiannual mortgage note payment on June 30.

Revenues

-42,000

Expenses

−

Net Income

Interest expense

42,000

-42,000

Interest expense

41,469

-41,469

Interest expense - $700,000 x 0.12 x 6/12 = $42,000 Principle pay down = $50,854 - $42,000 = $8,854

Cash

-50,854

Mortgage note payable -9,385 -41,469 Record semiannual mortgage note payment onDecember 31. Interest expense = ($700,000 - $8,854) x 0.12 x 6/12 = $41,469 Principle pay down = $50,854 - $41,469 = $9,385

E9-11A. Leases (LO4)

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BALANCE SHEET

Assets

Computer equipment

74,520

Cash

-1,000

Liabilities

Stockholders' Equity

INCO M E STATE M E NT

Revenues

Expenses

−

Net Income

Lease obligation 74,520 Record six-year capital lease.

-1,000 Record cash payment of January rent on warehouse storage space.

Rent expense

1,000

E9-12A. Contingent Liabilities (LO5) 1. B. Although the likelihood of default is low, disclosure is required for credit guarantees. 2. A. Both accrual and disclosure is required since the likelihood is probable and the amount is estimable. 3. B. Disclosure is required because the amount is deemed possible, but not probable.

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-1,000

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E19-13A. Ratio Analysis (LO6) a. Times-interest-earned ratio [$14,007 + $359] ÷ $359 = 40 b. Quick ratio [$1,808 + $18,085 + $9,367] ÷ $37,724 = 0.78 c. Current ratio $39,088 ÷ $37,724 = 1.04

E9- 14A. Issue price of a bond (LO2, LO3) a. 10% $100,000 x 0.61391 = $5,000 x 7.72173 =

$61,391 Table III Appendix E 38,609 Table IV Appendix E $100,000

Enter 10 N 10 I/YR Press PV 5,000 PMT 100,000 FV

Display N = 10 I/YR = 10 PV = -100,000 PMT = 5,000 FV = 100,000

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Note that the calculator needs to be preset to semi-annual compounding b. 8%

$100,000 x 0.67556 = $5,000 x 8.11090 = Enter 10 N 8 I/YR Press PV 5,000 PMT 100,000 FV

$67,556 40,555 $108,111 Display N = 10 I/YR = 8 PV = -108,110.90 PMT = 5,000 FV = 100,000

Note that the calculator needs to be preset to semi-annual compounding c. 12%

$100,000 x 0.55839 = $5,000 x 7.36009 =

55,839 36,800 $92,639 (Difference due to rounding.)

Enter 10 N 12 I/YR Press PV 5,000 PMT 100,000 FV

Display N = 10 I/YR = 12 PV = -92,639.91 PMT = 5,000 FV = 100,000

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E9-15A. Issue price of a bond (LO2, LO3) $900,000 x 0.55839 = $502,551 Table III Appendix E $45,000 x 7.36009 = 331,204 Table IV Appendix E $833,755 (Difference due to rounding.) Enter 10 N 12 I/YR Press PV 45,000 PMT 900,000 FV

Display N = 10 I/YR = 12 PV = -833,759.22 PMT = 45,000 FV = 900,000

Note that the calculator needs to be preset to semi-annual compounding

TESTBANKSELLER.COM

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EXERCISES—SET B E9-1B. Liabilities on the Balance Sheet (LO1) a. Long-term notes payable-current portion, $25,000 (current liability) Long-term notes payable, $100,000 (noncurrent liability) b. Estimated income tax payable, $34,000 (current liability). c. Accounts payable, $15,000 (current liability) d. State sales tax payable, $1,400 (current liability) e. No liability is disclosed in the year-end balance sheet although a notation should be made in the notes.

E9-2B. Maturity Dates of Notes Payable (LO1) Maturity Date Interest a. October 8 $162 ($7,200 x 0.09 x 90/360) b. August 12 160 ($6,000 x 0.08 x 120/360) c. September 16 140 ($5,600 x 0.075 x 120/360) d. July 25 54 0.08 TE($5,400 STBANx K SExL45/360) LER.COM e. January 12 125 ($7,500 x 0.08 x 75/360)

E9-3B. Accrued Interest Payable (LO1) Barton: $10,000  0.12  27/360 = $90 Lawson: $12,000  0.09  18/360 = $54 Riley: $15,000  0.10  12/360 = $50

E9-4B. Interest Accruals (LO1) Porter Company Bank note Dale, Inc.

$6,000 x 0.12 x 36/360 = $72 $7,200 x 0.10 x 21/360 = $42 $9,000 x 0.10 x 8/360 = $20

These accruals increase Interest Payable (current liability) and Interest Expense.

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E9-5B. Advance Payment for Services (LO1) BALANCE SHEET

Assets

Cas h

Liabilities

Un earn ed s u bs c ri pt i on reven u e

180,000

INCO M E STATE M E NT +

Stockholders' Equity

Revenues

Expenses

−

Net Income

180,000

Rec ord s eas on t i c ket s al es ( $180 x 1,000 = $180,000) Un earn ed s u bs c ri pt i on reven u e

-15,000

Su bs c ri p t i on reven u e

15,000

Ti c ket reven u e earn ed ( $180,000/12 games = $15,000)

E9-6B. Warranty Costs (LO5) October 36,000 0.03 1,080 1,080 —0—

Units sold Estimated failure rate Total failures expected Failures already occurred Expected future failures

November 34,000 0.03 1,020 590 + 430 +

December 45,000 0.03 1,350 410 940

TESTBANKSELLER.COM Total future failures expected Average cost per failure Total expected future warranty costs

1,370 x $35 $47,950

At December 31, the adjustment to provide for estimated future warranty expense increases both Warranty Expense and Liability for Product Warranty (a current liability) in the amount of $47,950.

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E9-7B. Bonds Payable Sold at a Discount; Effective Interest Amortization (LO3) BALANCE SHEET

Assets a.

Cash

554,718

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

Revenues

Net Income

Bonds payable 600,000 Discount on bonds payable -45,282 Record issuance of bonds sold at a discount.

Discount on -33,000 bonds payable 283 -33,283 Record semiannual interest payment and discount amortization on June 30. Coupon Interest = $600,000 x 0.11 x 6/12 = $33,000

Cash

Expenses

−

Bond interest expense

33,283

-33,283

Bond interest expense

33,300

-33,300

Effective interest expense = $554,718 X 0.12 x 6/12 = $33,283 Discount amortization = $33,283 - $33,000 = $283

Cash

Discount on bonds payable

-33,000

300

-33,300

Record semiannual interest payment and discount amortization on December 31. Effective interest expense = ($554,718 + 283) x 0.12 x 6/12 = $33,300 Discount amortization = $33,300 - $33,000 = $300

E9-8B. Bonds Payable Sold at a Premium; Effective Interest Amortization (LO3) TESTBANKSELLER.COM BALANCE SHEET

Assets a.

Cash

446,372

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

Revenues

Expenses

−

Net Income

Bonds payable 400,000 Premium on bonds payable 46,372 Record issuance of bonds sold at a premium.

Premium on -26,000 bonds payable -3,681 -22,319 Record semiannual interest payment and premium amortization on June 30. Coupon Interest = 400,000 x 0.13 x 6/12 = $26,000

Bond interest expense

22,319

-22,319

Bond interest expense

22,135

-22,135

Effective interest expense = $446,372 X 0.10 x 6/12 = $22,319 Premium amortization = $26,000 - $22,319 = $3,681

Cash

-26,000

Premium on bonds payable

-3,865

-22,135

Record semiannual interest payment and premium amortization on December 31. Effective interest expense = ($446,372 - $3,681) x 0.10 x 6/12 = $22,135 Premium amortization = $26,000 - 22,135 = $3,865

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E9-9B. Bonds Payable on the Balance Sheet (LO2) Long-Term Liabilities: Zero-coupon bonds payable 10% Bonds payable Add: Premium on 10% bonds payable 9% Bonds payable Less: Discount on 9% bonds payable 8% Bonds payable Total

$170,500 $500,000 15,000 600,000 19,000

515,000 581,000 100,000 $1,366,500

Bond interest payable of $25,000 is classified under current liabilities.

E9-10B. Installment Term Loan (LO3) BALANCE SHEET

Assets

Cash

500,000

Cash

-18,278

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

Revenues

Expenses

−

Net Income

Mortgage note payable 500,000 Borrowed $500,000 on a mortgage note payable. Mortgage note payable -8,278 Record quarterly mortgage note payment on March 31. Interest expense - $500,000 x 0.08 x 3/12 = $10,000

-10,000

Interest expense

10,000

-10,000

Interest expense

9,834

-9,834

TESTBANKSELLER.COM

Principle pay down = $18,278 - $10,000 = $8,278

Cash

-18,278

Mortgage note payable -8,444 -9,834 Record quarterly mortgage note payment on June 30. Interest expense = ($500,000 - $8,278) x 0.08 x 3/12 = $9,834 Principle pay down = $18,278 - 9,834 = $8,444

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E9-11B. Leases (LO4) BALANCE SHEET

Assets

Sound System

140,000

Cash

-1,500

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

Revenues

Expenses

−

Lease obligation 140,000 Record seven-year capital lease.

-1,500 Record cash payment of January rent on warehouse storage space.

Rent expense

1,500

c. The second lease is a short-term (one year or less) lease and the firm is not required to recognize an asset or liability. E9-12B. Contingent Liabilities (LO5) 1. C. Because the likelihood of default is low, neither accrual nor disclosure is required. 2. A. Both accrual and disclosure are required since the likelihood is probable and the amount is estimable. 3. B. Disclosure is required because the amount is deemed possible, but not probable.

TESTBANKSELLER.COM E9-13B. Ratio Analysis (LO6) a. Times-interest-earned ratio [$36,800 + $3,200] / $3,200 = 12.5 b. Quick ratio [$2,200 + $15,300 + $10,000] / $28,000 = 0.98 c. Current ratio $42,000 / $28,000 = 1.5

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-1,500

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E9-14B. ISSUE PRICE OF A BOND (LO2, LO3) a. 6% $100,000 x 0.74409 = $74,409 Table III Appendix E $3,000 x 8.53020 = 25,591 Table IV Appendix E $100,000 Enter 10 N 6 I/YR Press PV 3,000 PMT 100,000 FV

Display N = 10 I/YR = 6 PV = -100,000 PMT = 3,000 FV = 100,000

Note that the calculator needs to be preset to semi-annual compounding

b. 8%

$100,000 x 0.67556 = $67,556 $3,000 x 8.11090 = 24,333 $91,889 Enter 10 N 8 I/YR Press PV 3,000 PMT 100,000 FV

Display N = 10 I/YR = 8 PV = -91,889.10 PMT = 3,000 FV = 100,000

TESTBANKSELLER.COM

Note that the calculator needs to be preset to semi-annual compounding

c. 4%

$100,000 x 0.82035 = $82,035 $3,000 x 8.98259 = 26,948 $108,983 Enter 10 N 4 I/YR Press PV 3,000 PMT 100,000 FV

Display N = 10 I/YR = 4 PV = -108,982.59 PMT = 3,000 FV = 100,000

Note that the calculator needs to be preset to semi-annual compounding

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E9-15B. ISSUE PRICE OF A BOND (LO2, LO3) $500,000 x 0.45639 = $228,195 Table III Appendix E $22,500 x 13.59033 = 305,782 Table IV Appendix E $533,977 Difference due to rounding. Enter 20 N 8 I/YR Press PV 22,500 PMT 500,000 FV

Display N = 20 I/YR = 8 PV = -533,975.82 PMT = 22,500 FV = 500,000

Note that the calculator needs to be preset to semi-annual compounding

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PROBLEMS—SET A P9-1A. Accounts Payable and Notes Payable (LO1) BALANCE SHEET

Assets

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

Revenues

Expenses

−

Net Income

a. 8-Apr

Accounts payable

-4,800

Notes payable

4,800

Issued a 75-day, 8 percent note payable in payment of an account payable. 15-May Cash

36,000

Notes payable

36,000

Borrowed from bank for 60 days at 9 percent.

22-Jun Cash

-4,880

Notes payable

-4,800

Interest expense

-80

Interest expense

540

-540

-300

Interest expense

300

-300

-720

Interest expense

720

-720

-80

Paid note payable to Bennett Co. Interest expense: $4,800 x 0.08 x 75/360 = $80 6-Jul Inventory

12,000

Notes payable

12,000

Purchased merchandise and issued a note payable with interest at 10 percent for 90 days.

14-Jul Cash

-36,540

Notes payable

-36,000

-540

Paid note payable to bank. Interest expense: $36,000 x 0.09 x 60/360 = $540 2-Oct Cash

24,000

Notes payable

TEST24,000 BANKSELLER.COM

Borrowed from bank for 120 days at 12 percent. 4-Oct

Notes payable Accounts payable

-12,000 12,300

Defaulted on note payable Interest expense $12,000 x 0.10 x 90/360 = $300 b. Accrued interest payable

31-Dec

720

Interest on October 2 note payable Interest expense: $24,000 x 0.12 x 90/360 = $720

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P9-2A. Interest Accruals (LO1) BALANCE SHEET

Assets

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

Revenues

Expenses

−

Net Income

a. Interest expense

120

-120

Interest expense

108

-108

-132

Interest expense

132

-132

Interest payable -120 Paid November 16 note ($320 - 120 = $200)

-200

Interest expense

200

-200

31-Dec

Interest payable 54 Accrue interest on $9,000, 9% note for 24 days Interest = $9,000 x 0.09 x 24/360 = $54

-54

Interest expense

-54

31-Dec

Interest payable 50 Accrue interest on $18,000, 10% note for 10 days Interest = $18,000 x 0.10 x 10/360 = 50

Interest expense

-50

31-Dec

Interest payable 120 -120 Accrue interest on $12,000, 8% note payable for 45 days. Interest = $12,000 x 0.08 x 120/360 = $320; 45/120 x $320 = $120

31-Dec

Interest payable 108 -108 Accrue interest on $16,000, 9% note payable for 27 days. Interest = $16,000 x 0.09 x 60/360 = $240; 27/60 x $240 = $108

b. 2-Feb Cash

-16,240

Notes payable

-16,000

Interest payable -108 Paid December 4 note ($240 - 108 = $132)

15-Mar Cash

-12,320

Notes payable

-12,000

TESTBANKSELLER.COM -50

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P9-3A. Noncontingent and Contingent Liabilities (LO1, LO5) a. Situation Number b. Type of Liability 1. Contingent

c. Accounting Treatment Disclose in a note (probable, not reasonably estimable)

Contingent

Neither record nor disclose (remote)

Noncontingent

Record in accounts (current liability)

Contingent

Disclose in a note (reasonably possible)

Contingent

Disclose in a note (credit guarantees must be disclosed in a note, even if remote)

Contingent

Record in accounts (probable, reasonably estimable)

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P9-4A. Effective Interest Amortization (LO3) a. A

B C D Interest Book Value Interest Expense Balance of of Bonds Paid (10% x ½ of Periodic Unamortized End of Period (8%x 1/2 of bond book Amortization Discount ($250,000 ‒ face value) value) (B ‒ A) (D ‒ C) D) $29,100 $220,900 $10,000 $11,045 $1,045 28,055 221,945 10,000 11,097 1,097 26,958 223,042

Interest Year Period (at issue) 1 1 2

BALANCE SHEET

Assets b. 31-Dec Cash

220,900

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

Revenues

Expenses

−

Net Income

Bonds payable 250,000 Discount on bonds payable -29,100 Issued $250,000 face value, 8%, 9-year bonds for $220,900.

30-Jun Cash

Discount on -10,000 bonds payable 1,045 -11,045 Record semiannual interest payment and discount amortization.

11,045

-11,045

Bond interest expense

11,097

-11,097

TESTBANKSELLER.COM

31-Dec Cash

Bond interest expense

-10,000

Discount on bonds payable

1,097

-11,097

Record semiannual interest payment and discount amortiztion.

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P9-5A. Effective Interest Amortization (LO3) a. A

B C D E Interest Interest Expense Balance of Book Value Paid (8% x 1/2 of Periodic Unamortized of Bonds Interest (9% x 1/2 of bond book Amortization Premium End of Period Year Period face value) value) (A ‒ B) (D ‒ C) ($800,000 + D) (at issue) $78,948 $878,948 1 1 $36,000 $35,158 $842 78,106 878,106 2 36,000 35,124 876 77,230 877,230 BALANCE SHEET

Assets

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

Revenues

Expenses

−

Net Income

b. 1-Jan Cash

878,948

30-Jun Cash

Premium on -36,000 bonds payable -842 -35,158 Record semiannual interest payment and premium amortization.

Bonds payable 800,000 Premium on bonds payable 78,948 Issued $800,000 face value, 9%, 20-year bonds for $878,948.

31-Dec Cash

TESTBANKSELLER.COM -36,000

Premium on bonds payable

-876

-35,124

Bond interest expense

35,158

-35,158

Bond interest expense

35,124

-35,124

Record semiannual interest payment and premium amortiztion.

P9-6A. Current Ratio, Quick Ratio, and Times-Interest-Earned Ratio (LO6) a. The President’s idea will not have any effect on the current ratio. The write-off did not alter either current assets or current liabilities (or the income statement). It simply reduced accounts receivable and the allowance account by an equal amount, and therefore the effect was to cancel each other out. In contrast the CFO’s idea will reduce current assets by $10 ($550 to $540) and reduce current liabilities by $10 ($280 to $270), therefore raising the current ratio to 2.0 b. The quick ratio will be affected since both the denominator and the numerator will be lower by $10. There will be no effect on the times-interest-earned ratio.

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PROBLEMS —SET B P9-1B. Accounts Payable and Notes Payable (LO1) BALANCE SHEET

Assets

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

Revenues

Expenses

−

Net Income

a. 15-Apr

Accounts payable

-6,000

Notes payable

6,000

Issued a 75-day, 8 percent note payable in payment of an account payable. 22-May Cash

30,000

Notes payable

30,000

Borrowed from bank for 60 days at 9 percent.

29-Jun Cash

-6,100

Notes payable

-6,000

Interest expense

100

-100

Interest expense

450

-450

-300

Interest expense

300

-300

-1,080

Interest expense

1,080

-1,080

-100

Paid note payable to Bennett Co. Interest expense: $6,000 x 0.08 x 75/360 = $100 13-Jul Inventory

12,000

Notes payable

12,000

Purchased merchandise and issued a note payable with interest at 10 percent for 90 days.

21-Jul Cash

-30,450

Notes payable

-30,000

-450

Paid note payable to bank. Interest expense: $30,000 x 0.09 x 60/360 = $450 2-Oct Cash

36,000

Notes payable

36,000

TESTBANKSELLER.COM

Borrowed from bank for 120 days at 12 percent. 11-Oct

Notes payable Accounts payable

-12,000 12,300

Defaulted on note payable Interest expense $12,000 x 0.10 x 90/360 = $300 b.

31-Dec

Accrued interest payable

1,080

Interest on October 2 note payable Interest expense: $36,000 x 0.12 x 90/360 = $1,080

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P9-2B. Interest Accruals (LO1) BALANCE SHEET

Assets

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

Revenues

Expenses

−

Net Income

a. Interest expense

216

-216

Interest expense

-63

-189

Interest expense

189

-189

Interest payable -216 Paid November 25 note ($540 - 216 = $324)

-324

Interest expense

324

-324

31-Dec

Interest payable 77 Accrue interest on $15,400, 9% note for 20 days Interest = $15,400 x 0.09 x 20/360 = $77

-77

Interest expense

-77

31-Dec

Interest payable 120 Accrue interest on $18,000, 10% note for 24 days Interest = $18,000 x 0.10 x 24/360 = 120

Interest expense

120

-120

31-Dec

Interest payable 216 -216 Accrue interest on 27,000, 8% note payable for 36 days. Interest = $27,000 x 0.08 x 90/360 = $540; 36/90 x $540 = $216

31-Dec

Interest payable 63 -63 Accrue interest on $16,800, 9% note payable for 15 days. Interest = $16,800 x 0.09 x 60/360 = $252; 15/60 x $252 = $63

b. 14-Feb Cash

-17,052

Notes payable

-16,800

Interest payable -63 Paid December 16 note ($252 - 63 = $189)

23-Feb Cash

-27,540

Notes payable

-27,000

TESTBANKSELLER.COM -120

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P9-3B. Noncontingent and Contingent Liabilities (LO1, LO5) a. Situation Number b. Type of Liability 1. Contingent

c. Accounting Treatment Disclose in a note (credit guarantees must be disclosed in a note, even if remote)

Contingent

Disclose in a note (reasonably possible)

Contingent

Disclose in a note (probable, not reasonably estimable)

Contingent

Record in accounts (probable, reasonably estimable)

Noncontingent

Contingent

Record in accounts (current liability) Neither record nor disclose (remote)

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P9-4B. Effective Interest Amortization (LO3) a. A B C D E Interest Interest Paid Expense Balance of Book Value (11% x 1/2 (12% x ½ of Periodic Unamortized of Bonds Interest of bond book Amortization Discount End of Period Year Period face value) value) (B ‒ A) (D ‒ C) ($720,000 ‒ D) (at issue) $41,148 $678,852 1 1 $39,600 $40,731 $1,131 40,017 679,983 2 39,600 40,799 1,199 38,818 681,182 BALANCE SHEET

Assets b. 31-Dec Cash

678,852

Liabilities Bonds payable Discount on bonds payable

INCO M E STATE M E NT +

Stockholders' Equity

Revenues

Expenses

−

Net Income

720,000 -41,148

Issued $720,000 face value, 11%, 10-year bonds for $678,852.

30-Jun Cash

Discount on -39,600 bonds payable 1,131 -40,731 Record semiannual interest payment and discount amortization.

Bond interest expense

40,731

-40,731

Bond interest expense

40,799

-40,799

TESTBANKSELLER.COM

31-Dec Cash

Discount on -39,600 bonds payable 1,199 -40,799 Record semiannual interest payment and discount amortiztion.

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P9-5B. Effective Interest Amortization (LO3)

Interest Period

Year (at Issue) 1

1 2

B C D E Interest Expense (4% Interest Paid x 1/2 of Balance of Book Value of (6% x 1/2 of bond book Periodic Unamortized Bonds End of face value) value Amortization Premium Period (A-B) (D-C) ($250,000+D) $55,970 $ 305,970 $ 7,500 $ 6,119 $ 1,381 $ 54,589 $ 304,589 $ 7,500 $ 6,092 $ 1,408 $ 53,181 $ 303,181

BALANCE SHEET

Assets

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

Revenues

Expenses

−

Net Income

b. 1-Jan Cash

305,970

Bonds payable Premium on bonds payable

250,000 55,970

Issued $250,000 face value, 6%, 15-year bonds for $305,970.

c. 30-Jun Cash

-7,500

Premium on bonds payable

-1,381 TE STBANKSELL-6,119 ER.COM

Bond interest expense

6,119

-6,119

Bond interest expense

6,092

-6,092

Record semiannual interest payment and premium amortization.

d. 31-Dec Cash

-7,500

Premium on bonds payable

-1,408

-6,092

Record semiannual interest payment and premium amortization.

P9-6B. Current Ratio, Quick Ratio, and Times-Interest-Earned Ratio (LO6) a. The president’s idea will not have any effect on the current ratio. The write-off did not alter either current assets or current liabilities (or the income statement). It simply reduced accounts receivable and the allowance account by an equal amount, and therefore the effect was to cancel each other out. In contrast, the CFO’s idea will reduce current assets by $20 ($1,100 to $1,080) and reduce current liabilities by $20 ($560 to $540), therefore raising the current ratio to 2.0 b. The quick ratio will be affected since both the denominator and the numerator will be lower by $20. There will be no effect on the times-interest-earned ratio.

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SERIAL PROBLEM: ANGEL CITY GREETINGS SP9. 1. Kate has been accruing $75 of interest expense each month, so that she will have a balance of $375 in her interest payable account at the beginning of May. The interest expense for the month of May is the same as the prior month, a total of $75. The total interest payment is $450. 2.

The pending lawsuit in considered a contingent liability. Contingent losses such as this lawsuit should be accrued as a liability on the balance sheet if the loss is probable and can be reasonably estimated. In this case neither criteria applies, therefore there is not a requirement that Kate accrue any amount for this lawsuit. Since the likelihood of a negative outcome for Kate is more than remote, she should disclose the details of the lawsuit in the notes to the financial statements.

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EXTENDING YOUR KNOWLEDGE REPORTING AND ANALYSIS EYK9-1. Financial Reporting Problem: Columbia Sportswear Company ($ in thousands) a. Current liabilities: $453,636 b. Accounts payable ($252,301) and accrued liabilities ($182,228) c. Accrued salaries, bonus, paid time off and other benefits ($79,457 out of $182,228) (See Note 9) d. Straight-line and deferred rent liabilities ($31,016 out of $48,735) (See Note 11)

EYK9-2. Comparative Analysis Problem: Columbia Sportswear Company vs. Under Armour, Inc a. Columbia $1,649,497 / $453,636 = 3.6 Under Armour $2,337,679 / $1,060,375 = 2.2 Columbia has a higher current ratio than Under Armour (3.6 vs. 2.2). Neither company appears to have any liquidity concerns based on this ratio. b. Columbia Under Armour

$560,643 TE/S$2,212,902 TBANKSE=L25.3% LER.COM $1,987,725 / $4,006,367 = 49.6%

Columbia uses a lower percentage of debt in its capital structure than does Under Armour. This implies Columbia is in a stronger long-term solvency position than is Under Armour.

EYK9-3. Business Decision Problem Financing the expansion by issuing $2,000,000 bonds produces the highest estimated earnings per share, $7.68, as compared with $7.27 for financing by a combination of bonds and common stock and $6.96 for financing exclusively with common stock.

Current before-tax income Additional income ($2,000,000 x 0.18) Bond interest expense: ($1,000,000 x 0.10; $2,000,000 x 0.10) Income before income tax Income tax at 40% Net income Common shares outstanding Earnings per share

1 $ 800,000 360,000

Alternatives 2 $ 800,000 360,000

3 $800,000 360,000

_ _______ 1,160,000 464,000 $ 696,000 100,000 $6.96

(100,000) 1,060,000 424,000 $ 636,000 87,500 $7.27

(200,000) 960,000 384,000 $576,000 75,000 $7.68

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EYK9-4. Financial Analysis Problem –Abbott Laboratories a. Current ratio: 2017: $20,147 / $8,912 = 2.26 2016: $26,776 / $6,660 = 4.02 2015: $14,155 / $9,186 = 1.54 b. Quick ratio: 2017: ($9,407+ 203 + 5,249) / $8,912 = 1.67 2016: ($18,620 + 155 + 3,248) / $6,660 = 3.31 2015: ($5,001 + 1,124 + 3,418) / $9,186 = 1.04 c. Both of the ratios have fluctuated between 2015 and 2017, with the ratios in 2016 being the highest. During the three-year period, the company’s current assets peaked in 2016 while its current liabilities were at their lowest that year.

CRITICAL THINKING EYK9-5. Financial Analysis on the Web: General Mills, Inc. a. $5,330.8 million b. $604.7/($604.7 + $7,642.9) = 7.3% c. Current ratio = $4,061.4/5,330.8 = 0.76; Quick ratio = ($766.1 + 1,430.1)/$5,330.8 = 0.41 d. $10,885.4million TESTBANKSELLER.COM e. $604.7 million (See Note 8)

EYK9-6. Accounting Communication Activity Mr. Salos, Bonds represent one way for you to raise capital to finance your company’s growth. The primary advantage of bonds over common stock is that you will not be giving up any ownership interest in your company with the bonds. Unlike common stock, bondholders do not receive voting rights. Another advantage of bonds is the tax deductibility of any interest payments. In contrast, dividends on common stock are not deductible by the paying corporation. There are many possibilities with regard to features that can be added to bonds. These include (1) security, where specific property is pledged as security, (2) convertibility, where the bond can be converted into common stock at the option of the bondholder, (3) a call feature that gives the bond issuer the right to redeem the bond early, and (4) a sinking fund provision that requires the borrower to retire a portion of its outstanding bonds on a regular schedule. Sincerely, Your Name

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EYK9-7. Accounting Ethics Case The president may have a valid concern about the disclosure of the lawsuit if the wording admits fault. However, wording of the disclosure must, at a minimum, state (a) that there is a lawsuit, (b) the amount of the lawsuit, and (c) the fact that the liability insurance was less than the lawsuit at the time of the alleged incident. The vice president of finance will face the following ethical problems if he follows the president's instructions: 1. He will compromise his professionalism by allowing generally accepted accounting principles (GAAP) to be violated. GAAP requires disclosure of lawsuits of this nature. 2. He will compromise his professional responsibility to the board of directors and stockholders of the corporation by not disclosing the lawsuit to the directors. There is probable cause to believe that the corporation will be liable for some amount of uninsured damages in the future and all concerned parties should be made aware of the situation.

EYK9-8. Corporate Social Responsibility Problem Student answers will vary depending on the content of the current year Corporate Social Responsibility Report. As of the writing of this text, Microsoft provides access to relevant and affordable education technologies to young people worldwide through their YouthSpark program, pairing computer science professionals with students in high schools around the country reaching 6,000 students, helping with disaster relief with Windows phones that allow free skype calls, , and donating of free software to students and teachers through Office 365 for Education., as well as offering Office 365 T Nonprofit Skype in the Classroom ESTBAtoNassist KSELnonprofit LER.Corganization. OM allows teachers to bring the world to their students with guest speakers and other students from around the world. Microsoft has committed to donating Cloud Service to 50,000 nonprofits and creating opportunities for 10 million youth to learn computing.

EYK9.9. Forensic Accounting Problem Certain red flags relating to fraudulent invoices are often present. One common red flag is a lack of details such as a telephone, fax, and tax identification or invoice number. Another common red flag is an invoice that lacks detailed descriptions of items ordered. Lastly, using a mail drop or residential address may also indicate a billing fraud scheme. All of these red flags should be investigated. Source: Joseph Wells, Principles of Fraud Examination

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EYK9-10. Working with the Takeaways - MICROSOFT a. Current ratio

2017 $159,851 / $64,527 = 2.48 2016 $139,660 / $59,357 = 2.35

b. Quick ratio

2017 ($7,663 +$125,318 + $19,792) / $64,527 = 2.37 2016 ($6,510 + $106,730 + $18,277) / $59,357 = 2.22

c. Times-interest-earned ratio 2017 ($21,204 + 1,945 + 2,222) / $2,222 = 11.4 2016 ($16,798 + 2,953 + 1,243) / $1,243 = 16.9 The current and quick ratios improved from 2016 to 2017, indicating a positive change in shortterm liquidity. The majority of Microsoft’s current assets are in the form of cash or short-term investments, providing increased evidence, combined with the current ratio of 2.48, that Microsoft has a strong liquidity position and is in no danger of being unable to pay its interest expense.

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Chapter 10 Stockholders’ Equity QUESTIONS 1.

A corporation is a legal entity created on the approval of the appropriate governmental authority. The right to conduct business as a corporation is a privilege granted by the state in which the corporation is formed. A formal document prepared by incorporators, articles of incorporation outline the basic structure and purpose of the firm, and the type and quantity of capital stock authorized. A corporate charter is an official document, usually issued by a state government, that approves the formation of a specific corporation under terms set forth in the related articles of incorporation.

ESTBelected ANKSE ER.COM stockholders that has ultimate The board of directors is aTgroup byLaLcorporation’s authority and responsibility for the overall management of the corporation. Corporate officers—usually a president, one or more vice presidents, a controller, a secretary, and a treasurer—are selected by the board of directors and are responsible for implementing the board’s policies and for day-to-day management of the corporation. Organization costs are usually incurred in organizing a corporation; they include attorney’s fees, fees paid to the state, and certain costs incurred in promoting the formation of the corporation. 2.

As a separate legal entity, a corporation is responsible for its own debts and can be sued in its own name. Stockholders are not liable for the debts and acts of a corporation. Therefore, the maximum loss a shareholder might incur is the amount of his or her investment in the corporation. This characteristic is considered a major positive factor in the corporation’s ability to raise capital from large numbers of investors.

Both proprietorship and partnership income are considered personal income of the owners and are reported on the owners’ individual income tax returns. Partnerships must file an information return, but no tax is assessed on the firm itself. Corporations, however, are separate legal and taxable entities and must file a federal income tax return and pay income taxes on their reported earnings. Any distribution of after-tax corporate net income is usually taxed again as personal dividend income of the stockholders.

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Par value stock is stock that has a face value printed on the stock certificate. Par value does not have any economic significance, but it may have legal significance. States may use par value to define (1) the minimum amount that must be paid in for a share of stock and/or (2) legal capital—the minimum amount of contributed capital that must remain in the corporation as a protection for creditors.

The preemptive right permits a shareholder to maintain a proportionate interest in a corporation. A common shareholder has the right to subscribe to new stock issues in the ratio of his or her current ownership interest to the total ownership interest. This feature is designed to prevent the dilution of a shareholder’s current stock holdings. It also prevents the act of selling stock at a price below market value from creating a wealth transfer to new stockholders.

Preferred stock usually takes priority over common stock in the receipt of a specified amount of dividends and in the distribution of assets if the corporation is ever liquidated. Preferred stock does not usually have voting rights, while common stock does. Typically, preferred stock has the following features: 1. Prior claims to dividends and to assets in liquidation. 2. Cumulative dividend rights. 3. No voting rights.

Preferred stock is similar to debt when: 1. 2. 3. 4. 5.

Dividends are cumulative Dividends are nonparticipating TESTBANKSELLER.COM It is callable It is convertible into bonds It has a preference to assets in liquidation

Preferred stock is similar to common stock when: 1. 2. 3. 4. 5. 8.

Dividends are not cumulative Dividends are fully participating It is not callable It is convertible into common stock It does not have a preference to assets in liquidation

Dividend arrearage on preferred stock is the aggregate amount of dividends on cumulative preferred stock that has not been declared to date. The amount of dividends in arrears and a current dividend must be paid to preferred stockholders before common stockholders can receive any dividends. In the example, preferred stockholders must receive $90,000 in dividends ($500,000 x 0.06 x 3 years = $90,000) before common stockholders receive any dividends.

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A corporation’s authorized stock is the maximum number of shares of stock it may issue. The authorized amounts and classes of stock are enumerated in the company’s charter when the corporation is formed. A corporation may later amend its charter to change the amount of authorized capital. Shares that have been sold and issued to stockholders are the company’s issued stock. Shares that have been sold and issued may be reacquired by the corporation as treasury stock; in this case, issued shares exceed outstanding shares.

10.

Sources of contributed capital include the initial issuance of preferred stock, the initial issuance of common stock and the sale of treasury stock for more than its cost.

11.

A forward stock split refers to the issuance of additional shares of a class of stock to the current stockholders in proportion to their ownership interests, accompanied by a proportionate reduction in the par or stated value of the stock. For example, a 2‒for‒1 stock split doubles the number of shares outstanding and halves the par or stated value of the shares. Consequently, there is no change in the amount of contributed capital associated with that class of stock. The major reason for a stock split is to reduce the per share market price of the stock.

12.

Treasury stock is a corporation’s issued stock that has been reacquired by the company. A corporation often purchases treasury stock for distribution to employees or officers under stock participation, profit-sharing, or stock option plans. On the balance sheet, treasury stock should be carried at its cost and is commonly shown as a deduction in deriving the total stockholders’ equity.

13.

The $2,400 increase should TEnot STbe BAshown NKSEon LLthe ERincome .COM statement as any form of income or gain. The $2,400 is properly treated as paid-in Capital from treasury stock transactions and is shown as such in the stockholders’ equity section of the balance sheet. The latter treatment is justified because treasury stock transactions are considered capital rather than operating transactions.

14.

To compute the return on common stockholders’ equity, the preferred dividend requirements must be subtracted from net income in the ratio’s numerator and the ratio’s denominator must exclude the preferred stockholders’ equity (the same equity as is used to compute the preferred stock’s book value per share). Return on common stockholders’ equity is computed, therefore, as (net income – preferred dividends)/average common stockholders’ equity.

15.

A stock dividend is the distribution of additional shares of a corporation’s own stock to its stockholders. Technically, a stock dividend in no way changes a shareholder’s relative ownership interest, because each shareholder owns the same fractional share of the corporation before and after the stock dividend.

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16.

To record a small stock dividend Retained Earnings is reduced for the market value of the stock to be issued, Stock Dividend Distributable is increased for the par (or stated) value of the shares, and Paid-in Capital in Excess of Par (or Stated) Value is increased for any excess of the stock’s market value over its par or stated value. In effect, the stock’s market value is transferred from retained earnings to paid-in capital. In contrast, the accounting for a large stock dividend transfers only the legal minimum (usually the par or stated value) from retained earnings to paid-in capital. The entry for a large stock dividend decreases Retained Earnings and increases Stock Dividend Distributable for the stock’s par or stated value. In both cases, when the dividend is issued, Stock Dividend Distributable is reduced and Common Stock is increased.

17.

The statement of retained earnings analyzes the Retained Earnings account for an accounting period. The statement begins with the retained earnings balance at the beginning of the period, reports the items causing retained earnings to change during the period, and ends with the period-end retained earnings balance. The statement of stockholders’ equity analyzes all components of stockholders’ equity for an accounting period. The statement begins with the beginning balances of the various stockholders’ equity components (including Retained Earnings), reports the items causing changes in these components, and ends with the period-end balances.

18.

a. Dividends Payable—Common Stock: Current liability.

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b. Stock Dividend Distributable: Paid-in capital section of stockholders’ equity. 19.

Dividend yield is computed by dividing a firm’s annual dividends per share by the current per share market price of its stock.

20.

$5.80 earnings per share x 0.40 dividend payout ratio = $2.32 annual dividends per share $2.32 x 50,000 common shares = $116,000 total dividends for the year

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SHORT EXERCISES SE10-1. Issuance of Common Stock (LO1) The financial effects of the stock sale between the two shareholders should not be reported in the accounts of Los Altos, Inc. Under the entity principle, no transactions involving the owners (unless the transaction also financially affects the corporation) should be accounted for in the books of the corporate entity.

SE10-2. Issuance of No-Par Common Stock (LO2) The entire proceeds from the issuance of no-par common stock is recorded as Common Stock (legal capital). In this case the proceeds $100,000 (10,000 shares x $10/share) would be recorded as Common stock – no-par value. To record the issuance of the $1 par value common stock would involve the creation of an Additional Paid-in Capital in Excess of Par Value account in the amount of $400,000 (($5 $1) x 100,000 shares). The Common stock - $1 par value account would be increased by $100,000 ($1 par value x 100,000 shares.)

SE10-3. Allocating LiquidationTBetween Common and Preferred Stockholders ESTBAN KSELLEStockholders R.COM (LO3) $900,000 must be distributed to the preferred stockholders, whereas only $100,000 would be distributed to the common stockholders.

SE10-4. Issuance of Common Stock (LO4) Common stock—$1 par value ($1 x 500,000 shares) Additional Paid-in capital in excess of par value (($10 - $1) x 500,000 shares)

500,000 4,500,000

SE10-5. Outstanding Shares (LO5) Shares outstanding: 4 x 10 million = 40 million Par value: $2/4 = $0.50

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SE10-6. Treasury Stock Purchase (LO6) BALANCE SHEET

Assets Cash

Liabilities

-200,000

INCO M E STATE M E NT +

Stockholders' Equity Treasury stock

Revenues

−

Expenses

-200,000

Purchase 10,000 shares treasury stock for $20/share.

SE10-7. Dividends Paid and Dividends in Arrears (LO3) Dividend in arrears: ($100 par value x 6%) x 100,000 = $600,000 Total dividend: $600,000 x 2 = $1,200,000 SE10-8. Return on Common Stockholders’ Equity (LO9) Return on common stockholders’ equity: Year 1: ($35,000 ‒ $3,000)/$1,200,000 = 2.67 percent Year 2: ($55,000 ‒ $3,000)/$1,500,000 = 3.47 percent The return on common stockholders’ equity increased from Year 1 to Year 2.

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SE10-9. Dividend Yield (LO9) Dividend yield: Year 1: $1.20/$19.50 = 6.2 percent Year 2: $1.20/$21.00 = 5.7 percent

The dividend yield declined from Year 1 to Year 2.

SE10-10. Dividend Payout Ratio (LO9) Dividend payout: Year 1: $1.20/$1.90 = 63.2 percent Year 2: $1.20/$2.05 = 58.5 percent The dividend payout declined from Year 1 to Year 2. SE10-11. Change in Stockholders’ Equity (LO8) Common stock Paid-in capital in excess of par value Treasury stock Net income Dividends Total change in stockholders’ equity

$ 5,000 195,000 (15,000) 120,000 (25,000) $280,000

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Net Income

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EXERCISES—SET A E10-1A. Dividend Distribution (LO7) Distribution to Preferred Common $60,000

a. $50 par value x 6 percent x 20,000 shares Balance to common Per share $ 60,000/20,000 shares $100,000/80,000 shares

$100,000 $3.00 $1.25

b. $50 x 6 percent x 20,000 x 2 years Balance to common Per share $120,000/20,000 shares $ 40,000/80,000 shares

$120,000 $40,000 $6.00 $0.50

E10-2A. Share Issuances for Cash (LO2, LO4) BALANCE SHEET

Assets

INCO M E STATE M E NT

TESTB ANStockholders' KSELLEquity ER.COM Revenues +

Liabilities

−

Expenses

a. Cash

544,000

Preferred stock Paid-in capital in excess of par value-preferred stock

400,000

144,000

Issuance of 8,000 shares of $50 par value preferred stock at $68/share

Cash

No-par value common stock

120,000

Issuance of 12,000 shares of no-par value common stock for $10/share.

b. Cash

120,000

Common stock Paid-in capital in excess of stated value

60,000

Issuance of 12,000 shares of no-par value common stock, stated value $5, for $10/share.

c. Cash

120,000

Common stock Paid-in capital in excess of par

12,000 108,000

Issuance of 12,000 shares of $1 par value common stock for $10/share.

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Net Income

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E10-3A. Forward Stock Split (LO5) a. Immediately after the stock split, 800,000 shares of $10 par value common stock are issued and outstanding. b. The stock split does not change the Common Stock account balance. The account balance is $8,000,000 just before and immediately after the stock split. c. The stock split does not change the Paid-in Capital in Excess of Par Value account. The account balance is $3,400,000 just before and immediately after the stock split. d. Because a stock split does not change any account balance, no entry is required to record a stock split. A memorandum entry is prepared to note the change in par value.

E10-4A. Treasury Stock (LO4, LO6) BALANCE SHEET

Assets a. Cash

Cash

Liabilities

425,000

INCO M E STATE M E NT +

Stockholders' Equity Common stock Paid-in capital in excess of par value - C/S

Revenues

−

Expenses

125,000

300,000

Issuance of 25,000 shares of $5 par value common stock at $17/share. 8 percent $50 468,000 preferred stock 300,000 Paid in capital in excess of par value - P/S 168,000

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Issuance of 6,000 shares of $50 par value preferred stock at $78/share. Cash

-60,000

Treasury stock

-60,000

Acquired 3,000 shares of common stock at $20/share.

b. Cash

52,000

Treasury stock Paid in capital from treasury stock

40,000

12,000

Sold 2,000 shares of treasury stock originally purchased at $20/share for $26/share.

c. Cash

19,000

Treasury stock Paid-in capital from treasury stock

20,000

-1,000

Sold 1,000 shares of treasury stock originally purchased at $20/share for $19/share.

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Net Income

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E10-5A. Cash Dividends (LO7) BALANCE SHEET

Assets

Liabilities

Dividends payable preferred stock Dividends payable common stock

INCO M E STATE M E NT +

18,000

Stockholders' Equity

Retained earnings

Revenues

−

Expenses

-106,000

88,000

Declaration of $3 dividend on preferred stock and $2,20 on common stock. ($3 x 6,000 = $18,000; $2,20 x 40,000 = $88,000)

b. Cash

-106,000

Dividends payable preferred stock Dividends payable common stock

-18,000

-88,000

Payment of dividends on preferred and common stock.

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10-9

Net Income

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E10-6A. Statement of Retained Earnings (LO8) SHEPLER CORPORATION Statement of Retained Earnings For Year Ended December 31 Retained earnings, January 1 Add: Net income Less: Cash dividends declared Stock dividends declared Retained earnings, December 31

$324,000 193,000 $75,000 30,000

105,000 $412,000

E10-7A. Conversion of Preferred Stock into Common Stock (LO3) Common stock issued = 12,000 x 20 = 240,000 shares BALANCE SHEET

Assets

Liabilities

INCO M E STATE M E NT

Stockholders' Equity

Preferred stock

-1,200,000

Common stock Additional paidin capital in excess of par value

120,000

Revenues

−

Expenses

1,080,000

Comverson of 12,000 shares of $100 par value preferred stock into 240,000 shares of $0.50 par value common stock.

TESTBANKSELLER.COM E10-8A. Reverse Stock Split (LO5) a. 20,000,000/10 = 2,000,000 shares outstanding b. $0.01 x 10 = $0.10 par value per share c. Only a memorandum entry is necessary to disclose the new shares outstanding and the par value

E10-9A. Return on Common Stockholders’ Equity, Dividend Yield, and Dividend Payout (LO9) a. Return on common stockholder equity Year 1: ($55,000 - $5,000)/$2,000,000 = 2.3 percent Year 2: ($75,000 - $5,000)/$2,100,000 = 3.3 percent b. Dividend yield Year 1: $1.50/$29.50 = 5.1 percent Year 2: $1.60/$30.00 = 5.3 percent c. Dividend payout Year 1: $1.50/$2.90 = 51.7 percent Year 2: $1.60/$2.95 = 54.2 percent

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Net Income

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E10-10A. Characteristics of a Corporation (LO1) a. Advantage (A) b. Disadvantage (D) c. Disadvantage (D) d. Advantage (A)

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EXERCISES—SET B E10-1B. Dividend Distribution (LO7) Distribution to Preferred Common $–0– $–0–

a. Year 1: Year 2: Arrearage from Year 1 (15,000 shares x $50 x 8 percent) Current year dividend (15,000 shares x $50 x 8 percent) Balance to common Total for Year 2

$ 60,000

Year 3: Current year dividend (15,000 shares x $50 x 8 percent)

60,000 ___ ____ $120,000

$160,000 $160,000

$ 60,000

$–0–

b. Year 1: Year 2: Current year dividend (15,000 shares x $50 x 8 percent) Balance to common

$ 60,000 $220,000

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Year 3: Current year dividend (15,000 shares x $50 x 8 percent)

$ 60,000

$–0–

E10-2B. Cash and Noncash Share Issuances (LO4) BALANCE SHEET

Assets

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity Retained earnings

Aug. 1

Common stock Paid-in capital in excess of par value

-9,600

Revenues

Expenses

−

Organization costs

9,600

8,000

1,600

Issued 800 common shares for legal services valued at $9,600.

Aug. 15 Cash

75,000

Common stock Paid-in capital in excess of par value

50,000

25,000

Issued 5,000 shares of $10 par value common stock for $75,000 cash.

Oct. 15 Land

Common s t oc k Paid-in capital in excess of par value

48,000

30,000

18,000

Issued 3,000 shares of $10 par value common stock for land valued at $48,000.

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Net Income -9,600

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E10-3B. Forward Stock Split (LO5) a. Immediately after the 3-for-2 stock split, Oxford Company has 375,000 shares of $10 par value common stock [250,000 x (3/2) = 375,000] issued and outstanding. b. The balance in the Common Stock account is unchanged by the stock split; the balance remains at $3,750,000 (375,000 shares at $10 par value per share). c. The major reason for a corporation to split its stock is to reduce the per share market price of the stock and, therefore, improve the stock's marketability.

E10-4B. Stock Issuance and Treasury Stock (LO4, LO6) a. Shares originally issued: $437,000/$19 = 23,000 shares b. Par value of shares issued: $46,000/23,000 = $2 per share c. Shares of treasury stock acquired: $77,000/$22 = 3,500 shares d. Shares of treasury stock sold: $52,800/$22 = 2,400 shares e. Per share of treasury stock sold: $62,400/2,400 shares = $26 per share.

E10-5B. Cash and Stock Dividends (LO7) BALANCE SHEET

Assets

Liabilities

TEST+BAStockholders' NKSELEquity LER.COM Revenues

= Dividends payable

INCO M E STATE M E NT

47,000

Retained earnings

−

Expenses

-47,000

Declared dividend of $1.90 per share ( $1.90 x 25,000 shares = $47,000). Retained earnings Stock dividend distributable Paid-in capital in excess of par value

-35,000 10,000

25,000

Declared 4 percent stock dividend on 25,000 shares (0.04 x 25,000 = 1,000 shares); current market value is $35/share ($35 x 1,000 = $35,000)

c. Cash

-47,000

Dividends payable

-47,000

Paid cash dividend.

Stock dividend distributable

-10,000

Common stock

10,000

Issued stock for 4 percent stock dividend.

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Net Income

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E10-6B. Statement of Retained earnings (LO8) SCHAUER CORPORATION Statement of Retained Earnings For Year Ended December 31 Retained earnings, January 1 Add: Net income Less: Cash dividends declared Stock dividends declared Retained earnings, December 31

$347,000 94,000 $35,000 28,000

63,000 $378,000

E10-7B. Conversion of Preferred Stock into Common Stock (LO3) Common stock issued = 20,000 shares of preferred stock x 40 = 800,000 shares of common BALANCE SHEET

Assets

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity Preferred stock

-1,000,000

Common stock Additional paidin capital in excess of par value

800,000

Revenues

−

Expenses

TESTBANKSELLE200,000 R.COM

Comverson of 20,000 shares of $50 par value preferred stock into 800,000 shares of $1.00 par value common stock.

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Net Income

TESTBANKSELLER.COM

E10-8B. Reverse Stock Split (LO5) a. 50,000,000/20 = 2,500,000 shares outstanding b. $0.10 x 20 = $2.00 par value per share c. Only a memorandum entry is necessary to disclose the new shares outstanding and new par value. E10-9B. Return on Common Stockholders’ Equity, Dividend Yield, and Dividend Payout (LO9) a. Return on common stockholder equity Year 1: ($110,000 - $15,000)/$4,000,000 = 2.38 percent Year 2: ($150,000 - $15,000)/$4,200,000 = 3.21 percent b. Dividend yield Year 1: $3.00/$58.00 = 5.17 percent Year 2: $3.20/$59.50 = 5.38 percent c. Dividend payout Year 1: $3.00/$5.80 = 51.7 percent Year 2: $3.20/$5.90 = 54.2 percent

E10-10B. Characteristics of a Corporation (LO1) a. Disadvantage (D) b. Advantage (A) TESTBANKSELLER.COM c. Advantage (A) d. Advantage (A)

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PROBLEMS—SET A P10-1A. Dividend Distribution (LO7)

a. Year 1

Year 2

Year 3

b. Year 1

Year 2

Year 3

Preferred $0

Preferred Common Arrearage on preferred [7 % x (20,000 x $60)] Current year on preferred [7% x (20,000 x $60)] Remainder to common Total distribution Per share Preferred ($168,000/20,000) Common ($15,000/100,000)

Dividend Distribution Preferred Common Common per share per share $0 $0 $0

$ 84,000 84,000 $168,000

$15,000 $15,000 $8.40 $0.15

Current year on preferred [7% x (20,000 x $60)] $ 84,000 Remainder to common TESTBANKSELLER.COM$116,000 Per share Preferred ($84,000/20,000) Common ($116,000/100,000)

Preferred Common

$4.20 $1.16

$0 $0

Arrearage on preferred [7 % x (20,000 x $60)] Per share Preferred ($84,000/20,000) Common Arrearage on preferred [7% x (20,000 x $60)] Partial current year on preferred Total distribution Per share Preferred ($150,000/20,000) Common

$ 84,000 $4.20 $0

$ 84,000 66,000 $150,000 $7.50 $0

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P10-2A. Stockholders’ Equity: Transactions and Balance Sheet Presentation (LO4) a. BALANCE SHEET

Assets Apr. 1 Cash

= 1,200,000

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity Common Stock Paid-in capital in excess of par value - CS

Revenues

Expenses

−

Net Income

400,000

800,000

Issued 80,000 shares of $5 par value common stock at $15 per share. Retained earnings

Apr. 3

Common Stock Paid-in capital in excess of par value - CS

Organization costs

-31,000

31,000

10,000

21,000

Issued 2,000 shares of $5 par value common stock for organization services valued at $31,000.

Apr. 8 Equipment

48,000

Common Stock Paid-in capital in excess of par value - CS

15,000

33,000

Issued 3,000 shares of $5 par value common stock for equipment valued at $48,000.

Apr. 20 Cash

6 Percent preferred stock Paid-in capital in excess of par value - PS

330,000

300,000

30,000

Issued 6,000 shares of $50 par value preferred stock at $55 per share.

TESTBANKSELLER.COM b. Stockholders’ Equity Paid-in Capital 6 Percent preferred stock, $50 par value, 25,000 shares authorized; 6,000 shares issued and outstanding Common stock, $5 par value, 200,000 shares authorized; 85,000 shares issued and outstanding Additional Paid-in capital Paid-in capital in excess of par value— Preferred stock Paid-in capital in excess of par value— Common stock Total Paid-in Capital Retained earnings Total Stockholders’ Equity

$300,000

425,000

$ 725,000

30,000 854,000

884,000 1,609,000 49,000 $1,658,000

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-31,000

TESTBANKSELLER.COM

P10-3A. Stockholders’ Equity: Transactions and Balance Sheet Presentation (LO4, LO6) a. and b. DATE

STOCKHOLDERS' EQUITY Paid-in Paid-in Paid-in 8% Preferred Common capital in capital in capital from Stock $25 par Stock $10 par excess of excess of par Treasury Retained value value par - PS - CS stock Earnings

Jan. 1 balances Jan. 10 Jan. 23 Mar. 14 Jul.15 Nov. 15 Dec. 31 Dec. 31 balances

170,000

500,000 280,000

80,000

68,000

200,000 196,000

Treasury Stock

270,000

8,000

152,000 (76,000)

5,000

(19,000)

48,000 59,000

250,000

780,000

116,000

396,000

13,000

329,000

57,000

c. Stockholders’ Equity Paid-in capital TESTBANKSELLER.COM 8 percent preferred stock, $25 par value, 50,000 shares authorized; 10,000 shares issued and outstanding $250,000 Common stock, $10 par value, 200,000 shares authorized; 78,000 shares issued, of which 3,000 shares are in treasury 780,000 Additional Paid-in capital Paid-in capital in excess of par value— Preferred stock 116,000 Paid-in capital in excess of par value— Common stock 396,000 Paid-in capital from Treasury stock 13,000 Total Paid-in capital Retained earnings Less: Treasury stock (3,000 common shares) at cost Total Stockholders’ Equity

$1,030,000

525,000 1,555,000 329,000 1,884,000 57,000 $1,827,000

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P10-4A. Stockholders’ Equity: Transactions and Balance Sheet Presentation (LO4, LO5, LO6) a. and b. DATE

STOCKHOLDERS' EQUITY Common Stock $15 par Paid-in 7% Preferred value (after capital in Stock $100 Jan.12 $5 par excess of par value value) par - PS

Jan. 1 balances Jan. 12 Mar. 31 Jun. 1 Sep. 1 Oct. 12 Nov. 21 Dec. 28 Dec. 31 Dec. 31 balances

500,000

600,000

24,000

25,000 50,000

Paid-in Paid-in capital in capital from excess of par Treasury Retained - CS stock Earnings 360,000

Treasury Stock

325,000

18,000 10,000

25,000

3,000

100,000 (15,000)

(1,200)

(12,000)

30,000 83,000

550,000

650,000

34,000

408,000

1,800

408,000

73,000

1 3-for-1 common stock split - no adjustment 2 40 bonds x 125 common shares x $5 par value = $25,000 TExS$100 TBApar NKvalue SEL LER.COM 3 500 preferred shares = $50,000 4 10,000 common shares x $10 per share 5 1,500 treasury shares at $10 cost per share = $15,000 6 5,000 common shares x $5 par value = $25,000 7 1,200 treasury shares x $10 cost per share = $12,000

c. Stockholders’ Equity Paid-in capital 7 Percent preferred stock, $100 par value, 20,000 shares authorized; 5,500 shares issued and outstanding Common stock, $5 par value, 300,000 shares authorized; 130,000 shares issued, of which 7,300 shares are in treasury Additional Paid-in capital Paid-in capital in excess of par value—Preferred stock Paid-in capital in excess of par value—Common stock Paid-in capital from Treasury stock Total Paid-in capital Retained earnings

$550,000

650,000 34,000 408,000 1,800

Less: Treasury stock (7,300 common shares) at cost Total Stockholder's Equity

$1,200,000

443,800 1,643,800 408,000 2,051,800 73,000 $1,978,800

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P10-5A. Stockholders’ Equity: Analyze Information from Comparative Data (LO4, LO6) 1. Apparently, 4,000 shares of preferred stock were issued at $70 per share. BALANCE SHEET

Assets

Cash

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity 8% Preferred stock Paid in excess of par Preferred stock

280,000

Revenues

−

Expenses

Net Income

200,000

80,000

Issued 4,000 shares of preferred stock at $70/share.

2. Apparently, 8,000 previously unissued shares of common stock were issued at $29 per share. BALANCE SHEET

Assets Cash

Liabilities

INCO M E STATE M E NT +

232,000

Stockholders' Equity Common stock Paid in excess of stated value common stock

Revenues

−

Expenses

160,000

72,000

Issued 8,000 shares of common stock at $29/share.

STBANstock KSELwere LERsold .COatM$31 per share. 3. Apparently, 7,000 sharesTofEtreasury BALANCE SHEET

Assets

Cash

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity Treasury stock common Paid in capital from Treasury stock

217,000

Revenues

−

Expenses

196,000

21,000

Sold 7,000 shares of treasury stock, which had been acquired for a total of $196,000, at $31 per share.

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P10-6A. Stockholders’ Equity Transactions (LO4, LO5, LO6) a. and b. DATE

STOCKHOLDERS' EQUITY Common Stock $1 par 8% Preferred value ($0.50 Stock $100 after stock par value split)

Jan. 1 balance Jan. 1 Mar. 31 Jun. 1 Sept. 1 Nov. 21 Dec. 28 Dec. 31 Dec. 31 balances

400,000

40,000

Paid-in capital in excess of par - PS 200,000

5,000 30,000

Paid-in Paid-in capital in capital from excess of par Treasury Retained - CS stock Earnings 800,000

Treasury Stock

550,000

0 1 2 3

78,000 15,000 200,000

2,500

107,500 3,000

(20,000) 103,000

430,000

47,500

215,000

985,500

3,000

653,000

180,000

1 Memorandum - common stock split 2 for 1; issued shares increased to 80,000 and par value reduced to $0.50 per share. 2 Conversion of bonds TEinto ST10,000 BANKshares SEL(80 LExR125 .C=O10,000) M of $0.50 par value common stock. 3 Issued 300 shares of preferred stock in exchange for equipment with a FMV of $45,000. 4 Purchase of 10,000 shares of own common stock at $20 per share. 5 Issued 5,000 shares of $0.50 par value common stock at $22 per share. 6 Sold 1,000 shares of treasury stock originally purchased at $20 per share for $23 per share. 7 Net income for the year $103,000.

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TESTBANKSELLER.COM

P10-7A. The Stockholders’ Equity Section of the Balance Sheet (LO4, LO5, LO6) Stockholders’ Equity Paid-in capital 8 Percent preferred stock, $100 par value, 20,000 shares authorized; 4,300 shares issued and outstanding Common stock, $0.50 par value, 100,000 shares authorized; 95,000 shares issued, of which 9,000 shares are in treasury Additional Paid-in capital Paid-in capital in excess of par value—Preferred stock Paid-in capital in excess of par value—Common stock Paid-in capital from Treasury stock Total Paid-in capital Retained earnings

$430,000

47,500 215,000 985,500 3,000

Less: Treasury stock (9,000 common shares) at cost Total Stockholder's Equity

$ 477,500

1,203,500 1,681,000 653,000 2,334,000 180,000 $2,154,000

TESTBANKSELLER.COM

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TESTBANKSELLER.COM

PROBLEMS—SET B P10-1B. Dividend Distribution (LO7)

Preferred a. Year 1

Year 2

Year 3

b. Year 1

Year 2

Year3

Current year on preferred [6% x (18,000 x $50)] Remainder to common Per share Preferred ($54,000/18,000) Common ($9,000/90,000) Preferred Common

Dividend Distribution Preferred Common per share

$ 54,000 $

9,000 $3.00 $0.10

$0 $0

Arrearage on preferred [6% x (18,000 x $50)] $ 54,000 Current year on preferred [6% x (18,000 x $50)] 54,000 Remainder to common $270,000 Total distribution $108,000 $270,000 Per share TESTBANKSELLER.COM Preferred ($108,000/18,000) Common ($270,000/90,000)

Preferred Common Arrearage on preferred [6% x (18,000 x $50)] Current year on preferred [6% x (18,000 x $50)] Common Total distribution Per share Preferred ($108,000/18,000) Common

Common per share

$6.00 $3.00

$0 $0

$ 54,000 54,000 $108,000

Current year on preferred [6% x (18,000 x $50)] $ 54,000 Remainder to common Per share Preferred ($54,000/18,000) Common ($135,000/90,000)

$0 $0

$6.00 $0

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P10-2B. Stockholders’ Equity: Transactions and Balance Sheet Presentation (LO4) a. BALANCE SHEET

Assets Jul.1 Cash

Liabilities

527,000

INCO M E STATE M E NT +

Stockholders' Equity Common stock Paid-in capital in excess of par value - CS

Revenues

−

Expenses

310,000

217,000

Issued 31,000 shares of common stock at $17 per share

Jul. 12 Equipment

63,000

Common stock Paid-in capital in excess of par value - CS

35,000

28,000

Issued 3,500 shares of common stock for equipment valued at $63.000.

Jul. 15 Cash

$4 Preferred stock

220,000

Issued 5,000 shares of preferred stock at $44 per share.

b. Stockholders’ Equity Paid-in capital $4 Preferred stock, no-par value, 50,000 shares authorized; 5,000 shares issued and TESoutstanding TBANKSELLER.COM Common stock, $10 par value, 100,000 shares authorized; 34,500 shares issued and outstanding Additional Paid-in capital Paid-in capital in excess of par value—Common stock Total Paid-in capital Retained earnings Total Stockholders’ Equity

$220,000 345,000

$565,000 245,000 810,000 38,000 $848,000

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Net Income

TESTBANKSELLER.COM

P10-3B. Stockholders’ Equity: Transactions and Balance Sheet Presentation (LO4, LO6) a and b. DATE

STOCKHOLDERS' EQUITY

8% Preferred Common stock stock Jan. 1 balances Jan. 5 Jan. 18 Mar. 12 Jul. 17 Oct. 1 Dec. 31 Dec. 31 balances

750,000 50,000

Paid in capital in excess of par value PS

Paid in Paid in capital in capital from excess of par Treasury Retained value - CS stock earnings 0

600,000 70,000

Treasury stock

346,000

56,000 (14,000) (7,000)

3,000 (500) 125,000

50,000 72,500

125,000

800,000

50,000

670,000

2,500

418,500

35,000

1 Issued 10,000 shares of common stock at $12 per share. 2 Purchased 4,000 shares of common stock for treasury at $14 per share. 3 Sold 1,000 shares of treasury stock at $17 per share. 4 Sold 500 shares of treasury stock originally purchased at $14 per share for $13 per share. 5 Issued 5,000 shares TEofSpreferred TBANKstock SELatL$35 ERper .Cshare. OM 6 Net income for the year $72,500

c. Stockholders’ Equity Paid-in capital 8 Percent preferred stock, $25 par value, 50,000 shares authorized, 5,000 shares issued and outstanding. Common stock, $5 par value, 350,000 shares authorized; 160,000 shares issued; 2,500 shares in treasury. Additional Paid-in capital Paid-in capital in excess of par value— Preferred stock Paid-in capital in excess of par value—Common stock Paid-in capital from Treasury stock Total Paid-in capital Retained earnings

$125,000 800,000 50,000 670,000 2,500

Less: Treasury stock (2,500 shares) at cost Total Stockholders’ Equity

$ 925,000

722,500 1,647,500 418,500 2,066,000 35,000 $2,031,000

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P10-4B. Stockholders’ Equity: Transactions and Balance Sheet Presentation (LO4, LO5, LO6) a. and b. DATE

STOCKHOLDERS' EQUITY

8% Preferred Common stock stock Jan. 1 balances Jan. 15 Jan. 20 Jan. 31 May. 18 Jun. 1 Sep. 1 Oct. 12 Dec. 22 Dec. 28 Dec. 31 Dec. 31 balances

350,000 50,000

500,000

Paid in capital in excess of par value PS

Paid in Paid in capital in capital from excess of par Treasury Retained value - CS stock earnings

70,000 12,000

385,000

80,000 10,000

64,000 8,500

20,000

238,000

45,000 (16,200)

2,700 25,000

Treasury stock

4,500 (2,200)

(19,800) 85,000

425,000

610,000

86,500

477,500

500

323,000

1 2 3 4 5 6 7 8 9 10

9,000

1 Issued 1,000 shares of preferred stock at $62 per share. 2 Issued 4,000 shares of common stock at $36 per share. ES500 TBshares ANK(20 SEx L25L=E500) R.ofC$20 OMpar value common stock. 3 Conversion of bondsTinto 4 Memorandum: Common stock split 2 for 1; authorized shares increase to 100,000 and par value $10. 5 Issued 2,000 shares of common stock in exchange for equipment with a fair market value of $40,000. 6 Purhcased 2,500 shares of common stock at $18 per share. 7 Sold 900 shares of treasury stock originally purchased at $18/share for $21/share. 8 Issued 500 shares of preferred stock at $59 per share. 9 Sold 1,100 shares of treasury stock originally purchased at $18/share for $16/share. 10 Net income for the year $85,000.

c. Stockholders’ Equity Paid-in capital 8 Percent preferred stock, $50 par value, 10,000 shares authorized, 8,500 shares issued and outstanding. Common stock, $10 par value, 100,000 shares authorized; 61,000 shares issued; 500 shares in treasury. Additional Paid-in capital Paid-in capital in excess of par value— Preferred stock Paid-in capital in excess of par value—Common stock Paid-in capital from Treasury stock Total Paid-in capital Retained earnings

$425,000 610,000 86,500 477,500 500

Less: Treasury stock (500 shares) at cost Total Stockholders’ Equity

$1,035,000

564,500 1,599,500 323,000 1,922,500 9,000 $1,913,500

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P10-5B. Stockholders’ Equity: Transaction Descriptions from Account Data (LO4, LO6) BALANCE SHEET

Assets 1 Cash

= 80,600

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity Preferred stock Paid-in capital in excess of par P/S

Revenues

−

Expenses

65,000

15,600

Issued 1,300 preferred shares at $62 per share. Number of shares is calculated as $65,000 / $50 par value = 1,300 shares. Issue price is calculated from increase to cash, $80,600 / !,300 shares = $62 per share.

35,000

Common stock

35,000

Issued 3,500 common shares at par value of $10 per share. ( $35,000 / $10)

3 Land

93,000

Common Stock Paid in capital in excess of par C/S

60,000

33,000

Issued 6,000 common shares in exchange for land with a fair market value of $93,000. Number of shares is calculated as $60,000 / $10 par value = 6,000

4 Cash

-12,800

Treasury stock

12,800

Purchased 800 shares of common stock at $16 per share ($12,800 / 800 shares = $16 per share)

5 Cash

6,080

Treasury stock Paid in capital from treasury stock

-5,120

960

Sold 320 shares of the purchased treasury stock ($5,120 / $16 original cost = 320) for $19 per share ($6,080 / 320 = $19 per share)

TESTBANKSELLER.COM

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Net Income

TESTBANKSELLER.COM

P10-6B. Stockholders’ Equity Transactions (LO4, LO5, LO6) a. and b. DATE

9% Preferred stock, $100 Common par stock Jan. 1 balances Jan. 1 Mar. 31 Jun. 1 Sep. 1 Nov. 21 Dec. 28 Dec. 31 Dec. 31 balances

600,000

80,000

STOCKHOLDERS' EQUITY Paid in capital in Paid in Paid in excess of capital in capital from par value - excess of par Treasury Retained PS value - CS stock earnings 400,000

12,500 20,000

800,000

750,000

Treasury stock 0

90,500 10,000 200,000

5,000

105,000 3,000

(20,000) 200,000

620,000

97,500

410,000

995,500

3,000

950,000

180,000

1 Memorandum - Common stock split 2 for 1; issued shares increased to 80,000 and par value reduced to $1.00 per share. 2 Conversion of bonds into 12,500 shares (100 x 125 = 12,500) of $1.00 par value sommon stock. 3 Issued 200 shares of preferred stock in exchange for equipment with a fair market value of $30,000. 4 Purchased 10,000 shares TESof TBown ANcommon KSELstock LERat.$20 COper M share. 5 Issued 5,000 shares of $1.00 par value common stock at $22 per share. 6 Sold 1,000 shares of treasury stock originally purchased at $20 per share for $23 per share.

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P10-7B. The Stockholders’ Equity Section of the Balance Sheet (LO4, LO5, LO6) Stockholders’ Equity Paid-in capital 9 Percent preferred stock, $100 par value, 20,000 shares authorized, 6,200 shares issued and outstanding. Common stock, $1.00 par value, 100,000 shares authorized; 97,500 shares issued; 9,000 shares are in the treasury. Additional Paid-in capital Paid-in capital in excess of par value— Preferred stock Paid-in capital in excess of par value—Common stock Paid-in capital from Treasury stock Total Paid-in capital Retained earnings

$620,000

97,500 410,000 995,500 3,000

Less: Treasury stock (9,000 common shares) at cost Total Stockholders’ Equity

$ 717,500

1,408,500 2,126,000 950,000 3,076,000 180,000 $2,896,000

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SERIAL PROBLEM: ANGEL CITY GREETINGS SP10. 1. The major preferences associated with preferred stock are (a) liquidation and (b) dividends. One important consideration in this case has to do with voting. Common stockholders have the right to vote, whereas this right is not usually present with preferred stock. Since Taylor is not interested in voting, but does want a steady income from dividends, preferred shares appear to be the best choice. 2. BALANCE SHEET

Assets Cash

Liabilities

INCO M E STATE M E NT +

5,000

Stockholders' Equity Preferred stock

Revenues

−

Expenses

Net Income

5,000

3. With a cash dividend, the stockholder receives cash for each share they hold. In contrast, with a stock dividend the shareholder does not receive any cash. Instead of cash, the stockholder receives a proportionate amount of new stock, depending on the terms of the stock dividend. For example, with a ten percent stock dividend, the shareholder will receive one new share for every ten shares they hold. Because every common shareholder receives the same percentage of new shares, the relative ownership percentage does not change, nor does the shareholder’s wealth, since each new share TESTBANKSELLER.COM will be worth a proportionately smaller amount. Since Kate is the only shareholder, it does not make any sense to pay herself a stock dividend. 4. BALANCE SHEET

Assets

Cash

Liabilities

-1,300

INCO M E STATE M E NT +

Stockholders' Equity Retained earnings Common dividend Retained earnings Preferred dividend

Revenues

−

Expenses

-1,000

-300

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ANGEL CITY GREETINGS Statement of Retained Earnings For Month Ended August 31 Retained earnings, August 1 $15,000 Add: Net income 1,500 16,500 Less: Dividends 1,300 Retained earnings, August 31 $15,200

Stockholders’ Equity August 31 Preferred stock (50 shares issued, 6% cumulative) Common stock (5,000 shares authorized, 500 shares issued and outstanding) Paid-in capital in excess of par value – Common stock Retained earnings Total Stockholders’ Equity

5,000 500 9,500 15,200 $30,200

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EXTENDING YOUR KNOWLEDGE REPORTING AND ANALYSIS EYK10-1. Financial Reporting Problem: Columbia Sportswear a. 125,000,000 are authorized at December 31, 2017. b. 69,995 / 125,000 = 56.0% c. None d. 665,000 common shares were repurchased for $35,542,000. e. $0.62 in 2015, $0.69 in 2016, and $0.73 in 2017.

EYK10-2. Comparative Analysis Problem: Columbia Sportswear vs. Under Armour a. Columbia Sportswear Under Armour

($105,123 - $0)/[($1,581,511 + $1,652,259)/2] = 6.5% ($(48,260) - $0)/[($2,018,642 + $2,030,900)/2] = (2.4)%

b. Columbia Sportswear Under Armour

$0.73/$1.49 = 49.0% N/A No dividends were paid

c. Based on these two measures Columbia did a better job for its shareholders in 2017. ESTBAstockholders’ NKSELLERequity .COMof 6.5 percent compared to Under Columbia had a return onTcommon Armour’s loss of 2.4 percent. Columbia paid out 49 percent of its earnings as dividends whereas Under Armour did not pay any dividends.

EYK10-3. Business Decision Case a. The number of shares that a corporation is authorized to issue is specified in its articles of incorporation. If the amount was less than 15.6 million, then there would not be any need to get additional approval for the new stock issuance. However, if the new issuance exceeded the amount authorized, then the stockholders and the board of directors would need to approve a new higher level of authorized shares. b. Some of the reasons Egghead may have preferred equity over debt as a method of financing include: 1. Debt requires periodic interest payments, whereas dividends are at the discretion of the board of directors 2. Debt has a fixed maturity date at which time it will need to be repaid. 3. Excessive debt could cause Egghead to appear risky.

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EYK10-4. Financial Analysis Problem a. Gillette Company's return on common stockholders' equity is as follows: ($426.9 − $4.7)/[($1,397.2 + $1,380.0)/2] = 30.4%. b. 1. Gillette's return of 30.4% is above the industry average of 28.1%. 2. Procter & Gamble's return on common stockholders' equity is as follows: ($2,211.0 − $102.0)/[($5,472.0 + $6,890.0)/2] = 34.1%. Gillette's return of 30.4% is below the 34.1% return of Procter & Gamble. 3. Colgate-Palmolive's return on common stockholders' equity is as follows: ($548.1 − $21.6)/[($2,201.5 + $1,460.7)/2] = 28.8%. Gillette's return of 30.4% is above the 28.8% return of Colgate-Palmolive. 4. Gillette's return on common stockholders' equity for the previous year was: ($513.4 − $4.8)/$1,227.3 = 41.4%. Gillette's return in the current year of 30.4% is below the return from the previous year of 41.4%.

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CRITICAL THINKING EYK10-5. Financial Analysis on the Web: General Mills, Inc. a. General Mills is authorized to issue one billion shares of common stock. General Mills has issued 754.6 million shares at May 28, 2017. b. The par value of General Mills common stock is $0.10 per share. c. General Mills is does not have any outstanding preferred shares on May 28, 2017. d. General Mills purchased 25.4 million treasury shares on the open market in the 2017 fiscal year. These shares cost $1,651.5 million. There are 177.7 million common shares in the treasury at May 28, 2017. e. General Mills' return on common stockholders' equity for the 2017 fiscal year is 33.2%. The supporting computation is $1,657.5/[($4,685.5 + $5,307.1)/2] f.

General Mills declared a per share cash dividend of $1.92 in fiscal year 2017, $1.78 in fiscal year 2016, $1.67 in fiscal year 2015.

g. General Mills' earnings per share is $2.82 in fiscal year 2017, $2.83 in fiscal year 2016, $2.02 in fiscal year 2015. h. General Mills' dividend payout ratio is $1.92/$2.82 = 68.1% in fiscal year 2017, $1.78/$2.83 = 62.9% in fiscal year 2016, $1.67/$2.02 = 82.7% in fiscal year 2015. ©Cambridge Business Publishers, 2020 Solutions Manual, Chapter 10

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EYK10-6. Accounting Communications Activity Dear Norman, The corporate form of organization has many advantages over other organizational forms, however, there are also some disadvantages. You need to carefully consider all these advantages and disadvantages. A major advantage of the corporation is something known as limited liability. This advantage means that the shareholders of the corporation are liable for any corporate debt only to the extent of their investment in the corporation. Under other forms of organization the owners can be held liable for the full amount of the organizations debt, even if they had little to do with incurring the debt. Corporations are also able to more easily acquire large amounts of capital. Limited liability is one reason for this, since it would be difficult to get people to invest if they could later be held liable for corporate debt far in excess of their investment. Corporate ownership is also easily transferred, making it more suitable for individual investors. These advantages do come at a price. One price is the increased cost of organization and the additional complexity of the multiple regulatory obligations of a corporation. Perhaps the largest disadvantage of the corporate form is the “double” taxation they are subject to. First, the corporation is taxed on its earnings. Then, the shareholder is taxed on any dividend distributions, effectively subjecting this income to two layers of taxation. Sincerely,

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EYK10-7. Accounting Ethics Case This case describes a situation referred to as greenmail (derived from the term blackmail, although greenmail is not an illegal practice). Many greenmail maneuvers occurred during the 1980s. The ethical factors that Agee should consider include the following: 1. There is a conflict between the self-interest of top management (who will be replaced if Mecon takes control of Image) and the interests of stockholders other than Mecon (who cannot sell their stock to Image at a 50% premium above current market price). If the board of directors meets Mecon's demand, top management saves their jobs, but stockholders other than Mecon do not have the opportunity to receive offers from Mecon to sell their stock at attractive prices. 2. There may be a conflict of interest between Image's employees and stockholders. If Mecon takes control of Image and sells off the various divisions, a number of employees may lose their jobs (in addition to top management). However, the process of taking control by Mecon and breaking up Image may benefit the stockholders (through the purchase offers from Mecon or the distribution of assets as Image is liquidated). This case also provides the opportunity to discuss Mecon's ethics in initiating a greenmail action. The instructor may wish also to discuss the various defenses that corporations have devised to resist a hostile takeover. These defenses include the following: 1. Crown jewel defense: Entering into an agreement to sell to a third party the corporation's most valuable makes TESTasset(s). BANKSEThis LLE R.COthe M corporation less attractive to the raider. 2. Lollipop tactic: Giving certain current stockholders the right to offer their shares to the corporation at a premium price if a hostile bidder purchases a certain amount of shares. (This arrangement tastes good to all involved except the hostile bidder.) 3. Pac-Man defense: Trying to take control of the raider (if a corporation) before the raider can take control of his or her target corporation. 4. Poison pill: Issuing convertible preferred stock as a stock dividend to common stockholders and setting terms so it would be attractive to convert the preferred stock into common stock only if a takeover attempt occurred. The conversion would make the takeover a much more costly process. 5. White knight: Seeking someone friendly to the corporation to take over the corporation in place of the hostile bidder.

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EYK10-8. Corporate Social Responsibility Problem According to the 2016 Starbucks’ Corporate Social Responsibility Report, the company had purchased 99% of ethically sourced coffee. In addition, Starbucks has committed to providing 100 million coffee seedlings to coffee farmers by 2025. The seedlings will replace older and failing trees. By the end of 2016, Starbucks had donated 25 million seedlings.

EYK10-9. Working with the Takeaways a. Return on common stockholders’ equity = ($8,176 - $656) / $88,808 = 8.5% b. Dividend yield = $0.93 / $31.60 = 2.9% c. Dividend payout = $0.93 / $0.89 = 104.5%

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Chapter 11 Statement of Cash Flows QUESTIONS 1.

Cash equivalents are short-term, highly liquid investments that firms acquire with temporarily idle cash to earn interest on these funds. To qualify as a cash equivalent, an investment must (1) be easily convertible into cash and (2) be close enough to maturity so that its market value is not sensitive to interest rate changes (generally, investments with initial maturities of three months or less). Three examples of cash equivalents are U.S. Treasury bills, commercial paper, and money market funds.

Cash equivalents are included with cash in a statement of cash flows because the purchase and sale of such investments are considered to be part of a firm's overall cash management strategy, rather than a source or use of cash. Similarly, as statement users evaluate cash flows, it may matter very little to them whether the cash is on hand, TESorTB ANKSEinLcash LERequivalents. .COM deposited in a bank account, invested 3.

Operating activities: Inflow: Cash received from customers Outflow: Cash paid to suppliers Investing activities: Inflow: Sale of equipment Outflow: Purchase of stocks and bonds Financing activities: Inflow: Issuance of common stock Outflow: Payment of dividends

a. b. c. d. e. f. g. h.

Investing; outflow Investing; inflow Financing; outflow Operating (direct method, not shown separately under indirect method); inflow Financing; inflow Operating (direct method, not shown separately under indirect method); inflow Operating (direct method, not shown separately under indirect method); outflow Operating (direct method, not shown separately under indirect method); inflow

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A statement of cash flows helps external users assess the amount, timing, and uncertainty of future cash flows to the enterprise. These assessments help users evaluate their own future cash receipts from their investments in, or loans to, the firm. A statement of cash flows shows the periodic cash effects of a firm's operating, investing, and financing activities. Distinguishing among these different categories of cash flows helps users compare, evaluate, and predict cash flows. With cash flow information, creditors and investors are better able to assess a firm's ability to settle its liabilities and pay its dividends. Over time, the statement of cash flows permits users to observe and analyze management's investing and financing policies. A statement of cash flows also provides information useful in evaluating a firm's financial flexibility (which is its ability to generate cash to respond to unanticipated needs and opportunities).

The direct method presents the cash flow from operating activities by showing the major categories of operating cash receipts and cash payments (such as cash received from customers, cash paid to employees and suppliers, cash paid for interest, and cash paid for income taxes). The indirect method, in contrast, presents the cash flow from operating activities by applying a series of adjustments to the accrual net income to convert it to a cash basis.

Under the indirect method, depreciation is added to net income because as a noncash expense, it was deducted in computing net income. Adding depreciation to net income, therefore, eliminates it from the cash basis income amount. Amortization and depletion expenses are handled the same way.

Under the indirect method, the $98,000 cash received from the sale of the land will appear in the cash flows from investing ofMthe statement of cash flows. In TESTBAactivities NKSELLsection ER.CO addition, the $28,000 gain from the sale will be deducted from net income as one of the adjustments made to determine the cash flow from operating activities.

Net income Add (Deduct) items to convert net income to cash basis Depreciation Accounts receivable decrease Inventory increase Accounts payable decrease Income tax payable increase Cash provided by operating activities

10.

$88,000 6,000 13,000 (9,000) (3,500) 1,500 $96,000

The statement of cash flows will show a positive cash flow from operating activities if operating cash receipts exceed operating cash payments. This could happen, for example, if noncash expenses (such as depreciation and amortization) exceed the net loss. It would also happen if operating cash receipts exceed sales by more than the loss or if operating cash payments are less than accrual expenses by more than the loss (or some combination of these events).

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11. + =

Sales Accounts receivable decrease Cash received from customers

$925,000 14,000 $939,000

+ =

Wages expense Wages payable decrease Cash paid to employees

$ 86,000 1,100 $ 87,100

+ =

Advertising expense Prepaid advertising increase Cash paid for advertising

$ 43,000 1,600 $ 44,600

12.

13.

14.

Under the direct method, the $5,100 cash received from the sale of equipment will appear in the cash flows from investing activities section of the statement of cash flows.

15.

The separate disclosures required for a company using the direct method in the statement of cash flows are (1) a reconciliation of net income to cash flow from operating activities, (2) all noncash investing and financing transactions, and (3) the policy for determining which highly liquid, short-term investments are treated as cash equivalents.

16.

The operating cash-flow-to-current-liabilities ratio is calculated by dividing cash flow from operating activities by average current liabilities. This ratio is a measure of a firm's ability to pay its current liabilities.

17.

The operating cash-flow-to-capital-expenditures ratio is calculated by dividing a firm's cash flow from operatingTactivities byKits expenditures. A ratio below ESTBAN SEannual LLER.net COcapital M 1.00 indicates that the firm's current operating activities are not providing enough cash to cover the capital expenditures. A ratio above 1.0 is normally considered a sign of financial strength.

18.

a. The revenue recognition principle states that, in general, revenues are recognized when services are performed or goods are sold. The matching concept states that to the extent possible, all expenses related to given revenue are matched with and deducted from that revenue in the determination of net income. b. The revenue recognition principle and the matching concept define the essence of accrual accounting. In accrual accounting, revenues are recognized when they are both earned and realized (revenue recognition principle) and expenses are recorded in the period they help to generate the recorded revenues (matching concept). As such, accrual revenues are a better indicator of periodic financial accomplishment than are cash inflows, and accrual expenses are a better indicator of the financial effort needed to generate the revenues than are the period's cash outflows. Receipts and payments of cash, while important, do not necessarily represent the period's financial accomplishments and the cost of the associated financial efforts. An income statement prepared under accrual accounting, therefore, is a better report on periodic financial performance than a statement of cash flows.

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SHORT EXERCISES SE11-1. Cash Flow from Operating Activities (LO1, LO2) Cash flow from operating activities Net income Add (deduct) items to convert net income to cash basis

$ 76,000

Depreciation Amortization Gain on sale of equipment Accounts receivable increase Inventory decrease Prepaid expenses Increase Accounts payable increase Accrued liabilities decrease Cash provided by operating activities

29,000 6,000 (4,000) (4,000) 13,000 (2,000) 9,000 (3,000) $120,000

SE11-2. Cash Flow from Investing Activities (LO1, LO2) Cash flow from investing activities TESTBANKSEL$17,000 LER.COM Sale of equipment Purchase of land (90,000) Cash used by investing activities (73,000)

SE11-3. Cash Flow from Financing Activities (LO1, LO2) Cash flow from investing activities Issuance of common stock Retirement of bonds payable Payment of dividends Cash used by financing activities

$35,000 (60,000) (29,000) $(54,000)

SE11-4. Direct Method (Appendix 11A) (LO4) Rent expense $80,000 ‒ Prepaid rent decrease (2,000) = Cash paid for rent $78,000 SE11-5. Direct Method (Appendix 11A) (LO4) Interest income $26,000 ‒ Interest receivable increase (700) = Cash received as interest $25,300 ©Cambridge Business Publishers, 2020 11-4

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SE11-6. Direct Method (Appendix 11A) (LO4) Cost of goods sold + Inventory increase + Accounts payable decrease = Cash paid for merchandise purchased

$108,000 3,000 4,000 $115,000

SE11-7. Converting Sales Revenue to Cash (Appendix 11A) (LO4) Sales revenue + Accounts receivable decrease = Cash received from customers

$1,025,000 24,000 $1,049,000

SE11-8. Free Cash Flow (LO3) Free cash flow = $1,500,000 ‒ $850,000 = $650,000

SE11-9. Operating-Cash-Flow-to-Current-Liabilities Ratio (LO3) Operating-cash-flow-to-current-liabilities ratio = $1,500,000/[($300,000 + $360,000)/2] = 4.55

TESTBANKSELLER.COM SE11-10. Operating-Cash-Flow-to-Capital-Expenditures Ratio (LO3) Operating-cash-flow-to-capital-expenditures ratio = $1,500,000/$850,000 =1.76

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EXERCISE—SET A E11-1A. Classification of Cash Flows (LO1) a. Cash flow from an operating activity b. Cash flow from an investing activity c. Cash flow from an investing activity d. Cash flow from an operating activity e. Cash flow from a financing activity f. Cash flow from a financing activity g. Cash flow from an investing activity

E11-2A. Classification of Cash Flows (LO1) a. Cash flow from a financing activity b. Cash flow from an operating activity c. Noncash investing and financing activity d. Cash flow from an operating activity e. Cash flow from an operating activity f. None of the above (a change in the composition of cash and cash equivalents)

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E11-3A. Statement of Cash Flows (Indirect Method) (LO2, LO3) a. Lund Corporation Statement of Cash Flows For Year Ended December 31 Cash flow from operating activities Net income $76,000 Add (deduct) items to convert net income to cash basis Depreciation 29,000 Amortization 6,000 Gain on sale of equipment (4,000) Accounts receivable increase (4,000) Inventory decrease 13,000 Prepaid expenses increase (2,000) Accounts payable increase 9,000 Accrued liabilities decrease (3,000) Cash provided by operating activities Cash flow from investing activities Sale of equipment 17,000 Purchase of land (90,000) Cash used by investing activities Cash flow from financing activities Issuance of common stock 35,000 Retirement of bonds payable (60,000) TESTBANKSELLER.COM Payment of dividends (29,000) Cash used by financing activities Net decrease in cash Cash at beginning of year Cash at end of year

120,000

(73,000)

(54,000) (7,000) 22,000 $15,000

b. $120,000/$100,000 = 1.20

E11-4A. Cash Flow from Operating Activities (Indirect Method) (LO2) Net income $113,000 Add (deduct) items to convert net income to cash basis Accounts receivable increase (5,000) Inventory decrease 6,000 Prepaid insurance increase (1,000) Accounts payable increase 4,000 Wages payable decrease (2,000) Cash provided by operating activities $115,000

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E11-5A. Operating Cash Flow (Direct Method) (LO4) (Appendix 11A) a. Advertising expense + Prepaid advertising increase = Cash paid for advertising b. Income tax expense + Income tax payable decrease = Cash paid for income taxes

$62,000 4,000 $66,000 $29,000 2,200 $31,200

c. Cost of goods sold $180,000 Inventory decrease (5,000) Accounts payable increase (2,000) = Cash paid for merchandise purchased $173,000

E11-6A. Statement of Cash Flows (Direct Method) (LO4) (Appendix 11A) Mason Corporation Statement of Cash Flows For Year Ended December 31 Cash flow from operating activities Cash received from customers Cash received as interest

$194,000 6,000

TESTBANKSELLER.COM $200,000 Cash paid to employees and suppliers Cash paid as income taxes Cash provided by operating activities Cash flow from investing activities Sale of land Purchase of equipment Cash used by investing activities Cash flow from financing activities Issuance of bonds payable Acquisition of treasury stock Payment of dividends Cash provided by financing activities Net decrease in cash Cash at beginning of year Cash at end of year

(148,000) (11,000) (159,000) 41,000 40,000 (89,000) (49,000) 30,000 (10,000) (16,000) 4,000 (4,000) 16,000 $ 12,000

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E11-7A. Operating Cash Flows (Direct Method) (LO4) (Appendix 11A) Sales revenue Accounts receivable increase = Cash received from customers

$750,000 (5,000) $745,000

Cost of goods sold Inventory decrease Accounts payable increase Cash paid for merchandise purchased

$470,000 (6,000) (4,000) $460,000

+ =

Wages expense Wages payable decrease Cash paid to employees

$110,000 2,000 $112,000

+ =

Insurance expense Prepaid insurance increase Cash paid for insurance

$ 15,000 1,000 $ 16,000

Cash flow from operating activities Cash received from customers $745,000 Cash paid for merchandise purchased (460,000) Cash paid to employees (112,000) Cash paid for rent (42,000) Cash paid for insurance (16,000) Cash provided by operating activities $115,000 TESTBANKSELLER.COM E11-8A. Investing and Financing Cash Flows (LO2, LO4) (a) Cash flows from investing activities will show Purchase of Stock Investments ($80,000) Sale of Stock Investments 59,000 (b) Cash flows from financing activities will show Issuance of Bonds $103,000 Retirement of Bonds (131,000)

E11-9A. Cash Flow from Operating Activities (Indirect Method) (LO2) Net income $13,000 Add (deduct) items to convert net income to cash basis Accounts receivable increase (5,000) Inventory decrease 26,000 Prepaid rent increase (1,000) Accounts payable decrease (6,000) Wages payable increase 3,000 Cash provided by operating activities $30,000 ©Cambridge Business Publishers, 2020 11-10 Edition

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E11-10A. Statement of Cash Flows (Indirect Method) (LO2) Newcastle Corporation Statement of Cash Flows For Year Ended December 31 Cash flow from operating activities Net income $96,000 Add (deduct) items to convert net income to cash basis Depreciation 39,000 Amortization 16,000 Gain on sale of equipment (14,000) Accounts receivable increase (7,000) Inventory increase (13,000) Prepaid expenses increase (8,000) Accounts payable decrease (5,000) Wages payable decrease (3,000) Cash provided by operating activities Cash flow from investing activities Sale of equipment 12,000 Purchase of land (100,000) Cash used by investing activities Cash flow from financing activities Issuance of common stock 45,000 Retirement of bonds payable (75,000) Payment of dividends TESTBANKSELLER.COM (6,000) Cash used by financing activities Net decrease in cash Cash at beginning of year Cash at end of year

101,000

(88,000)

(36,000) (23,000) 30,000 $ 7,000

E11-11A. Cash Flow Ratios (LO3) $50,000 - $35,000 = $15,000 $50,000/$60,000 = 0.83 $50,000/$35,000 = 1.43

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EXERCISES—SET B E11-1B. Classification of Cash Flows (LO1) a. Cash flow from an investing activity b. Cash flow from an operating activity c. Cash flow from a financing activity d. Cash flow from an operating activity e. Cash flow from an operating activity f. Cash flow from a financing activity g. Cash flow from an investing activity

E11-2B. Classification of Cash Flows (LO1) a. Cash flow from an operating activity b. Cash flow from an operating activity c. Cash flow from a financing activity d. Noncash investing and financing activity e. None of the above (a change in the composition of cash and cash equivalents) f. Cash flow from an investing activity

E11-3B. Cash Flow from Operating Activities TEST BANKSE(Indirect LLER.Method) COM (LO2, LO3) a. Net income Add (deduct) items to convert net income to cash basis Depreciation Gain on sale of investments Accounts receivable increase Inventory increase Prepaid rent decrease Accounts payable increase Income tax payable decrease Cash provided by operating activities

$45,000 8,000 (9,000) (9,000) (6,000) 2,000 4,000 (2,000) $33,000

b. $33,000/$13,200 = 2.50

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E11-4B. Cash Flow from Operating Activities (Indirect Method) (LO2) Net loss ($21,000) Add (deduct) items to convert net loss to cash basis Depreciation 8,600 Accounts receivable decrease 9,000 Inventory decrease 3,000 Prepaid expenses decrease 3,000 Accounts payable increase 4,000 Accrued liabilities decrease (2,600) Cash provided by operating activities $ 4,000 Cairo Company's operating activities provided $4,000 cash.

E11-5B. Operating Cash Flows (Direct Method) (LO4) (Appendix 11A) a. Rent expense ‒ Prepaid rent decrease = Cash paid for rent b. Interest income ‒ Interest receivable increase = Cash received as interest

$ 60,000 2,000 $ 58,000 $ 16,000 700 $ 15,300

c. Cost of goods sold TESTBANKSELLER.$C98,000 OM + Inventory increase 3,000 + Accounts payable decrease 4,000 = Cash paid for merchandise purchased $105,000

E11-6B. Operating Cash Flows (Direct Method) (LO4) (Appendix 11A) Sales revenue $825,000 ‒ Accounts receivable increase 11,000 = Cash received from customers $814,000

+ + =

Cost of goods sold Inventory increase Accounts payable decrease Cash paid for merchandise purchased

$550,000 13,000 6,000 $569,000

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E11-7B. Statement of Cash Flows (Direct Method) (LO4) (Appendix 11A) Gilbert Corporation Statement of Cash Flows For Year Ended December 31 Cash flow from operating activities Cash received from customers Cash paid as interest Cash paid to employees and suppliers Cash paid as income taxes Cash provided by operating activities Cash flow from investing activities Purchase of patent Sale of equipment Cash provided by investing activities Cash flow from financing activities Retirement of bonds payable Issuance of common stock Payment of dividends Cash used by financing activities Net increase in cash Cash at beginning of year Cash at end of year

$216,000 (7,000) (151,000) (24,000) 34,000 (66,000) 98,000 32,000 (70,000) 35,000 (21,000) (56,000) 10,000 20,000 $ 30,000

TESTBANKSELLER.COM E11-8B. Investing and Financing Cash Flows (LO2, LO4) (a) Cash flow from investing activities will show Purchase of plant assets ($44,000) Sale of investments (34,000-21,000+9,000) 22,000 (b) Cash flow from financing activities will show Issuance of common stock $29,000 Payment of dividends (30,000) Change in R/E – Net Income (106,000-91,000-45,000)

E11-9B. Cash Flow from Operating Activities (Indirect Method) (LO2) Net income $63,000 Add (deduct) items to convert net income to cash basis Accounts receivable increase (25,000) Inventory decrease 16,000 Prepaid insurance decrease 2,000 Accounts payable decrease (2,000) Wages payable decrease (1,000) Cash provided by operating activities $53,000

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E11-10B. Statement of Cash Flows (Indirect Method) (LO2) Fremantle Corporation Statement of Cash Flows For Year Ended December 31 Cash flow from operating activities Net income $126,000 Add (deduct) items to convert net income to cash basis Depreciation 69,000 Amortization 26,000 Gain on sale of equipment (14,000) Accounts receivable increase (4,000) Inventory decrease 13,000 Prepaid expenses increase (2,000) Accounts payable increase 11,000 Accrued liabilities decrease (3,000) Cash provided by operating activities Cash flow from investing activities Sale of equipment 17,000 Purchase of land (100,000) Cash used by investing activities Cash flow from financing activities Issuance of common stock 75,000 Retirement of bonds payable (70,000) Payment of dividends TESTBANKSELLER.COM (49,000) Cash used by financing activities Net increase in cash Cash at beginning of year Cash at end of year

222,000

(83,000)

(44,000) 95,000 22,000 $117,000

E11-11B. Cash Flow Ratios (LO3) $60,000 ‒ $52,500 = $7,500 $60,000/$90,000 = 0.67 $60,000/$52,500 = 1.14

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PROBLEMS—SET A P11-1A. Statement of Cash Flows (Indirect Method) (LO2, LO3) a. Cash, December 31 Current Year, $11,000 Cash, December 31 Prior Year 5,000 Cash increase during the year $ 6,000 b. Supporting computations: The adjustments to convert the net income of $56,000 to a cash provided by operating activities of $35,000 are shown in the statement of cash flows. Purchase of plant assets: $250,000 ending plant assets ‒ $195,000 beginning plant assets = $55,000 Issuance of bonds payable: $130,000 ending bonds payable ‒ $75,000 beginning bonds payable = $55,000 Payment of dividends: $29,000 given in problem data. Other analysis: Accumulated depreciation increased by $17,000, which is the amount of depreciation expense. Common stock balance did not change. Retained earnings increased by $27,000, which is the difference between the net income of $56,000 and the dividends declared of $29,000.

TESWolff TBAN KSELLER.COM Company Statement of Cash Flows For Year Ended December 31 Cash flow from operating activities Net income $56,000 Add (deduct) items to convert net income to cash basis Depreciation 17,000 Accounts receivable increase (9,000) Inventory increase (30,000) Prepaid insurance decrease 2,000 Accounts payable decrease (3,000) Wages payable increase 3,000 Income tax payable decrease (1,000) Cash provided by operating activities Cash flow from investing activities Purchase of plant assets (55,000) Cash used by investing activities Cash flow from financing activities Issuance of bonds payable 55,000 Payment of dividends (29,000) Cash provided by financing activities Net increase in cash Cash at beginning of year Cash at end of year

35,000

(55,000)

26,000 6,000 5,000 $11,000

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c. $35,000 ‒ $55,000 = -$20,000 d. $35,000/[($7,000+$9,000+$7,000+$10,000+$6,000+$8,000)/2] = 1.49 e. $35,000/$55,000 = 0.64

P11-2A. Statement of Cash Flows (Indirect Method) (LO2) a. Cash, December 31 Current Year $49,000 Cash, December 31 Prior Year 28,000 Cash increase during the year $21,000 b. Supporting computations: The adjustments to convert the net loss of $42,000 to a cash used by operating activities of $36,000 are shown in the statement of cash flows. Sale of land: $70,000 given in problem data. Purchase of equipment: $360,000 ending plant assets ‒ ($222,000 beginning plant assets ‒ $45,000 plant assets decrease from sale of land) = $183,000 Issuance of bonds payable: $20,000 ending bonds payable ‒ $0 beginning bonds payable = $200,000

TESTBANKSELLER.COM Purchase of treasury stock: $30,000 ending treasury stock ‒ $0 beginning treasury stock = $30,000 Other analysis: Accumulated depreciation increased by $22,000, which is the amount of depreciation expense. Common stock account balance did not change. Retained earnings decreased by $42,000, which is the amount of net loss. Continued

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Arctic Company Statement of Cash Flows For Year Ended December 31 Cash flow from operating activities Net loss Add (deduct) items to convert net loss to cash basis Depreciation Gain on sale of land Accounts receivable decrease Inventory decrease Prepaid advertising decrease Accounts payable decrease Interest payable increase Cash used by operating activities Cash flow from investing activities Sale of land Purchase of equipment Cash used by investing activities Cash flow from financing activities Issuance of bonds payable Purchase of treasury stock Cash provided by financing activities Net increase in cash Cash at beginning of year Cash at end of year

($42,000) 22,000 (25,000) 8,000 6,000 3,000 (14,000) 6,000 (36,000) 70,000 (183,000) (113,000) 200,000 (30,000)

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170,000 21,000 28,000 $ 49,000

P11-3A. Statement of Cash Flows (Indirect Method) (LO2) a. Cash, December 31 Current year $27,000 Cash, December 31 Prior year 18,000 Cash increase $ 9,000 b. Supporting computations: The adjustments to convert the net income of $85,000 to a cash provided by operating activities of $119,000 are shown in the statement of cash flows. Sale of equipment: $17,000 given in problem data. Acquisition of equipment in exchange for bonds payable: $60,000 given in problem data; this is a noncash investing and financing activity. Retirement of bonds payable: $120,000 beginning bonds payable + $60,000 bonds payable increase from acquisition of equipment ‒ $60,000 ending bonds payable + $5,000 loss on bond retirement = $125,000 Continued

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Issuance of common stock: $252,000 ending common stock ‒ $228,000 beginning common stock = $24,000 Payment of dividends: $26,000 given in problem data. Other analysis: Plant assets increased by $24,000, which is the difference between the $60,000 increase from equipment acquired for bonds payable and the $36,000 decrease from the cost of equipment sold. Accumulated depreciation increased by $3,000, which is the difference between the $22,000 increase from depreciation expense and the $19,000 decrease from the sale of equipment. Goodwill decreased by $7,000, which is the amount of goodwill amortization expense. Retained earnings increased by $59,000, which is the difference between the net income of $85,000 and the dividends declared of $26,000. Dairy Company Statement of Cash Flows For Year Ended December 31 Cash Flow from operating activities Net income $ 85,000 Add (deduct) items to convert net income to cash basis TESTBANKSELLER.COM 22,000 Depreciation Goodwill amortization 7,000 Loss on bond retirement 5,000 Accounts receivable increase (5,000) Inventory decrease 6,000 Prepaid expenses increase (2,000) Accounts payable increase 6,000 Interest payable decrease (3,000) Income tax payable decrease (2,000) Cash provided by operating activities Cash flow from investing activities Sale of equipment 17,000 Cash provided by investing activities Cash flow from financing activities Retirement of bonds payable (125,000) Issuance of common stock 24,000 Payment of dividends (26,000) Cash used by financing activities Net increase in cash Cash at beginning of year Cash at end of year

119,000

17,000

(127,000) 9,000 18,000 $ 27,000

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P11-4A. Statement of Cash Flows (Indirect Method) (LO2) a. Cash and cash equivalents, December 31 Current year Cash and cash equivalents, December 31 Prior year Cash and cash equivalents decrease during the year

$19,000 25,000 $ ( 6,000)

b. Supporting computations: The adjustments to convert the net income of $97,000 to cash provided by operating activities of $101,000 are shown in the statement of cash flows. Sale of investments: $60,000 given in problem data. Purchase of land: $190,000 ending land ‒ $100,000 beginning land = $90,000 Improvements to building: $445,000 ending buildings ‒ $350,000 beginning buildings = $95,000 Sale of equipment: $14,000 given in problem data. Issuance of bonds payable: $155,000 ending bonds payable ‒ $125,000 beginning bonds payable = $30,000 Acquisition of patent in exchange for preferred stock: $25,000 given in problem data; this is a noncash investing and financing activity.

TESTBANKSELLER.COM Issuance of common stock: $379,000 ending common stock ‒ $364,000 beginning common stock = $15,000 $133,000 ending paid-in capital in excess of par value—common ‒ $124,000 beginning paid-in capital in excess of par value—common = + 9,000 $24,000 (Also may be computed as 3,000 shares x $8 = $24,000) Payment of dividends: $50,000 given in problem data. Continued

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b. continued Other analysis: Long-term investments—available for sale decreased by $50,000, which is the cost of the investments sold. Fair value adjustment to investments decreased by $7,000, due to the elimination of this account balance at yearend (this was the adjustment related to the investments sold); no cash flow effect. Accumulated depreciation—buildings increased $16,000, which is the depreciation expense on buildings. Equipment decreased by $46,000, which is the cost of equipment sold. Accumulated depreciation—equipment decreased by $4,000, which is the difference between the $23,000 increase from depreciation expense on equipment and the $27,000 decrease from the sale of equipment. Patents increased $18,000, which is the difference between the $25,000 patent acquired by issuing preferred stock and the $7,000 patent amortization expense. Preferred stock increased by $25,000, which is the par value of the shares issued to acquire a patent. Retained earnings increased by $47,000, which is the difference between the net income of $97,000 and the dividends ofE$50,000. TESdeclared TBANKS LLER.COM Unrealized gain on investments decreased by $7,000, due to the elimination of this account balance at yearend (this was the unrealized gain in stockholders' equity related to the investments sold); no cash flow effect. Continued

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b. continued Rainbow Company Statement of Cash Flows For Year Ended December 31 Cash flow from operating activities Net income $97,000 Add (deduct) items to convert net income to cash basis Depreciation 39,000 Patent amortization 7,000 Loss on sale of equipment 5,000 Gain on sale of investments (10,000) Accounts receivable increase (10,000) Inventory increase (26,000) Prepaid expenses increase (4,000) Accounts payable increase 4,000 Interest payable increase 1,000 Income tax payable decrease (2,000) Cash provided by operating activities Cash flow from investing activities Sale of investments 60,000 Purchase of land (90,000) Improvements to building (95,000) Sale of equipment 14,000 Cash used by investing activities Cash flow from financing activities TESTBANKSELLER.COM 30,000 Issuance of bonds payable Issuance of common stock 24,000 Payment of dividends (50,000) Cash provided by financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year

101,000

(111,000)

4,000 (6,000) 25,000 $ 19,000

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P11-5A. Statement of Cash Flows (Direct Method) (LO3, LO4) (Appendix 11A) a. Cash, December 31 Current year $11,000 Cash, December 31 Prior year 5,000 Cash increase during the year $ 6,000 b. Supporting computations: Cash received from customers: $635,000 sales ‒ $9,000 accounts receivable increase = $626,000 Cash paid for merchandise purchased: $430,000 cost of goods sold + $30,000 inventory increase + $3,000 accounts payable decrease = $463,000 Cash paid to employees: $86,000 wages expense ‒ $3,000 wages payable increase = $83,000 Cash paid for insurance: $8,000 insurance expense ‒ $2,000 prepaid insurance decrease = $6,000 Cash paid for interest: Equal to the $9,000 balance in interest expense. Cash paid for income taxes: $29,000 income tax expense + $1,000 income tax payable decrease = $30,000

TESTBANKSELLER.COM Purchase of plant assets: $250,000 ending plant assets ‒ $195,000 beginning plant assets = $55,000 Issuance of bonds payable: $130,000 ending bonds payable ‒ $75,000 beginning bonds payable = $55,000 Payment of dividends: $29,000 given in problem data. Other analysis: Accumulated depreciation increased by $17,000, which is the amount of depreciation expense. Common stock account balance did not change. Retained earnings increased by $27,000, which is the difference between the net income of $56,000 and the dividends declared of $29,000. Continued

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b. continued Wolff Company Statement of Cash Flows For Year Ended December 31 Cash flow from operating activities Cash received from customers Cash paid for merchandise purchased Cash paid to employees Cash paid for insurance Cash paid for interest Cash paid for income Taxes

$626,000 ($463,000) (83,000) (6,000) (9,000) (30,000) 591,000

Cash provided by operating activities Cash flow from investing activities Purchase of plant assets Cash used by investing activities Cash flow from financing activities Issuance of bonds payable Payment of dividends Cash provided by financing activities Net increase in cash Cash at beginning of year Cash at end of year

35,000 (55,000) (55,000) 55,000 (29,000) 26,000 6,000 5,000 $ 11,000

TESTBANKSELLER.COM

c. $35,000 ‒ $55,000 = -$20,000

d. $35,000/[($7,000+$9,000+$7,000+$10,000+$6,000+$8,000)/2] = 1.49 e. $35,000/$55,000 = 0.64

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P11-6A. Statement of Cash Flows (Direct Method) (LO4) (Appendix 11A) a. Cash, December 31 Current year $49,000 Cash, December 31 Prior year 28,000 Cash increase during the year $21,000 b. Supporting computations: Cash received from customers: $728,000 sales + $8,000 accounts receivable decrease = $736,000 Cash paid for merchandise purchased: $534,000 cost of goods sold ‒ $6,000 inventory decrease + $14,000 accounts payable decrease = $542,000 Cash paid to employees: Equal to the $190,000 balance in wages expense. Cash paid for advertising: $31,000 advertising expense ‒ $3,000 prepaid advertising decrease = $28,000 Cash paid for interest: $18,000 interest expense ‒ $6,000 interest payable increase = $12,000 Sale of land: $70,000 given in problem data. Purchase of equipment: TESTBANKSELLER.COM $360,000 ending plant assets ‒ ($222,000 beginning plant assets ‒ $45,000 plant assets decrease from sale of land) = $183,000 Issuance of bonds payable: $200,000 ending bonds payable ‒ $0 beginning bonds payable = $200,000 Purchase of treasury stock: $30,000 ending treasury stock ‒ $0 beginning treasury stock = $30,000 Other analysis: Accumulated depreciation increased by $22,000, which is the amount of depreciation expense. Common stock account balance did not change. Retained earnings decreased by $42,000, which is the amount of net loss. Continued

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b. continued Arctic Company Statement of Cash Flows For Ended December 31 Cash flow from operating activities Cash received from customers Cash paid for merchandise purchased Cash paid to employees Cash paid for advertising Cash paid for interest

$736,000 ($542,000) (190,000) (28,000) (12,000) 772,000

Cash used by operating activities Cash flow from investing activities Sale of land Purchase of equipment Cash used by investing activities Cash flow from financing activities Issuance of bonds payable Purchase of treasury stock Cash provided by financing activities Net increase in cash Cash at beginning of year Cash at end of year

(36,000) 70,000 (183,000) (113,000) 200,000 (30,000) 170,000 21,000 28,000 $ 49,000

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P11-7A. Statement of Cash Flows (Direct Method) (LO4) (Appendix 11A) a. Cash, December 31 Current year $27,000 Cash, December 31Prior year 18,000 Cash increase during the year $ 9,000 b. Supporting computations:

Cash received from customers: $700,000 sales ‒ $5,000 accounts receivable increase = $695,000 Cash paid for merchandise purchased: $440,000 cost of goods sold ‒ $6,000 inventory decrease ‒ $6,000 accounts payable increase = $428,000 Cash paid for wages and other operating expenses: $95,000 wages and other operating expenses + $2,000 increase in prepaid expenses = $97,000 Cash paid for interest: $10,000 interest expense + $3,000 decrease in interest payable = $13,000 Continued

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b. continued Cash paid for income taxes: $36,000 income tax expense + $2,000 decrease in income tax payable = $38,000 Sale of equipment: $17,000 given in problem data. Acquisition of equipment in exchange for bonds payable: $60,000 given in problem data; this is a noncash investing and financing activity. Retirement of bonds payable: $120,000 beginning bonds payable + $60,000 bonds payable increase from acquisition of equipment ‒ $60,000 ending bonds payable + $5,000 loss on bond retirement = $125.000 Issuance of common stock: $252,000 ending common stock ‒ $228,000 beginning common stock = $24,000 Payment of dividends: $26,000 given in problem data Other analysis: Plant assets increased by $24,000, which is the difference between the $60,000 increase from equipment acquired for bonds payable and the $36,000 decrease from the cost of equipment sold. Accumulated depreciation increased by $3,000, which is the difference between the $22,000 increase fromTE depreciation STBANKSexpense ELLERand .COthe M $19,000 decrease from the sale of equipment. Goodwill decreased by $7,000, which is the amount of goodwill amortization expense. Retained earnings increased by $59,000, which is the difference between the net income of $85,000 and the dividends declared of $26,000. Continued

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b. continued Dairy Company Statement of Cash Flows For Year Ended December 31 Cash flow from operating activities Cash received from customers $695,000 Cash paid for merchandise purchased ($428,000) Cash paid for wages and other operating expenses (97,000) Cash paid for interest (13,000) Cash paid for income taxes (38,000) 576,000 Cash provided by operating activities Cash flow from investing activities Sale of equipment 17,000 Cash provided by investing activities Cash flow from financing activities Retirement of bonds payable (125,000) Issuance of common stock 24,000 Payment of dividends (26,000) Cash used by financing activities Net increase in cash Cash at beginning of year Cash at end of year

119,000

17,000

(127,000) 9,000 18,000 $ 27,000

TESTBANKSELLER.COM P11-8A. Statement of Cash Flows (Direct Method) (LO4) (Appendix 11A) a. Cash and cash equivalents, December 31 Current year Cash and cash equivalents, December 31 Prior year Cash and cash equivalents decrease during the year

$19,000 25,000 $ 6,000

b. Supporting computations: Cash received from customers: $750,000 sales ‒ $10,000 accounts receivable increase = $740,000 Cash received as dividends: $15,000 dividend income reported in income statement. Cash paid for merchandise purchased: $440,000 cost of goods sold + $26,000 inventory increase ‒ $4,000 accounts payable increase = $462,000 Cash paid for wages and other operating expenses: $130,000 wages and other operating expenses + $4,000 increase in prepaid expenses = $134,000 Continued

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b. continued Cash paid for interest: $13,000 interest expense ‒ $1,000 increase in interest payable = $12,000 Cash paid for income taxes: $44,000 income tax expense + $2,000 decrease in income tax payable = $46,000 Sale of investments: $60,000 given in problem data. Purchase of land: $190,000 ending land ‒ $100,000 beginning land = $90,000 Improvements to building: $445,000 ending buildings ‒ $350,000 beginning buildings = $95,000 Sale of equipment: $14,000 given in problem data. Issuance of bonds payable: $155,000 ending bonds payable ‒ $125,000 beginning bonds payable = $30,000 Acquisition of patent in exchange for preferred stock: $25,000 given in problem data; this is a noncash investing and financing activity. Issuance of common stock: $379,000 ending common stock ‒ $364,000 beginning common stock = $133,000 ending paid-in capital in excess of par value—common ‒ $124,000 beginning = TESexcess TBANKofSpar ELvalue—common LER.COM

$15,000 +$9,000 $24,000

(Also may be computed as 3,000 shares x $8 = $24,000) Payment of dividends: $50,000 given in problem data Continued

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b. continued Other analysis: Long-term investments—available for sale decreased by $50,000, which is the cost of the investments sold. Fair value adjustment to investments decreased by $7,000, due to the elimination of this account balance at yearend (this was the adjustment related to the investments sold); no cash flow effect. Accumulated depreciation—buildings increased $16,000, which is the depreciation expense on buildings. Equipment decreased by $46,000, which is the cost of equipment sold. Accumulated depreciation—equipment decreased by $4,000, which is the difference between the $23,000 increase from depreciation expense on equipment and the $27,000 decrease from the sale of equipment. Patents increased $18,000, which is the difference between the $25,000 patent acquired by issuing preferred stock and the $7,000 patent amortization expense. Preferred stock increased by $25,000, which is the par value of the shares issued to acquire a patent. Retained earnings increased TESTBAbyNK$47,000, SELLEwhich R.COisM the difference between the net income of $97,000 and the dividends declared of $50,000. Unrealized gain on investments decreased by $7,000, due to the elimination of this account balance at yearend (this was the unrealized gain in stockholders' equity related to the investments sold); no cash flow effect. Continued

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b. continued Rainbow Company Statement of Cash Flows For Year Ended December 31 Cash flow from operating activities Cash received from customers Cash received as dividends

Cash provided by operating activities

$ 740,000 15,000 $755,000 (462,000) (134,000) (12,000) (46,000) (654,000) 101,000

Cash flow from investing activities Sale of investments Purchase of land Improvements to building Sale of equipment Cash used by investing activities

60,000 (90,000) (95,000) 14,000 (111,000)

Cash flow from financing activities Issuance of bonds payable Issuance of common stock TESTBANKSELLER.COM Payment of dividends Cash provided by financing activities

30,000 24,000 (50,000) 4,000

Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year

(6,000) 25,000 $ 19,000

Cash paid for merchandise purchased Cash paid for wages and other operating expenses Cash paid for interest Cash paid for income taxes

P11-9A. Analyzing Cash Flow Ratios (LO3) a. (N) No effect (N) No effect (N) No effect b. (I) Increase (I) Increase (I) Increase c. (N) No effect (N) No effect (N) No effect d. (D) Decrease (N) No effect (D) Decrease e. (D) Decrease (D) Decrease (D) Decrease f. (N) No effect (D) Decrease (N) No effect

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PROBLEMS—SET B P11-1B. Statement of Cash Flows (Indirect Method) (LO2, LO3) a. Cash, December 31 Current year $20,000 Cash, December 31 Prior year 37,000 Cash decrease during the year $17,000 b. Supporting computations: The adjustments to convert the net income of $68,000 to a cash provided by operating activities of $81,000 are shown in the statement of cash flows. Purchase of plant assets: $420,000 ending plant assets ‒ $300,000 beginning plant assets = $120,000 Issuance of common stock: $294,000 ending common stock ‒ $252,000 beginning common stock + $72,000 ending Paid-in capital in excess of par value - $58,000 beginning paid-in capital in excess of par value = $56,000 Payment of dividends: $34,000 given in problem data. Other analysis: Accumulated depreciation increased by $20,000, which is the amount of depreciation expense. Retained earnings increased by $34,000, which is the difference between the net income of $68,000 and the dividends declared of $34,000.

TESTBANKSELLER.COM

Rural Company Statement of Cash Flows For Year Ended December 31 Cash flow from operating activities Net income $ 68,000 Add (deduct) items to convert net income to cash basis Depreciation 20,000 Accounts receivable decrease 8,000 Inventory increase (27,000) Prepaid rent increase (2,000) Accounts payable increase 12,000 Wages payable increase 5,000 Income tax payable decrease (3,000) Cash provided by operating activities Cash flow from investing activities Purchase of plant assets (120,000) Cash used by investing activities Cash flow from financing activities Issuance of common stock 56,000 Payment of dividends (34,000) Cash provided by financing activities Net decrease in cash Cash at beginning of year Cash at end of year

81,000

(120,000)

22,000 (17,000) 37,000 $ 20,000

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c. $81,000 – $120,000 = ($39,000) d. $81,000/[($29,000+$12,000+$5,000+$17,000+$7,000+$8,000)/2] = 2.08 e. $81,000/$120,000 = 0.68

P11-2B. Statement of Cash Flows (Indirect Method) (LO2) a. Cash, December 31 Current year $23,000 Cash, December 31 Prior year 31,000 Cash decrease during the year $ 8,000 b. Supporting computations: The adjustments to convert the net income of $110,000 to cash provided by operating activities of $91,000 are shown in the statement of cash flows. Sale of equipment: $27,000 given in problem data. Purchase of equipment: $887,000 ending plant assets – ($770,000 beginning plant assets – $57,000 Plant assets decrease from sale of equipment) = $174,000 Issuance of bonds payable: $135,000 ending bonds TEpayable STBAN–K$80,000 SELLEbeginning R.COM bonds payable = $55,000 Issuance of common stock: $660,000 ending common stock – $585,000 beginning common stock = $75,000 Purchase of treasury stock: $52,000 ending treasury stock – $0 beginning treasury stock = $52,000 Payment of dividends: $30,000 given in problem data. Other analysis Accumulated depreciation increased by $14,000, which is the difference between the depreciation expense of $60,000 (increases accumulated depreciation) and the $46,000 accumulated depreciation on the equipment sold (decreases accumulated depreciation). Retained earnings increased by $80,000, which is the difference between the net income of $110,000 and the dividends declared of $30,000. Continued

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b. continued Sweet Company Statement of Cash Flows For Year Ended December 31 Cash flow from operating activities Net income $110,000 Add (deduct) items to convert net income to cash basis Depreciation 60,000 Gain on sale of equipment (16,000) Accounts receivable increase (25,000) Inventory increase (51,000) Prepaid insurance decrease 2,000 Accounts payable increase 10,000 Interest payable increase 5,000 Income tax payable decrease (4,000) Cash provided by operating activities 91,000 Cash flow from investing activities Sale of equipment 27,000 Purchase of equipment (174,000) Cash used by investing activities (147,000) Cash flow from financing activities Issuance of bonds payable 55,000 Issuance of common stock 75,000 Payment of dividends (30,000) Purchase of treasury stock (52,000) TESTBANKSELLER.COM Cash provided by financing activities 48,000 Net decrease in cash (8,000) Cash at beginning of year 31,000 Cash at end of year $ 23,000

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P11-3B. Statement of Cash Flows (Indirect Method) (LO2) a. Cash, December 31 Current year $34,000 Cash, December 31 Prior year 16,000 Cash increase during the year $18,000 b. Supporting computations: The adjustments to convert the net income of $58,000 to cash provided by operating activities of $32,000 are shown in the statement of cash flows. Sale of equipment: $13,000 given in problem data Acquisition of patent in exchange for land: $79,000 given in problem data; this is a noncash investing and financing activity. Land given up had a cost of $43,000 (equal to the decrease in land) and the difference of $36,000 is the gain on exchange of land for patent. Improvements to building: $441,000 ending building and equipment ‒ $361,000 beginning building and equipment + $20,000 decrease from sale of equipment = $100,000 Issuance of bonds payable: $175,000 ending bonds payable ‒ $75,000 beginning bonds payable = $100,000 Payment of dividends: $27,000 problem data. TESTBgiven ANKinSE LLER. COM Other analysis: Building and equipment increased by $80,000, which is the difference between the $100,000 increase from building improvements and the $20,000 decrease from the cost of equipment sold. Accumulated depreciation increased by $20,000, which is the difference between the $27,000 increase from depreciation expense and the $7,000 decrease from the sale of equipment. Patent increased by $73,000, which is the difference between the $79,000 increase from the patent acquisition and the $6,000 decrease from patent amortization expense. Common stock account balance did not change. Retained earnings increased by $31,000, which is the difference between the net income of $58,000 and the dividends declared of $27,000. Continued

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b. continued Huber Company Statement of Cash Flows For Year Ended December 31 Cash flow from operating activities Net income $ 58,000 Add (deduct) items to convert net income to cash basis Depreciation 27,000 Patent amortization 6,000 Gain on exchange of land for patent (36,000) Accounts receivable increase (15,000) Inventory increase (21,000) Accounts payable increase 10,000 Interest payable increase 8,000 Income tax payable decrease (5,000) Cash provided by operating activities Cash flow from investing activities Sale of equipment Improvements to building (100,000) Cash used by investing activities Cash flow from financing activities Issuance of bonds payable 100,000 Payment of dividends (27,000) Cash provided by financing activities Net increase in cash TESTBANKSELLER.COM Cash at beginning of year Cash at end of year

32,000 13,000 (87,000)

73,000 18,000 16,000 $34,000

P11-4B. Statement of Cash Flows (Indirect Method) (LO2) a. Cash, December 31 Current year $43,000 Cash, December 31 Prior year 36,000 Cash increase during the year $ 7,000 b. Supporting computations: The adjustments to convert the net loss of $6,000 to cash provided by operating activities of $45,000 are shown in the statement of cash flows. Sale of equipment: $9,000 given in problem data Sale of investments: $87,000 given in problem data Extension of franchise: $91,000 ending franchise ‒ $29,000 beginning franchise + $10,000 franchise amortization expense = $72,000 Continued ©Cambridge Business Publishers, 2020 Solutions Manual, Chapter 11

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b. continued Payment of notes payable: $27,000 beginning notes payable ‒ $0 ending notes payable = $27,000 Acquisition of land in exchange for common stock: $60,000 given in problem data; this is a noncash investing and financing activity. Payment of dividend: $15,000 given in problem data. Purchase of treasury stock: $20,000 ending treasury stock ‒ $0 beginning treasury stock = $20,000 Other analysis: Long term investments—available for sale decreased by $70,000, which is the cost of the investments sold. Fair value adjustment to investments decreased by $10,000, due to the elimination of this account balance at yearend (this was the adjustment related to the investments sold); no cash flow effect. Plant assets increased by $41,000, which is the difference between the $60,000 land acquired and the $19,000 cost of equipment sold. Accumulated depreciation increased by $49,000, which is the difference between the $52,000 increase from depreciation expense and the $3,000 decrease from the sale of equipment. TESTBANKSELLER.COM Common stock increased by $60,000, which is the par value of the shares issued to acquire land. Retained earnings decreased by $21,000, which is the sum of the net loss of $6,000 and the dividends declared of $15,000. Unrealized gain on investments decreased by $10,000, due to the elimination of this account balance at yearend (this was the unrealized gain in stockholders' equity related to the investments sold); no cash flow effect. Continued

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b. continued Towne Company Statement of Cash Flows For Year Ended December 31 Cash flow from operating activities Net loss Add (deduct) items to convert net loss to cash basis Depreciation Franchise amortization Loss on sale of equipment Gain on sale of investments Accounts receivable decrease Interest receivable decrease Prepaid expenses increase Accrued liabilities decrease Cash provided by operating activities Cash flow from investing activities Sale of equipment Sale of investments Extension of franchise Cash provided by investing activities Cash flow from financing activities Payment of notes payable Payment of dividends Purchase of treasury stock TESTBANKSELLER.COM Cash used by financing activities Net increase in cash Cash at beginning of year Cash at end of year

($6,000) 52,000 10,000 7,000 (17,000) 5,000 4,000 (8,000) (2,000) 45,000 9,000 87,000 (72,000) 24,000 (27,000) (15,000) (20,000) (62,000) 7,000 36,000 $43,000

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P11-5B. Statement of Cash Flows (Direct Method) (LO3, LO4) (Appendix 11A) a. Cash, December 31 Current year $20,000 Cash, December 31 Prior year 37,000 Cash decrease during the year $17,000 b. Supporting computations: Cash received from customers: $630,000 sales + $8,000 accounts receivable decrease = $638,000 Cash paid for merchandise purchased: $376,000 cost of goods sold + $27,000 inventory increase ‒ $12,000 accounts payable increase = $391,000 Cash paid to employees: $107,000 wages expenses ‒ $5,000 wages payable increase = $102,000 Cash paid for rent: $28,000 rent expense + $2,000 prepaid rent increase = $30,000 Cash paid for income taxes: $31,000 income tax expense + $3,000 income tax payable decrease = $34,000 Purchase of plant assets: $420,000 ending plantTassets ‒N $300,000 beginning ESTBA KSELLE R.COM plant assets = $120,000 Issuance of common stock: ($294,000 ending common stock + $72,000 ending paid-in capital in excess of par value) ‒ ($252,000 beginning common stock + $58,000 beginning paid-in capital in excess of par value) = $56,000 Payment of dividends: $34,000 given in problem data. Other analysis: Accumulated depreciation increased by $20,000, which is the amount of depreciation expense. Retained earnings increased by $34,000, which is the difference between the net income of $68,000 and the dividends declared of $34,000. Continued

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b. continued Rural Company Statement of Cash Flows For Year Ended December 31 Cash flow from operating activities Cash received from customers Cash paid for merchandise purchased Cash paid to employees Cash paid for rent Cash paid for income taxes

$638,000 ($391,000) (102,000) (30,000) (34,000) (557,000)

Cash provided by operating activities Cash flow from investing activities Purchase of plant assets Cash used by investing activities Cash flow from financing activities Issuance of common stock Payment of dividends Cash provided by financing activities Net decrease in cash Cash at beginning of year Cash at end of year

81,000 (120,000) (120,000) 56,000 (34,000) 22,000 (17,000) 37,000 $ 20,000

$81,000 ‒ $120,000 = ($39,000)

$81,000/[($29,000+$12,000+$5,000+$17,000+$7,000+$8,000)/2] = 2.08

$81,000/$120,000 = 0.68

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P11-6B. Statement of Cash Flows (Direct Method) (LO4) (Appendix 11A) a. Cash, December 31 Current year $23,000 Cash, December 31 Prior year 31,000 Cash decrease during the year $ 8,000 b. Supporting computations: Cash received from customers: $946,000 sales ‒ $25,000 accounts receivable increase = $921,000 Cash paid for merchandise purchased: $507,000 cost of goods sold + $51,000 inventory increase ‒ $10,000 accounts payable increase = $548,000 Cash paid to employees: Equal to the $203,000 balance in wages expense Cash paid for insurance: $13,000 insurance expense ‒ $2,000 prepaid insurance decrease = $11,000 Cash paid for interest: $12,000 interest expense ‒ $5,000 interest payable increase = $7,000 Cash paid for income taxes: $57,000 income tax expense + $4,000 income tax payable decrease = $61,000

TESTBANKSELLER.COM Sale of equipment: $27,000 given in problem data. Purchase of equipment: $887,000 ending plant assets ‒ ($770,000 beginning plant assets ‒ $57,000 plant assets decrease from sale of equipment) = $174,000 Issuance of bonds payable: $135,000 ending bonds payable ‒ $80,000 beginning bonds payable = $55,000 Issuance of common stock: $660,000 ending common stock ‒ $585,000 beginning common stock = $75,000 Purchase of treasury stock: $52,000 ending treasury stock ‒ $0 beginning treasury stock = $52,000 Payment of dividends: $30,000 given in problem data. Continued

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b. continued Other analysis Accumulated depreciation increased by $14,000, which is the difference between the depreciation expense of $60,000 (increases accumulated depreciation) and the $46,000 accumulated depreciation on the equipment sold (decreases accumulated depreciation). Retained earnings increased by $80,000, which is the difference between the net income of $110,000 and the dividends declared of $30,000.

Sweet Company Statement of Cash Flows For Year Ended December 31 Cash flow from operating activities Cash received from customers Cash paid for merchandise purchased Cash paid to employees Cash paid for insurance Cash paid for interest Cash paid for income taxes

$921,000 ($548,000) (203,000) (11,000) (7,000) (61,000) (830,000)

Cash provided by operating activities Cash flow from investing activities Sale of equipment 27,000 TESTBANKSELLER.COM (174,000) Purchase of equipment Cash used by investing activities Cash flow from financing activities Issuance of bonds payable 55,000 Issuance of common stock 75,000 Payment of dividends (30,000) Purchase of treasury stock (52,000) Cash provided by financing activities Net decrease in cash Cash at beginning of year Cash at end of year

91,000

(147,000)

48,000 (8,000) 31,000 $ 23,000

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P11-7B. Statement of Cash Flows (Direct Method) (LO4) (Appendix 11A) a. Cash, December 31 Current year $34,000 Cash, December 31 Prior year 16,000 Cash increase during the year $18,000 b. Supporting computations: Cash received from customers: $800,000 sales ‒ $15,000 accounts receivable increase = $785,000 Cash paid for merchandise purchased: $530,000 cost of goods sold + $21,000 inventory increase ‒ $10,000 accounts payable increase = $541,000 Cash paid for wages and other operating expenses: $172,000 wages and other operating expenses shown in income statement. Cash paid for interest: $18,000 interest expense ‒ $8,000 increase in interest payable = $10,000 Cash paid for income taxes: $25,000 income tax expense + $5,000 decrease in income tax payable = $30,000 Sale of equipment: $13,000 given in problem data.

TESTBANKSELLER.COM Acquisition of patent in exchange for land: $79,000 given in problem data; this is a noncash investing and financing activity. Land given up had a cost of $43,000 (equal to the decrease in land) and the difference of $36,000 is the gain on exchange of land for patent. Improvements to building: $441,000 ending building and equipment ‒ $361,000 beginning building and equipment + $20,000 decrease from sale of equipment = $100,000 Issuance of bonds payable: $175,000 ending bonds payable ‒ $75,000 beginning bonds payable = $100,000 Payment of dividends: $27,000 given in problem data.

Continued

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b. continued Other analysis: Building and equipment increased by $80,000, which is the difference between the $100,000 increase from building improvements and the $20,000 decrease from the cost of equipment sold. Accumulated depreciation increased by $20,000, which is the difference between the $27,000 increase from depreciation expense and the $7,000 decrease from the sale of equipment. Patent increased by $73,000, which is the difference between the $79,000 increase from the patent acquisition and the $6,000 decrease from patent amortization expense. Common stock account balance did not change. Retained earnings increased by $31,000, which is the difference between the net income of $58,000 and the dividends declared of $27,000.

Huber Company Statement of Cash Flows For Year Ended December 31 Cash flow from operating activities TESTBANKSELLER.COM Cash received from customers Cash paid for merchandise purchased Cash paid for wages and other operating expenses Cash paid for interest Cash paid for income taxes Cash provided by operating activities Cash flow from investing activities Sale of equipment Improvements to building Cash used by investing activities Cash flow from financing activities Issuance of bonds payable Payment of dividends Cash provided by financing activities Net increase in cash Cash at beginning of year Cash at end of year

$785,000 ($541,000) (172,000) (10,000) (30,000) (753,000) 32,000 13,000 (100,000) (87,000) 100,000 (27,000) 73,000 18,000 16,000 $ 34,000

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P11-8B. Statement of Cash Flows (Direct Method) (LO4) (Appendix 11A) a. Cash, December 31 Current year $43,000 Cash, December 31 Prior year 36,000 Cash increase during the year $ 7,000 b. Supporting computations: Cash received from customers: $317,000 services fees earned + $5,000 accounts receivable decrease = $322,000 Cash received as dividends and interest: $14,000 dividend and interest income + $4,000 decrease in interest receivable $18,000

Cash paid for wages and other operating expenses: $285,000 wages and other operating expenses + $8,000 increase in prepaid expenses + $2,000 decrease in accrued liabilities = $295,000 Sale of equipment: $9,000 given in problem data. Sale of investments: $87,000 given in problem data. Extension of franchise: $91,000 ending franchise ‒ $29,000 beginning franchise + $10,000 franchise amortization expenseT=E$72,000 STBANKSELLER.COM Payment of notes payable: $27,000 beginning notes payable ‒ $0 ending notes payable = $27,000 Acquisition of land in exchange for common stock: $60,000 given in problem data; this is a noncash investing and financing activity. Payment of dividends: $15,000 given in problem data Purchase of treasury stock: $20,000 ending treasury stock v $0 beginning treasury stock = $20,000 Continued

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b. continued Other analysis: Long-term investments—available for sale decreased by $70,000, which is the cost of the investments sold. Fair value adjustment to investments decreased by $10,000, due to the elimination of this account balance at yearend (this was the adjustment related to the investments sold); no cash flow effect. Plant assets increased by $41,000, which is the difference between the $60,000 land acquired and the $19,000 cost of equipment sold. Accumulated depreciation increased by $49,000, which is the difference between the $52,000 increase from depreciation expense and the $3,000 decrease from the sale of equipment. Common stock increased by $60,000, which is the par value of the shares issued to acquire land. Retained earnings decreased by $21,000, which is the sum of the net loss of $6,000 and the dividends declared of $15,000. Unrealized gain on investments decreased by $10,000, due to the elimination of this account balance at yearend (this was the unrealized gain in stockholders' equity related to the investments TESsold); TBANno KScash ELLflow ER.effect. COM Towne Company Statement of cash flows For Year Ended December 31 Cash flows from operating activities Cash received from customers Cash received as dividends and interest Cash paid for wages and other operating expenses Cash provided by operating activities Cash flows from investing activities Sale of equipment Sale of investments Extension of franchise Cash provided by investing activities Cash flows from financing activities Payment of notes payable Payment of dividends Purchase of treasury stock Cash used by financing activities Net increase in cash Cash at beginning of year Cash at end of year

$322,000 18,000 $340,000 (295,000) 45,000 9,000 87,000 (72,000) 24,000 (27,000) (15,000) (20,000) (62,000) 7,000 36,000 $ 43,000

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P11-9B. Analyzing Cash Flow Ratios (LO3) a. (N) No effect (N) No effect (N) No effect b. (I) Increase (I) Increase (I) Increase c. (N) No effect (N) No effect (N) No effect d. (D) Decrease (N) No effect (D) Decrease e. (D) Decrease (D) Decrease (D) Decrease f. (N) No effect (D) Decrease (N) No effect

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SERIAL PROBLEM: ANGEL CITY GREETINGS SP11. a. Indirect method ANGEL CITY GREETINGS Statement of Cash Flows Year Ended August 31 Cash flow from operating activities Net income Add depreciation Increase in accounts receivable Increase in inventory Increase in prepaid expenses Increase in accounts payable Increase in unearned revenue Increase in other current liabilities Cash provided by operating activities

$ 16,500 3,250 (11,000) (16,000) (1,000) 6,200 1,250 1,900

Cash flow from investing activities Purchase of equipment Cash used by investing activities

(17,500)

1,100

(17,500)

ESTBANKSELLER.COM Cash flow from financing T activities Proceeds from bank note Issuance of common stock Issuance of preferred stock Cash dividends Cash provided by financing activities Increase in cash Cash at beginning of year Cash at end of year

15,000 10,000 5,000 (1,300) 28,700 12,300 0 $ 12,300

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b. Direct method ANGEL CITY GREETINGS Statement of Cash Flows Year Ended August 31 Cash flow from operating activities Cash collected from customers Cash paid for inventory Cash paid for operating expenses Cash paid for interest Cash paid for taxes Cash provided by operating activities

$125,2501 (81,800)2 (32,550)3 (900) (8,900)

Cash flow from investing activities Purchase of equipment Cash provided by investing activities

(17,500)

Cash flow from financing activities Proceeds from bank note Issuance of common stock Issuance of preferred stock Cash dividends Cash provided by financing activities Increase in cash Cash at beginning of year Cash at end of year

1,100

(17,500)

15,000 10,000 5,000 (1,300)

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28,700 12,300 0 $ 12,300

$135,000 (revenue) - $11,000 (A/R) + $1,250 (unearned revenue) -$72,000 (COGS) - $16,000 (inventory) + $6,200 (A/P) 3 -$36,700 (operating expenses) + $3,250 (depreciation) - $1,000 (prepaid insurance) + $1,900 (other current liabilities) 2

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EXTENDING YOUR KNOWLEDGE REPORTING AND ANALYSIS EYK11-1. Financial Reporting Problem: Columbia Sportswear Company ($ in thousands) a. Cash and cash equivalents increased by $121,777 in 2017 to $673,166 at December 31. b. The largest source of cash and cash equivalents in 2017 was from net cash from operations of $341,128. c. The single largest outflow of cash and cash equivalents in 2017 was the purchase of shortterm investments of $130,993. d. Cash dividends were $50,909. e. Columbia Sportswear uses the indirect method. This method begins with net income. Because depreciation and amortization are subtracted to arrive at net income, but are not cash outflows, they need to be added back to net income to arrive at cash provided by operating activities.

EYK11-2.

Comparative Analysis Problem: Columbia Sportswear Company vs. Under Armour, Inc. ($ in thousands) a. Columbia Sportswear $341,128 TESTB– A($53,352 NKSEL–L$279) ER.C=O$288,055 M Under Armour $234,063 – $281,339 = ($47,276) b. Columbia Sportswear $341,128 / ($53,352 - $279) = 6.4 Under Armour $234,063 / $281,339 = 0.8 c. Columbia appears to have sufficient cash flow to finance its capital expenditures as measured in both absolute and relative terms. Under Armour appears to be unable to generate enough cash flow from operating activities to finance its capital expenditures.

EYK11-3. Business Decision Problem Depreciation expense is a noncash expense. The reason depreciation expense is shown as an ddition to net income in the calculation of the cash flow from operating activities is to remove the effect it had on the determination of net income. This is one step in the process of converting the net income from an accrual basis to a cash basis. Changing depreciation methods will not change the cash flow from operating activities. An increase in depreciation (calculated using double declining balance, for example) will cause a corresponding decrease in net income. Adding this larger depreciation amount to the reduced net income will give the same answer as adding the current straightline depreciation amount to the current net income figure.

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EYK11-4. Financial Analysis Problem a. Current ratio Year 3 $1,018,354/$504,444 = 2.02 Year 2 $1,056,443/$468,254 = 2.26 Year 1 $1,055,776/$358,729 = 2.94 b. Operating-cash-flow-to-current-liabilities ratio Year 3 $259,204/[($468,254 + $504,444)/2] = 0.53 Year 2 $229,382/[($358,729 + $468,254)/2] = 0.55 Year 1 $235,186/[($345,594 + $358,729)/2] = 0.67 c. The three-year trends in these two ratios run in the same direction. The current ratio is getting weaker over the three-year period, decreasing from 2.94 to 2.02. Similarly, the operating-cash-flow-to-current-liabilities ratio is getting weaker over the same three-year period, decreasing from 0.67 to 0.53. The trends in these two ratios, therefore, reinforce each other. Even though the ratios are declining over the three-year period, their levels in Year 3 are still fairly strong. d. Operating-cash-flow-to-capital-expenditures ratio Year 3 $259,204/$99,914 = 2.59 Year 2 $229,382/$91,484 = 2.51 Year 1 $235,186/$84,955 = 2.77 The operating-cash-flow-to-capital-expenditures ratio is strong in all three years. Ratios in excess of 1.0 mean that operating activities are providing sufficient cash to finance capital expenditures. Parker Hannifin's ratio TESTB ANis KSwell ELin LEexcess R.COofM 1.0 in each year.

CRITICAL THINKING EYK11-5. Accounting Research Problem: General Mills, Inc. a. All investments purchased with an original maurity of three months or less are treated as cash equivalents. b. General Mills uses the indirect method to report its cash provided by operating activities. c. Cash and cash equivalents increased $2.4 million during fiscal 2017. Cash and cash equivalents at May 28, 2017 are $766.1 million. d. General Mills' 2017 operating cash-flow-to-capital expenditures ratio is: $2,313.3 / ($684.4 - $4.2) = 3.40 e. General Mills' 2017 operating cash-flow-to-current-liabilities ratio is: $2,313.3 / [($5,330.8 + $5,014.7) / 2] = 0.45

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EYK11-6. Accounting Communications Activity Memo: Ms. Henderson, Both the income statement and the statement of cash flows report activity of the company over a period of time. The primary difference is that the income statement is based on the accrual method of accounting, whereas the statement of cash flows is based on the cash basis of accounting, simply showing cash inflows and cash outflows. The statement of cash flows is designed to give the reader more information than simply the change in cash and cash equivalents for the period. By formatting a company’s cash flows into the three sections of operating, investing, and financing, the user can form a better idea as to the sustainability of the company’s cash flows. Cash flows from operating activities is considered by most users the most important of the three areas as the only way that a company can stay in business in the long run is to be able to generate positive operating cash flows. Sincerely, Your Name

EYK11-7. Accounting Ethics Case The major focus in this case is whether the criterion used to identify the suppliers to receive delayed payments should beTthe ESTimpact BANKon SEprofits LLERor.Csome OM concept of equity. Discussion points should include the following: 1. Short-term versus long-term impact on profits. a. Delaying payments to suppliers that do not charge interest will have the most favorable immediate impact on profits. b. Delaying payments to suppliers that do not charge interest may cause future changes from these suppliers in their policies (to begin charging interest) and/or prices (to recover costs of carrying customers' unpaid accounts) and/or service priorities. (Anton may not receive the same service treatment that it currently receives if suppliers discover that Anton is paying promptly only suppliers that charge interest.) It is difficult to predict the future responses of suppliers not receiving payment, but it is possible that their future changes may have a long-term negative impact on Anton's profits. The long-term negative impact may more than offset the short-term benefit to profits from delaying payment to these suppliers. 2. Whether it is appropriate to use a selection criterion other than impact on profits. 3. The concept of equity used if impact on profits is not the selection of criterion. Is it more appropriate to provide equal treatment of all suppliers or favored treatment for long-term suppliers?

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EYK11-8. Corporate Social Responsibility Problem Students’ answers will vary considerably as this is an ongoing partnership that is very extensive in its breadth.

EYK11-9. Forensic Accounting Problem Some basic internal controls in addition to the separation of duties, like job rotation, mandatory vacations, surprise cash counts, and physical security of cash, can also assist in deterring and detecting larceny schemes.

EYK11-10. Working with the Takeaways The free cash flow is $8,200 ($9,783 - $1,583); the operating-cash-flow-to-current-liabilities ratio is 0.73 = ($9,783/$13,328); and the operating-cash-flow-to-capital-expenditures ratio is 6.18 $9,783/$1,583). Thus, the Home Depot does not generate sufficient cash flow from operating activities to pay all of its current liabilities. The company will need to either increase its operating cash flow or find some alternative means of financing, such as short-term bank financing, to pay its current liabilities. The company is, however, generating sufficient cash flow from operations to fund capital expenditures.

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Chapter 12 Analysis and Interpretation of Financial Statements QUESTIONS 1.

In a single‒step income statement, the ordinary, continuing income of the business is derived in one step by subtracting total expenses from total revenue. In a multiple‒step income statement, one or more intermediate amounts—such as gross profit on sales or income before taxes—are derived before the ordinary, continuing income is reported.

The gross profit on sales amount is identified and presented only in a multiple‒step income statement. Income from continuing operations, income before extraordinary items, and net income are amounts that are identified and presented in both single‒and multiple‒step income statements.

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A segment of a business is a unit—such as a department or a division—the activities of which constitute a separate major line of business or a particular class of customer. Reporting gains and losses from a discontinued segment in a separate section of the income statement permits the results of ordinary, continuing operations to be identified. This should make it easier for financial statement users to estimate a company's future earnings performance.

Horizontal analysis compares the same item(s) on financial statements for two or more years. Vertical analysis evaluates relationships among items in a single financial statement, such as the income statement, for a given year.

The statement is incorrect. Analysts should focus attention on significant items only. Large percentage changes may occur in items whose dollar amounts are not significant.

Trend percentages are the data of a given year expressed as a percentage of the related amounts in a base year. Trend percentages are calculated by selecting a base year and dividing the amounts of the base year into the amounts of the other years. The analyst must choose a representative base year or the resulting percentages may be distorted by the unrepresentative aspects of the base‒year data.

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A common‒size financial statement presents each item in the statement as a percentage of a key figure. Common-size financial statements highlight the relative importance of the various items in the statements. Common‒size financial statements make it easier to compare different firms within the same industry or to compare the same firm for several years.

The key figure in a common‒size income statement is sales revenue (or net sales). The key figure in a common-size balance sheet is total assets.

In comparing the profitability of Lite Company and Scanlon Company, a specific amount of net income is most meaningful when related to the amount of assets employed or to the common stockholder equity. Also, a comparison with sales revenue might be made. Gross profit percentage and asset turnover are other indicators of profitability. All these relationships can be compared with those of earlier periods for the companies, with comparable competitors, and with industry averages.

10.

Profit margin can be safely used in like companies in the same industry. Profit margin should be used with caution when comparing companies in different industries, because this ratio varies widely among industries.

11.

Return on assets summarizes, in one ratio, the impact of two component ratios: orofit margin and asset turnover. Return on assets is the product of these two latter ratios, as follows: Return on assets = Profit margin x Asset turnover.

12.

Return on assets = Profit margin x Asset turnover. Blare Company's return on TEassets STBA=N0.065 KSELxL2.40 ER.=C15.6 OM percent.

13.

The return on common stockholders’ equity measures the ultimate profitability of the ownership interest held by common stockholders. The ratio shows the percentage of profit earned (net of preferred stock dividends) on each dollar of common stockholders’ equity.

14.

The quick ratio relates quick assets (cash and cash equivalents, short‒term investments, and accounts receivable) to current liabilities, whereas the current ratio relates current assets to current liabilities. Compared with the current ratio, the quick ratio excludes inventory and prepaid expenses from the assets used in the ratio.

15.

a. b. c. d. e. f. g.

16.

The debt-to-equity ratio is significant because it discloses the relative amount of capital furnished by creditors and stockholders. The ratio gives potential creditors an indication of the margin of protection available to them. The ratio is computed by dividing total liabilities by total stockholders’ equity.

Current ratio: high Quick ratio: high Operating-cash-flow-to-current liabilities ratio: high Accounts receivable turnover: high Average collection period: low Inventory turnover: high Days' sales in inventory: low

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17.

Determining the times-interest-earned ratio is useful to bondholders and other creditors because it reveals the margin of safety for their interest payments. This ratio indicates how many times the firm's earnings would pay the total interest payments. Other things being equal, the larger this ratio, the safer the interest payments. The times-interestearned ratio is computed by dividing the income before interest expense and income taxes by interest expense.

18.

The operating-cash-flow-to-capital-expenditures ratio measures the ability of a firm's operations to provide sufficient cash to replace, and expand when appropriate, its property, plant, and equipment. To the extent that the acquisition of plant assets can be financed with cash provided by operating activities, a firm does not have to use other financing sources, such as long-term debt.

19.

(a) Price-earnings ratio:

$46.80/$4.50 = 10.4

(b) Dividend yield:

$2.34/$46.80 = 5 percent

$2.34/$4.50 = 52 percent

20.

Inherent limitations of financial statement data focus on problems of comparability. The following are acceptable answers: a. Companies otherwise similar may use different accounting methods. b. Inflation may distort the comparison of financial data through time.

TESTBANKSELLER.COM c. Data for companies operating in several industries (conglomerates) may be difficult to analyze because of the consolidated nature of the financial data. Segment disclosures may be helpful in overcoming this limitation.

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SHORT EXERCISES SE12-1. Quick Ratio (LO4) Quick ratio: $64,300/$45,000 = 1.43 This ratio is just slightly better than the industry average of 1.3.

SE12-2. Current Ratio (LO4) Current ratio: $103,800/$45,000 = 2.31 This ratio is just slightly less than the industry average of 2.4.

SE12-3. Accounts Receivable Turnover (LO4) Accounts receivable turnover: $210,000/[($41,000 + $46,000)/2] = 4.83 This ratio is below the industry average of 5.9 times.

SE12-4. Inventory Turnover (LO4) Inventory turnover: $125,000/[($43,700 + $39,500)/2] = 3.00 This ratio is slightly less thanTthe ESindustry TBANKaverage SELLEof R.3.5 COtimes, M so the firm is not particularly efficient in converting inventory into sales.

SE12-5. Debt-to-Equity Ratio (LO4) Debt-to-equity ratio: $85,000/$87,000 = 0.98 This ratio shows that Hi-Tech uses more debt than the industry average of .73, suggesting that Hi-Tech may need to consider issuing stock when additional funds are needed in the future.

SE12-6. Gross Profit Percentage (LO4) Gross profit percentage: $85,000/$210,000 = 40.5 percent This percentage is not as good as the industry average of 42.8%.

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SE12-7. Profit Margin (LO4) Profit margin: $8,300/$210,000 = 4.0 percent This percentage is not as good as the industry average of 4.5%. Hi-Tech apparently has room to improve the efficiency and effectiveness of its operating activities.

SE12-8. Return on Assets (LO4) Return on assets: $8,300/[($167,000 + $172,000)/2] = 4.9 percent Hi-Tech is below the industry ROA of 7.6 percent.

SE12-9. Dividends per Share (LO4) Dividends per share: $2,600,000 dividends/2,000,000 shares = $1.30 dividends per share of common stock. Dividend payout ratio:

$1.30/$4.15 = 31.3 percent

SE12-10. Earnings per Share (LO4) Price-earnings ratio: $62.25/$4.15 = 15.0 Dividend yield: $1.30/$62.25 TESTBAN=K2.1 SEpercent LLER.COM SE12-11. Persistent Earnings (LO1) a. (P) persistent b. (T) transitory c. (P) persistent d. (P) persistent e. (T) transitory

SE12-12. Horizontal Analysis (LO2) The change from 2018 to 2019 was a decrease of 5.3% ($900,000 ‒ $950,000)/$950,000 The change from 2019 to 2020 was an increase of 11.1% ($1,000,000 ‒ $900,000)/$900,000

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SE12-13. Common-Size Income Statement (LO3) 2018 = 17% (100.0 ‒ 62.5 ‒ 20.5) 2019 = 18% (100.0 ‒ 63.0 ‒ 19.0) 2020 = 18.5% (100.0 ‒ 60.5 ‒ 21.0) Prag’s net income as a percentage of net sales increased over the three-year period.

SE12-14. Financial Statement Analysis Limitations (LO5) b. Firms may be audited by different auditing firms.

SE12-15. Financial Statement Disclosures (LO6 – Appendix 12A) d. Bullet points

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EXERCISES—SET A E12-1A. Income Statement Sections (LO1) Income from continuing operations Discontinued operations Loss from operations of discontinued segment (net of $26,250 reduction of income taxes) Gain on disposal of discontinued segment (net of $73,500 income taxes) Net income

E12-2A. Earnings per Share (LO4) Shares Months Outstanding 240,000 x 3 = 245,000 x 4 = 275,000 x 5 = 12

$850,000

$ (48,750) 136,500

87,750 $937,750

Share Months 720,000 980,000 1,375,000 3,075,000

Weighted-average number of common shares outstanding: 3,075,000/12 = 256,250 Earnings per share: $589,375/256,250 =K $2.30 TESTBAN SELLER.COM E12-3A. Comparative Income Statements (LO2) a. Ross Company Comparative Income Statements Increase 2020 2019 (Decrease) $550,000 $450,000 $100,000 336,000 279,000 57,000 214,000 171,000 43,000

Percent Change 22.2 20.4 25.1

99,000 50,000 149,000 22,000 5,400 $16,600

6.1 20.0 10.7 122.7 44.4 148.2

Sales revenue Cost of goods sold Gross profit on sales Operating expenses Selling expenses 105,000 Administrative expenses 60,000 Total 165,000 Income before income taxes 49,000 Income tax expense 7,800 Net income $ 41,200

6,000 10,000 16,000 27,000 2,400 $24,600

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b. Although sales revenue increased 22.2 percent, cost of goods sold increased 20.4 percent. As a result, gross profit increased 25.1 percent. The firm's selling prices are apparently keeping pace with increases in product costs. Another favorable aspect is that selling expenses increased by only 6.1 percent compared with the 22.2 percent increase in sales. Also, administrative expenses increased 20.0 percent, and total expenses increased only 10.7 percent. The smaller increase in expenses enabled the firm to increase its income before income taxes by 122.7 percent and net income by 148.2 percent.

E12-4A. Common-Size Income Statements (LO3) a. Ross Company Common-Size Income Statements (Percent of Sales Revenue) 2020 2019 Sales revenue 100.0% 100.0% Cost of goods sold 61.1 62.0 Gross profit on sales 38.9 38.0 Operating expenses Selling expenses 19.1 22.0 Administrative expenses 10.9 11.1 Total 30.0 33.1 Income before income taxes 8.9 4.9 Income tax expense 1.4 1.2 Net income 7.5% 3.7% TESTBANKSELLER.COM b. During 2020, gross profit increased to 38.9 percent of sales revenue (from 38 percent in Year 2019). However, operating expenses also decreased to 30.0 percent of sales revenue (from 33.1 percent in 2019). As a result, income before income taxes increased from 4.9 percent of sales revenue in Year 2019 to 8.9 percent in 2020. Also, net income increased to 7.5 percent of sales revenue in 2020 from 3.7 percent in 2019.

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E12-5A. Ratios Analyzing Firm Profitability (LO4) a. Gross profit percentage: Gross profit on sales/Net sales $3,050,000/$8,600,000 = 35.5 percent b. Profit margin: Net income/Net sales $567,600/$8,600,000 = 6.6 percent c. Asset turnover: Net sales/Average total assets $8,600,000/[($6,000,000 + $6,500,000)/2] = 1.38 d. Return on assets: Net income/Average total assets $567,600/[($6,000,000 + $6,500,000)/2] = 9.1 percent e. Return on common stockholders’ equity: (Net income - Preferred stock dividends)/Average common stockholders’ equity ($567,600 - $0)/[($3,200,000 + $4,000,000)/2] = 15.8 percent

E12-6A. Working Capital and Short-Term Liquidity Ratios (LO4) a. Current liabilities: TESTBANKSELLER.COM $460,000/3.00 = $153,333 b. Working capital: Current assets - Current liabilities: $460,000 - $153,333 = $306,667 c. Quick ratio: (Cash and cash equivalents + Short-term investments + Accounts receivables)/Current Liabilities ($29,000 + $49,400 + $170,000)/$153,333 = 1.62 d. Operating-cash-flow-to-current-liabilities ratio: Cash flow from operating activities/Average Current Liabilities $60,000/[($140,000 + $153,333)/2] = 0.41

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E12-7A. Accounts Receivable and Inventory Ratios (LO4) a. Accounts receivable turnover: Net sales/Average accounts receivable $900,000/[($160,000 + $170,000)/2] = 5.45 b. Average collection period: 365/Accounts receivable turnover 365/5.45 = 67.0 days c. Inventory turnover: Cost of goods sold/Average inventory $550,000/[($195,000 + $200,000)/2] = 2.78 d. Days' sales in inventory: 365/Inventory turnover 365/2.78 = 131.3 days

E12-8A. Ratios Analyzing Long Term Firm Solvency (LO4) a. Debt-to-equity ratio: Total liabilities/Total stockholders’ equity $2,400,000/$4,000,000 = 0.60 b. Times-interest-earned ratio: TESTBANKSELLER.COM Income before interest expense and income taxes/Interest expense ($496,500 + $90,000 + $203,500)/$90,000 = 8.78 c. Operating-cash-flow-to-capital-expenditures ratio: Cash flow from operating activities/Annual capital expenditures $425,000/$320,000 = 1.33

E12-9A. Financial Ratios for Common Stockholders (LO4) a. Price-earnings ratio: Market price per share/Earnings per share $63.00/$5.25 = 12.0 b. Dividend yield: Annual dividends per share/Market price per share $2.10/$63.00 = 3.3 percent c. Dividend payout ratio: Annual dividends per share/Earnings per share $2.10/$5.25 = 40 percent

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E12-10A. Financial Statement Limitations (LO5) There are several potential complications that could present difficulties in an analysis of Patton Company. First, the company recently introduced a credit card that now makes up twenty percent of the company’s profit. This will make trend analysis difficult. The selection of Johnson Stores as a comparable firm also presents difficulties. First, Johnson Stores is much larger. Second, it sells groceries, a much lower margin item. Third, it does not have a credit card, therefore it will not have similar revenues from this type of activity.

E12-11A. Financial Statement Notes (LO6) a. Commitment b. Significant accounting policy c. Contingency d. Special transaction (related party disclosure)

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EXERCISES—SET B E12-1B. Income Statement Sections (LO1) Income from continuing operations Discontinued operations Loss from operations of discontinued segment (net of $80,000 reduction of income taxes) Loss on disposal of discontinued segment (net of $90,000 reduction of income taxes) Net income

E12-2B. Earnings Per Share (LO4) Shares Months Outstanding 35,000 x 4 = 45,000 x 4 = 55,000 x 4 = 12

$750,000

$120,000 135,000

255,000 $495,000

Share Months 140,000 180,000 220,000 540,000

Weighted-average number of common shares outstanding: 540,000/12 = 45,000 Earnings per share: $468,000/45,000 TESTBA=N$10.40 KSELLER.COM E12-3B. Comparative Balance Sheets (LO2) a. Great Buy Co., Inc. Comparative Balance Sheets (Thousands of Dollars) Feb. 28, Feb. 22, Increase 2020 2019 (Decrease) Assets Cash and cash equivalents $ 59,872 $ 7,138 $ 52,734 Accounts receivables 52,944 37,968 14,976 Merchandise inventories 637,950 249,991 387,959 Other current assets 13,844 9,829 4,015 Current assets 764,610 304,926 459,684 Property and equipment (Net) 172,724 126,442 46,282 Other assets 15,160 7,774 7,386 Total Assets $952,494 $439,142 $513,352

Percent Change 738.8 39.4 155.2 40.8 150.8 36.6 95.0 116.9

Table continued

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a. table continued Great Buy Co., Inc. Comparative Balance Sheets - continued (Thousands of Dollars) Feb. 28, Feb. 22, Increase 2020 2019 (Decrease) Liabilities Current liabilities Long-term liabilities Total Liabilities

Percent Change

$402,028 239,022 641,050

$186,005 70,854 256,859

$216,023 168,168 384,191

116.1 237.3 149.6

Stockholders’ Equity Common stock 2,087 Additional paid-in-capital 224,089 Retained earnings 85,268 Total Stockholders’ Equity 311,444 Total Liabilities & Stockholders’ Equity $952,494

1,149 137,151 43,983 182,283

938 86,938 41,285 129,161

81.6 63.4 93.9 70.9

$439,142

$513,352

116.9

b. The comparative data show that Great Buy Co., Inc., experienced tremendous growth during the year from February 22, 2019, to February 28, 2020. Every asset, liability, and stockholders’ equity category reflects an increase. The percentage increases are large. Total assets more than doubled in one year, with a percentage increase of 116.9 percent. Because Great Buy is a merchandising firm, the 155.2 percent growth in merchandise inventories is of particular note. Current and long-term liabilities also show very large percentage increases; in total liabilities just about TESTBnote ANKthat SELthe LEdollar R.COincrease M matches the dollar increase in merchandise inventories. The largest percentage increase relates to cash and cash equivalents, but this is due to the fact that the base amount is relatively small. In terms of dollar changes, the change in cash and cash equivalents is the fifth largest change in the comparative balance sheets.

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E12-4B. Common-Size Balance Sheets (LO3) a. Great Buy Co., Inc. Common-Size Balance Sheets (Percentage of Total Assets) Feb. 28, 2020

Feb. 22, 2019

Assets Cash and cash equivalents Accounts receivables Merchandise inventories Other current assets Current assets Property and equipment (net) Other assets Total Assets

6.3% 5.6 67.0 1.6 80.3* 18.1 1.6 100.0%

1.6% 8.6 56.9 2.2 69.4* 28.8 1.8 100.0%

Liabilities Current liabilities Long-term liabilities Total Liabilities

42.2% 25.1 67.3

42.4% 16.1 58.5

Stockholders’ Equity Common stock TESTBANKSELLE0.2 R.COM Additional paid in-capital 23.5 Retained earnings 9.0 Total Stockholders’ Equity 32.7 Total Liabilities and Stockholders’ Equity 100.0%

0.3 31.2 10.0 41.5 100.0%

*Due to rounding, percentage does not agree with the sum of component percentages.

b. Great Buy is more liquid at February 28, 2020, than the year before: cash and cash equivalents compose 6.3 percent of total assets at February 28, 2020, compared to 1.6 percent at February 22, 2019. Inventory is clearly the most significant asset, representing a sizable 67.0 percent of total assets at February 28, 2020, and 56.9 percent of total assets a year earlier. With property and equipment at only 18.1 percent of total assets at February 28, 2020, and 28.8 percent a year earlier, it should be clear that Great Buy's practice is to lease, rather than own, its retail locations. (Most of Great Buy's store leases are operating leases; leases on a distribution center and some equipment are capitalized; capitalized leases represent less than 8 percent of Great Buy's property and equipment at February 28, 2020.) Great Buy has proportionately more debt in its capital structure at February 28, 2020, than it did a year before: total liabilities are 67.3 percent of total assets at February 28, 2020, compared with 58.5 percent a year earlier. The proportionate increase in liabilities is centered in the long term category.

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E12-5B. Ratios Analyzing Firm Profitability (LO4) a. Gross profit percentage: Gross profit on sales/Net sales $2,593,600/$6,600,000 = 39.3 percent b. Profit margin: Net income/Net sales $310,000/$6,600,000 = 4.7 percent c. Asset turnover: Net sales/Average total assets $6,600,000/[($2,500,000 + $2,850,000)/2] = 2.47 d. Return on assets: Net income/Average total assets $310,000/[($2,500,000 + $2,850,000)/2] = 11.6 percent e. Return on common stockholders’ equity: (Net income ‒ Preferred stock dividends)/Average common stockholders’ equity ($310,000 ‒ $25,000)/[($1,800,000 + $1,900,000)/2] = 15.4 percent

E12-6B. Working Capital and Short-Term Liquidity Ratios (LO4) a. Current liabilities: TESTBANKSELLER.COM $430,000/2.15 = $200,000 b. Working capital: Current assets ‒ Current liabilities $430,000 ‒ $200,000 = $230,000 c. Quick ratio: (Cash and cash equivalents + Short-term investments + Accounts receivable)/Current liabilities ($28,000 + $87,000 + $125,000)/$200,000 = 1.20 d. Operating-cash-flow-to-current-liabilities ratio: Cash flow from operating activities/Average current liabilities $33,830/[($195,000 + $200,000)/2] = 0.17

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E12-7B. Accounts Receivable and Inventory Ratios (LO4) a. Accounts receivable turnover: Net sales/Average accounts receivable $580,000/[($121,000 + $125,000)/2 ] = 4.72 b. Average collection period: 365/Accounts receivable turnover 365/4.72 = 77.3 days c. Inventory turnover: Cost of goods sold/Average inventory $345,900/[($154,650 + $178,500)/2] = 2.08 d. Days' sales in inventory: 365/Inventory turnover 365/2.08 = 175.5 days

E12-8B. Ratios Analyzing Long-Term Firm Solvency (LO4) a. Debt-to-equity ratio: Total liabilities/Total stockholders’ equity $3,500,000/$2,200,000 = 1.59 b. Times-interest-earned ratio: TESTBANKSELLER.COM Income before interest expense and income taxes/Interest expense ($294,000 + $170,000 + $126,000)/$170,000 = 3.47 c. Operating-cash-flow-to-capital-expenditures ratio: Cash flow from operating activities/Annual capital expenditures $247,000/$435,000 = 0.57

E12-9B. Financial Ratios for Common Stockholders (LO4) a. Price-earnings ratio: Market price per share/Earnings per share $35.15/$2.00 = 17.58 b. Dividend yield: Annual dividends per share/Market price per share $0.85/$35.15 = 2.4 percent c. Dividend payout ratio: Annual dividends per share/Earnings per share $0.85/$2.00 = 42.5 percent

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E12-10B. Financial Statement Limitations (LO5) There are several potential complications that could present difficulties during an analysis of Anderson Company. First, the company recently discontinued a segment that accounted for fifteen percent of the company’s assets. This will make trend analysis difficult. The selection of Bertran, Inc. as a comparable firm also presents difficulties. First, Anderson is much larger. Second, Bertran not only does manufacturing, but also does contract repair work, a service function that likely has much different margins.

E12-11B. Financial Statement Notes (LO6) a. Significant accounting policy b. Special transaction (related party disclosure) c. Segment (reliance on major customer) d. Contingency

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PROBLEMS—SET A P12-1A. Income Statement Format (LO1) a. Belvidere Company Income Statement For Year Ended Sales revenue Cost of goods sold Gross profit on sales Selling expenses 87,000 Administrative expenses 73,000 Operating income Interest expense Income from continuing operations before taxes Income tax expense Income from continuing operations Discontinued operations Loss from operations of discontinued segment (net of $24,000 reduction of income taxes) (36,000) Gain on disposal of discontinued segment (net of $16,000 income taxes) TESTBANKSELLER.COM24,000 Net income

$772,000 464,000 308,000 160,000 148,000 10,000 138,000 60,000 78,000

(12,000) $ 66,000

b. Belvidere Company Income Statement For Year Ended Sales revenue Expenses Cost of goods sold Selling expenses Administrative expenses Interest expense Income tax expense Total expenses Income from continuing operations Discontinued operations Loss from operations of discontinued segment (net of $24,000 reduction of income taxes) Gain on disposal of discontinued segment (net of $16,000 income taxes) Net income

$772,000 $464,000 87,000 73,000 10,000 60,000 694,000 78,000

(36,000) 24,000

(12,000) $ 66,000

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P12-2A. Earnings per Share (LO4) Net Income $516,000 Shares Months Outstanding Share Months 150,000 x 2 = 300,000 160,000 x 5 = 800,000 176,000 x 3 = 528,000 170,000 x 2 = 340,000 12 1,968,000 Weighted-average number of common shares outstanding: 1,968,000/12 = 164,000 Earnings per share: $516,000/164,000 = $3.15

P12-3A. Earnings per Share and Multiple-Step Income Statement (LO1, LO4)) Bowden Corporation Income Statement For Year Ended December 31 Sales revenue Cost of goods sold Gross profit on sales Selling expenses $65,000 Administrative expenses TESTBANKSELLER.CO72,000 M Operating income Loss on sale of equipment Income before taxes Income tax expense Net income Earnings per share of common stock*

$760,000 450,000 310,000 137,000 173,000 5,000 168,000 42,000 $126,000 $5.04

*Weighted-average number of common shares outstanding:

Shares 20,000 27,000 29,000

Outstanding Months x 4 = x 6 = x 2 = 12

Share Months 80,000 162,000 58,000 300,000

300,000/12 = 25,000 weighted-average number of common shares outstanding EPS: $126,000 / 25,000 = $5.04

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P12-4A. Trend Percentages (LO2) a.

Trend Percentages Year 1 Year 2

Year 3

Year 4

Year 5

Net sales Net income Total assets

100 100 100

111.6 114.1 108.7

119.3 121.9 114.6

123.6 132.8 120.0

132.4 149.7 129.2

b. Profit margin:

4.48%

4.57%

4.81%

5.06%

c. As a percentage of the base year amount, net sales and total assets increased in each year, which represents steady growth. Also favorable is the fact that net income increased 49.7 percent during the five years compared with 32.4 percent and 29.2 percent increases in net sales and total assets, respectively. The profit margin was consistently above the rate considered good for the industry during all five years and increased most years. Apparently, Vibrant Controls, Inc. is a well-managed company.

P12-5A. Changes in Various Ratios (LO4) a. 1. Gross profit percentage: Gross profit on sales/Net sales $345,000/$920,000 =T37.5 ESTpercent BANKSELLER.COM 2. Return on assets: Net income/Average total assets $61,000/[($675,000 + $750,000)/2] = 8.6 percent 3. Profit margin: Net income/Net sales $61,000/$920,000 = 6.6 percent 4. Return on common stockholders’ equity: Net income ‒ Preferred stock dividends/Average common stockholders’ equity ($61,000 ‒ $0)/[($400,000 + $450,000)/2] = 14.4 percent 5. Accounts receivable turnover: Net sales/Average accounts receivable $920,000/[($120,000 + $126,000)/2] = 7.48 6. Average collection period: 365/Accounts receivable turnover 365/7.48 = 48.8 days continued

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a. continued 7. Inventory turnover: Cost of goods sold/Average inventory $575,000/[($160,000 + $196,000)/2 ] = 3.23 8. Times-interest-earned ratio: Income before interest expense and income taxes/Interest expense ($61,000 + $20,000 + $27,000)/$20,000 = 5.40 9. Operating-cash-flow-to-capital-expenditures ratio: Cash flow from operating activities/Annual capital expenditures $65,000/$45,000 = 1.44 b. During 2020, Brimmer Company showed improvement on all the profitability ratios computed: gross profit percentage, return on assets, profit margin, and return on common stockholders’ equity. On the other hand, the three ratios computed that relate to short term liquidity—accounts receivable turnover, average collection period, and inventory turnover—all moved in an unfavorable direction during 2020. Two long-term solvency ratios—the times-interest-earned ratio and the operating cash flow-to-capital expenditures ratio—improved during 2020.

P12-6A. Ratios from Comparative and Common-Size Data (LO2, LO3, LO4) a. (Amounts in thousands ofTdollars) ESTBANKSELLER.COM Current ratio: 2020: $214,000/$91,000 = 2.35 2019: $174,000/$82,000 = 2.12 Quick ratio: 2020: $74,000/$91,000 = 0.81 2019: $55,000/$82,000 = 0.67 Operating-cash-flow-to-current-liabilities ratio: 2020: $65,200/[($82,000 + $91,000)/2]= 0.75 2019: $60,500/[($77,000 + $82,000)/2] = 0.76 Inventory turnover: 2020: $545,000/[($105,000 + $120,000)/2] = 4.84 2019: $433,920/[($87,000 + $105,000)/2] = 4.52 Debt-to-equity ratio: 2020: $316,000/$369,000 = 0.86 2019: $242,000/$343,000 = 0.71 continued

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a. continued Times-interest-earned ratio: 2020: $100,000/$22,500 = 4.44 2019: $94,880/$16,000 = 5.93 Return on assets: 2020: $54,600/[($585,000 + $685,000)/2] = 8.6 percent 2019: $57,580/[($490,000 + $585,000)/2]= 10.7 percent Return on common stockholders’ equity: 2020: ($54,600 - $6,750)/[($268,000 + $294,000)/2] = 17.0 percent 2019: ($57,580 - $6,750)/[($235,000 + $268,000)/2] = 20.2 percent b. Common-Size Percentages 2020 2019 Sales revenue 100.0 100.0 Cost of goods sold 66.5 64.0 Gross profit on sales 33.5 36.0 Selling and administrative expenses 21.3 22.0 Income before interest expense and income taxes 12.2 14.0 Interest expense 2.7 2.4 Income before income taxes 9.5 11.6 Income tax expense 2.8 3.1 Net income 6.7 8.5 TESTBANKSELLER.COM c. The 1.8 percent decrease in the profit margin (Net income / Net sales) from 6.7 percent in 2020 compared with 8.5 percent in 2019 was due mainly to the increase in the cost of goods sold percentage (66.5 percent in 2020 compared with 64.0 percent in 2019). Although operating expenses were not as large a percentage of sales in 2020, interest expense increased as a percentage of sales. Apparently, the increase in sales in 2020 resulted mostly from an increased number of units sold, because price increases were not in effect most of the year. If the firm can maintain the rate of increase in sales volume with price increases in effect, it should improve its operating results, including the return on assets and on common stockholders’ equity. The latter two rates dropped because of the pricing situation. It is encouraging that the firm's current position improved in 2020; the current ratio, quick ratio, and inventory turnover all improved, although the operating cash flow-to-current liabilities ratio remained about the same as in 2019. The debt-to-equity ratio increased in 2020 as a result of an additional bond issuance. The interest coverage also dropped in 2020 due to the additional bond issuance. With the 2020 ratio at 4.44, however, there is still a good margin of safety for the bondholders' interest payments.

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P12-7A. Constructing Statements from Ratio Data (LO4) Omicron Company Income Statement For Year Ended December 31, 2019 Sales revenue Cost of goods sold Gross profit on sales Selling and administrative expenses Income before interest expense and income taxes Interest expense Income before income taxes Income tax expense Net income

$7,250,000 4,930,000 2,320,000 1,411,429 908,571 80,000 828,571 248,571 $ 580,000

(c)* (e) (d) (g) (f) Given (a) (b) Given

Omicron Company Balance Sheet December 31, 2019 Cash $ 45,000 (m) Current liabilities $1,050,000 (l) Accounts receivable (net) 952,500 (i) 8% Bonds payable 1,000,000 (j) Inventory 1,048,000 (h) Common stock 3,000,000 (k) Equipment (net) 3,954,500 (n) Retained earnings 950,000 Given Total Assets $6,000,000 Given Total Liabilities and Stockholders' Equity $6,000,000 Given

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*The letters indicate one sequence of computations to complete the financial statements, as follows: Net income/(1 ‒ Income tax rate) = $580,000/0.70 = $828,571 Income before income taxes x Income tax rate = $828,571 x 0.30 percent = $248,571 Net income/Profit margin = $580,000/0.08 = $7,250,000 Net sales x Gross profit percentage = $7,250,000 x 0.32 = $2,320,000 Net sales ‒ Gross profit on sales = $7,250,000 ‒ $2,320,000 = $4,930,000 Income before income taxes + Interest expense = $828,571 + $80,000 = $908,571 Gross profit on sales ‒ Income before interest expense and income taxes = $2,320,000 ‒ $908,571 = $1,411,429 (h) Cost of goods sold/Inventory turnover = Average inventory = $4,930,000/5 = $986,000 (Average inventory x 2) ‒ Beginning inventory = Ending inventory = ($986,000 x 2) ‒ $924,000 = $1,048,000 (i) Net sales/Accounts receivable turnover = Average accounts receivable = $7,250,000/8 = $906,250 (Average accounts receivable x 2) ‒ Beginning accounts receivable = Ending accounts receivable ($906,250 x 2) ‒ $860,000 = $952,500 (j) Interest expense/Interest rate = Bonds payable = $80,000/0.08 = $1,000,000 (k) Net income/Return on common stockholders’ equity = Average common stockholders’ equity $580,000/0.16 = $3,625,000 (Average common stockholders’ equity x 2) ‒ Beginning common stockholders’ equity = Ending common stockholders’ equity = ($3,625,000 x 2) ‒ $3,300,000 = $3,950,000 Ending common stockholders’ equity ‒ Retained earnings = Common stock $3,950,000 ‒ $950,000 = $3,000,000 (l) Total liabilities and stockholders’ equity ‒ Retained earnings ‒ Common stock ‒ 8% Bonds payable = Current liabilities = $6,000,000 ‒ $950,000 ‒ $3,000,000 ‒ $1,000,000 = $1,050,000 (m) Quick ratio x Current liabilities = Cash + Accounts receivable (net) = 0.95 x $1,050,000 = $997,500 [Cash + Accounts receivable (net)] ‒ Accounts receivable (net) = Cash] = $997,500 ‒ $952,500 = $45,000 (n) Total assets ‒ Cash ‒ Accounts receivable (net) ‒ Inventory = Equipment (net) $6,000,000 ‒ $45,000 ‒ $952,500 ‒ $1,048,000 = $3,954,500 (a) (b) (c) (d) (e) (f) (g)

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P12-8A. Ratios Compared with Industry Averages (LO4) a. 1. Profit margin: $575,000/$11,280,000 = 5.1 percent 2. Return on assets: $575,000/[($5,064,000 + $5,860,000)/2] = 10.5 percent 3. Return on common stockholders’ equity: ($575,000 ‒ $42,000)/[($2,580,000 + $3,216,000)/2] = 18.4 percent 4. Quick ratio: $700,000/$724,000 = 0.97 5. Current ratio: $1,072,000/$724,000 = 1.48 6. Debt-to-equity ratio: $2,164,000/$3,696,000 = 0.59 b. Phantom Corporation's profit margin (5.1 percent) and return on assets (10.5 percent) are better than the median returns for the paper manufacturing industry, although they are less than the returns for the upper quartile. The return on common stockholders’ equity (18.4 percent), however, places the company in the industry's upper quartile. The high return on common stockholders’ equity results, in part, because the firm is earning more than 10 percent on assets and paying lower rates to bondholders and preferred stockholders (10 percent and 8 percent, respectively). Both the quick ratio and the current ratio are below the median ratios for the industry, although the quick ratio is only slightly below the industry median. Phantom's debt-to-equity ratio (0.59) falls within the upper quartile for the industry. The firm apparently has room for additional long-term debt and may wish to consider increasing its use of leverage.

P12-9A. Ratios Compared with Industry Averages (LO4) a. 1. Quick ratio: $71,000/$83,700 TESTBA= N0.85 KSELLER.COM 2. Current ratio: $219,000/$83,700 = 2.62 3. Accounts receivable turnover: $825,000/($60,900 + $66,900)/2 = 12.91 4. Inventory turnover: $540,000/[($140,000 + $148,000)/2] = 3.75 5. Debt-to-equity ratio: $233,700/$214,200 = 1.09 6. Gross profit percentage: $285,000/$825,000 = 34.5 percent 7. Profit margin: $50,500/$825,000 = 6.1 percent 8. Return on assets: $50,500/[($401,500 + $447,900)/2] = 11.9 percent Packard Plastics' quick ratio (0.85) is below the industry median, but its current ratio (2.62) is above the industry median. This suggests that the inventory may be higher than normally expected. This is confirmed by the inventory turnover (3.75), which is well below the industry median of 7.8. Accounts receivable, however, do not appear to be too large, because the accounts receivable turnover of 12.91 compares favorably with the industry median of 7.9. The firm's debt-to-equity ratio (1.09) is somewhat above the industry median. The firm's gross profit percentage (34.5 percent) is slightly higher than the industry median of 32.7 percent. However, Packard Plastics' profit margin (6.1 percent) is considerably better than the industry median of 3.5 percent. This indicates that Packard Plastics must be doing an excellent job of controlling its operating expenses. The firm's return on assets (11.9 percent) is also well above the industry median of 6.3 percent, indicating that Packard Plastics is quite effective in the use of its assets to generate net profits.

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b. $15,000,000 dividends/12,500,000 shares = $1.20 dividend per share of common stock Dividend payout ratio: $1.20/$4.25 = 28.2 percent c. Price-earnings ratio: $50.25/$4.25 = 11.8 Dividend yield: $1.20/$50.25 = 2.4 percent

P12-10A. Financial Statement Notes: Quarterly Data (LO2, LO4) a. First quarter: $186,111/$780,326 = 24 percent Second quarter: $177,537/$780,326 = 23 percent Third quarter: $203,070/$780,326 = 26 percent Fourth quarter: $213,608/$780,326 = 27 percent b. First quarter: Second quarter: Third quarter: Fourth quarter:

$ 84,896/$546,165 = 16 percent $ 83,796/$546,165 = 15 percent $142,137/$546,165 = 26 percent $235,336/$546,165 = 43 percent

c. Company B has the most seasonal business: 69 percent of its sales are concentrated in the third and fourth quarters. The fourth quarter alone has 43 percent of annual sales whereas the first and second quarters have only 16 percent and 15 percent, respectively. In contrast, company A's sales are quite constant from one quarter to the next. TESTBANKSELLER.COM d. Company B is Gibson Greetings, Inc., and Company A is Hon Industries, Inc. The greeting card business is more seasonal than the office furniture business. Company B's sales pattern portrays the pattern of a greeting card firm. Sales are concentrated in the fourth quarter when the yearend holiday season occurs. Company A's sales pattern is typical for an office furniture business, which has no particular seasonal pattern. e. Interim quarterly data for Hon Industries, Inc. (Company A) are probably most useful for predicting annual results because the firm's sales are not subject to significant seasonal variations. (Firms with extreme seasonal variations, such as Gibson Greetings, Inc. (Company B), should disclose the seasonal nature of their business in interim reports and consider supplementing their interim reports with financial data for the 12 months ending on the interim date for the current and preceding years.)

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PROBLEMS—SET B P12-1B. Income Statement Format (LO1) a. Tricon Company Income Statement For Year Ended Sales revenue Cost of goods sold Gross profit on sales Selling expenses Administrative expenses Operating income Interest expense Income from continuing operations before taxes Income tax expense Income from continuing operations Discontinued operations Loss from operations of discontinued segment (net of $68,000 reduction of income taxes) Gain on disposal of discontinued segment (net of $30,000 income taxes) Net income TESTBANKSELLER.COM

$1,650,000 928,000 722,000 $174,000 145,000

319,000 403,000 14,000 389,000 115,000 274,000

(52,000) 60,000

8,000 $ 282,000

b. Tricon Company Income Statement For Year Ended Sales revenue Expenses Cost of goods sold Selling expenses Administrative expenses Interest expense Income tax expense Total expenses Income from continuing operations Discontinued operations Loss from operations of discontinued segment (net of $68,000 reduction of income taxes) Gain on disposal of discontinued segment (net of $30,000 income taxes) Net income

$1,650,000 $928,000 174,000 145,000 14,000 115,000 1,376,000 274,000

(52,000) 60,000

8,000 $ 282,000

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P12-2B. Earnings per Share (LO4) Net income $230,000 Shares 50,000 62,000 42,000 48,000

Months Outstanding x 4 = x 2 = x 2 = x 4 = 12

Share Months 200,000 124,000 84,000 192,000 600,000

Weighted-average number of common shares outstanding: 600,000/12 = 50,000 Earnings per share: $230,000/50,000 = $4.60

P12-3B. Earnings per Share and Multiple-Step Income Statement (LO1, LO4) Garner Corporation Income Statement For Year Ended Sales revenue Cost of goods sold Gross profit on sales Selling expenses $180,000 Administrative expenses 142,800 Operating income TESTBANKSELLER.COM Loss from plant strike Income before taxes Income tax expense Net income Earnings per share of common stock*

$2,216,000 1,290,000 926,000 322,800 603,200 95,000 508,200 204,000 $ 304,200 $3.85

*Weighted-average number of common shares outstanding: Shares 65,000 82,000 85,000

Months Outstanding x 3 = x 4 = x 5 = 12

Share Months 195,000 328,000 425,000 948,000

948,000/12 = 79,000 weighted-average number of common shares outstanding Earnings per share: $304,200/79,000 = $3.85

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P12-4B. Trend Percentages (LO2) a. Sales of Automotive Products—Trend Percentages Ford Motor Company General Motors Corporation Year 1 100.0 100.0 Year 2 98.8 98.2 Year 3 86.0 95.7 Year 4 101.8 103.9 Year 5 110.5 109.0

Year 1 Year 2 Year 3 Year 4 Year 5

Net Sales—Trend Percentages Pfizer Inc. Abbott Laboratories 100.0 100.0 112.9 114.5 122.5 127.8 127.5 145.9 131.8 156.3

b. During the period Year 2 to Year 3, both Ford Motor Company and General Motors Corporation trended downward in their sales of automotive products. General Motors' decline was less severe than Ford's decline. Ford's Year 3 sales were more than 13 percent below the Year 1 level, whereas General Motors' Year 3 sales were less than 5 percent below its Year 1 level. Over the next two years, however, Ford's recovery exceeded that of General Motors. Ford's Year 5 sales exceeded its Year 1 level by 10.5 percent; General Motors Year 5B sales TEST ANKwere SEL9.0 LEpercent R.COMgreater than its Year 1 level. c. During the period Year 2 to Year 5, Abbott Laboratories' growth in net sales outperformed Pfizer's growth. Each year from Year 2 through Year 5, Abbott's net sales as a percentage of Year 1 net sales exceeded the corresponding percentage for Pfizer. Neither company experienced a downturn during this time period. Both companies experienced solid growth for Year 2 to Year 5, but Abbott's growth is stronger. Abbott's Year 5 net sales were more than 50 percent above its Year 1 level, whereas Pfizer's Year 5 net sales are 31.8 percent above its Year 1 level.

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P12-5B. Changes in Various Ratios (LO4) a. 1. Gross profit percentage: Gross profit on sales/Net sales $272,300/$680,000 = 40.0 percent 2. Return on assets: Net income/Average total assets $26,000/[($350,000 + $460,000)/2] = 6.4 percent 3. Profit margin: Net income/Net sales $26,000/$680,000 = 3.8 percent 4. Return on common stockholders’ equity: Net income ‒ Preferred stock dividends/Average common stockholders’ equity ($26,000 ‒ $0)/[($165,000 + $205,000)/2] = 14.1 percent 5. Accounts receivable turnover: Net sales/Average accounts receivable $680,000/[($128,000 + $182,000)/2] = 4.39 6. Average collection period: 365/Accounts receivable turnover 365/4.39 = 83.1 days

TESTBANKSELLER.COM 7. Inventory turnover: Cost of goods sold/Average inventory $407,700/[($180,000 + $225,000)/2] = 2.01 8. Times-interest-earned ratio: Income before interest expense and income taxes/Interest expense ($26,000 + $20,000 + $6,200)/$20,000 = 2.61 9. Operating-cash-flow-to-capital-expenditures ratio: Net cash flow from operating activities/Annual capital expenditures $29,500/$42,000 = 0.70 b. During 2020, Cycle Company showed a decline in all the profitability ratios computed: gross profit percentage, return on assets, profit margin, and return on common stockholders’ equity. Similarly, the three ratios computed that relate to short-term liquidity—accounts receivable turnover, average collection period, and inventory turnover—all moved in an unfavorable direction during 2020. The two long term solvency ratios computed—the times-interest-earned ratio and the operating-cash-flow-to-capitalexpenditures ratio—also decreased during 2020.

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P12-6B. Ratios from Comparative and Common-Size Data (LO2, LO3, LO4) a. (Amounts in thousands of dollars) Current ratio: 2020: $167,500/$77,000 = 2.18 2019: $113,500/$46,000 = 2.47 Quick ratio: 2020: $61,000/$77,000 = 0.79 2019: $37,500/$46,000 = 0.82 Operating-cash-flow-to-current-liabilities ratio: 2020: $30,000/[($46,000 + $77,000)/2] = 0.49 2019: $25,000/[($40,000 + $46,000)/2] = 0.58 Inventory turnover: 2020: $552,000/[($72,000 + $105,000)/2] = 6.24 2019: $465,000/[($68,000 + $72,000)/2] = 6.64 Debt-to-equity ratio: 2020: $264,500/$366,500 = 0.72 2019: $196,000/$345,000 = 0.57 Times-interest-earned ratio: 2020: $67,000/$17,000 = 3.94 2019: $58,500/$13,500 = 4.33 TE STBANKSELLER.COM Return on assets: 2020: $35,900/[($541,000 + $631,000)/2] = 6.1 percent 2019: $32,500/[($490,000 + $541,000)/2] = 6.3 percent Income before interest expense and income taxes divided by average total assets 2020: $67,000/[($541,000 + $631,000)/2] = 11.4 percent 2019: $58,500/[($490.000 + $541,000)/2] = 11.3 percent Return on common stockholders’ equity: 2020: $35,900 ‒ $5,000/[($285,000 + $306,500)/2] = 10.4 percent 2019: $32,500 ‒ $4,800/[($265,000 + $285,000)/2] = 10.1 percent

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Common-Size Percentages 2020 2019 Sales revenue 100.0 Cost of goods sold 64.9 Gross profit on sales 35.1 Selling and administrative expenses 27.2 Income before interest expense and income taxes 7.9 Interest expense 2.0 Income before income taxes 5.9 Income tax expense 1.7 Net income 4.2

100.0 66.7 33.3 24.9 8.4 1.9 6.5 1.8 4.7

c. Apparently, the addition of the new high margin product improved the gross profit percentage, which increased from 33.3 percent to 35.1 percent. However, selling and administrative expenses as a percentage of sales increased from 24.9 percent to 27.2 percent. As a result, profit margin decreased from 4.7 percent to 4.2 percent. Vega's return on assets was approximately the same each year. The return on common stockholders’ equity exceeds the return on assets and increased from 10.1 percent to 10.4 percent, because Vega successfully traded on the equity, and additional financing with 9 percent bonds was done in 2020. (Vega's income before interest expense and income taxes divided by average total assets is 11.3 percent in 2019 and 11.4 percent in 2020; these rates exceed the cost of borrowed funds [9 percent] and the cost of preferred stock [8 percent], so the return to common stockholders exceeds the return on assets.) TESTBANKSELLER.COM The firm's short-term liquidity suffered somewhat in 2020; the current ratio, the quick ratio, and the operating cash flow-to-current liabilities ratio all decreased in 2020. The impact of issuing additional bonds payable in 2020 is shown in two long-term solvency ratios: the debt-to-equity ratio increased to 0.72, and the times-interest-earned ratio dropped to 3.94.

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P12-7B. Constructing Statements from Ratio Data (LO4) Timber Company Income Statement For Year Ended December 31 Sales revenue Cost of goods sold Gross profit on sales Selling and administrative expenses Income before interest expense and income taxes Interest expense Income before income taxes Income tax expense Net income

$877,500 614,250 263,250 148,564 114,686 14,400 100,286 30,086 $ 70,200

(e)* (h) (f) (g) (d) (c) (a) (b) Given

Timber Company Balance Sheet December 31 Cash $ 32,500 (n) Accounts receivable (net) 90,000 (m) Inventory 87,500 (l) Equipment (net) 366,000 (k) Total Assets $576,000 Given

Current liabilities $ 70,000 (j) 10% Bonds payable 144,000 Given Common stock 312,000 (i) Retained earnings 50,000 Given Total Liabilities and Stockholders’ Equity $576,000 Given

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*The letters indicate one sequence of computations to complete the financial statements, as follows: Net income/(1 ‒ Income tax rate) = $70,200/0.70 = $100,286 Income before income taxes x Income tax rate = $100,286 x 0.30 = $30,086 Bonds payable x Bond interest rate = $144,000 x 0.10 = $14,400 Income before income taxes + Interest expense = $100,286 + $14,400 = $114,686 Net income/Profit margin = $70,200/0.08 = $877,500 Net sales x Gross profit percentage = $877,500 x 0.30 = $263,250 Gross profit on sales ‒ Income before interest expense and income taxes = $263,250 ‒ $114,686 = $148,564 Net sales ‒ Gross profit on sales = $877,500 ‒ $263,250 = $614,250 Net income/Return on common stockholders’ equity = Average common stockholders’ equity $70,200/0.20 = $351,000 (Average common stockholders’ equity x 2) ‒ Beginning common stockholders’ equity = Ending common stockholders’ equity ($351,000 x 2) ‒ $340,000 = $362,000 Ending common stockholders’ equity ‒ Retained earnings = Common Stock $362,000 ‒ $50,000 = $312,000 (j) Total liabilities and stockholders’ equity ‒ Bonds payable ‒ Common stock ‒ Retained earnings = Current liabilities = $576,000 ‒ $144,000 ‒ $312,000 ‒ $50,000 = $70,000 (k) Current liabilities x Current ratio = Current assets $70,000 x 3.0 = $210,000 Total assets ‒ Current assets = Equipment (Net) = $576,000 ‒ $210,000 = $366,000 (l) Current liabilities x Quick ratio = Quick assets = $70,000 x 1.75 = $122,500 Current assets ‒ Quick assets = Inventory = $210,000 ‒ $122,500 = $87,500 (m) Net sales/Accounts receivable turnover = Average accounts receivable = $877,500/12 = $73,125 (Average accounts receivable x 2) ‒ Beginning accounts receivable = Ending accounts receivable ($73,125 x 2) ‒ $56,250 = $90,000 (n) Total assets ‒ Accounts receivable (net) ‒ Inventory ‒ Equipment (net) = Cash $576,000 ‒ $90,000 ‒ $87,500 ‒ $366,000 = $32,500 (a) (b) (c) (d) (e) (f) (g) (h) (i)

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P12-8B. Ratios Compared with Industry Averages (LO4) a. 1. Profit margin: $680,000/$8,800,000 = 7.7 percent 2. Return on assets: $680,000/[($4,870,000 + $5,500,000)/2] = 13.1 percent 3. Return on common stockholders’ equity: ($680,000 ‒ $65,000)/[($2,170,000 + $2,700,000)/2] = 25.3 percent 4. Quick ratio: $385,000/$600,000 = 0.64 5. Current ratio: $1,335,000/$600,000 = 2.23 6. Debt-to-equity ratio: $1,900,000/$3,600,000 = 0.53 d. Lumite Corporation's performance on five of the six ratios computed falls between the industry median and upper quartile measures. This relationship holds true for the profit margin, return on assets, return on common stockholders’ equity, current ratio, and debtto-equity ratio. On these measures, therefore, Lumite's performance in the industry would be considered solid but not outstanding. Lumite is profitably trading on the equity as evidenced by its return on common stockholders’ equity, which is well in excess of the return on assets. In contrast, the quick ratio of 0.64 falls well below the industry median of 1.0. The amount of current assets tied up in inventory should be a matter of concern to Lumite.

P12-9B. Ratios Compared with Industry Averages (LO3) a. 1. Quick ratio: $64,500/$45,200 = 1.43 2. Current ratio: $104,000/$45,200 = 2.30 3. Accounts receivable turnover: TESTBA$220,000/[($43,000 NKSELLER.COM+ $46,000)/2] = 4.94 4. Inventory turnover: $125,000/[($43,700 + $39,500)/2] = 3.00 5. Debt-to-equity ratio: $85,200/$87,000 = 0.98 6. Gross profit percentage: $95,000/$220,000 = 43.2 percent 7. Profit margin: $8,000/$220,000 = 3.6 percent 8. Return on assets: $8,000/[($170,000 + $172,200)/2] = 4.7 percent Avery Instruments' quick ratio (1.43) is above the industry median, but its current ratio (2.23) is below the industry median. This suggests that the inventory may be lower than normally expected. However, Avery's inventory turnover (3.00) is still below the industry median, so the firm is not particularly efficient in converting inventory into sales. The firm's accounts receivable turnover (4.94) is also below the industry median. The firm's debt-to-equity ratio (0.98) is above the industry median, suggesting that Avery may need to consider issuing stock when additional funds are needed in the future. Avery is below the industry median on all three profitability measures computed: gross profit percentage (43.2 percent), profit margin (3.6 percent), and return on assets (4.7 percent). Avery apparently has room to improve the efficiency and effectiveness of its operating activities.

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b. $2,600,000 dividends/2,000,000 shares = $1.30 dividends per share of common stock Dividend payout ratio: $1.30/$4.25 = 30.6 percent c. Price-earnings ratio: $63.00/$4.25 = 14.8 Dividend yield: $1.30/$63.00 = 2.1 percent

P12-10B. Financial Statement Notes: Quarterly Data (LO2, LO4)) a. First quarter: $1,216.6/$5,410.8 = 22 percent Second quarter: $1,237.3/$5,410.8 = 23 percent Third quarter: $1,339.7/$5,410.8 = 25 percent Fourth quarter: $1,617.2/$5,410.8 = 30 percent b. First quarter: Second quarter: Third quarter: Fourth quarter:

$1,172.5/$7,169.2 = 16 percent $1,249.1/$7,169.2 = 17 percent $1,345.8/$7,169.2 = 19 percent $3,401.8/$7,169.2 = 47 percent

c. Company D has the most seasonal business; its quarterly sales range from 16 percent to 47 percent of annual sales (due to rounding, percentages do not sum to 100 percent). In contrast, Company C's quarterly sales are less variable, ranging from 22 percent to 30 percent of annual sales.

TESTBANKSELLER.COM d. Company D is Toys "R" Us, and Company C, therefore, is The Gillette Company. A retailer (Toys "R" Us) should show a more seasonal pattern to its annual sales than a manufacturer of consumer products. Toys "R" Us's strongest quarter for sales is the fourth quarter (covering November, December, and January), a time period encompassing the yearend holiday season and the January clearance sales.

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SERIAL PROBLEM: ANGEL CITY GREETINGS SP12. 1. Gross profit percentage: $63,000/$135,000 = 46.7 percent 2. Profit margin: $16,500/$135,000 = 12.2 percent 3. Asset turnover: $135,000/[($54,550 + $0)/2] = 4.95 4. Return on assets: $16,500/[($54,550 + $0)/2] = 60.5 percent 5. Return on common stockholders’ equity: ($16,500 ‒ $300)/[($500 + $9,500 + $15,200 + $0)/2] = 128.6 percent 6. Working capital: $40,300 - $9,350 = $30,950 7. Current ratio: $40,300/$9,350 = 4.31 8. Quick ratio: $23,300/$9,350 = 2.49 9. Operating-cash-flow-to-current-liabilities ratio: $1,100/[($9,350 + $0)/2] = .24 10. Accounts receivable turnover: $135,000/[($11,000 + $0)/2] = 24.55

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11. Average collection period: 365/24.55 = 14.9 days

12. Inventory turnover: $72,000/[($16,000 + $0)/2] = 9.0 13. Days' sales in inventory: 365/9.0 = 40.6 days 14. Debt-to-equity ratio: $24,350/$30,200 = 0.81 15. Times-interest-earned ratio: $26,300/$900 = 29.22 16. Operating-cash-flow-to-capital-expenditures ratio: $1,100/$17,500 = 0.06

Continued

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A banker is likely to focus on liquidity and solvency measures since their primary concern is to be paid back their principle loan along with interest on the loan balance. In addition, bankers frequently will also look at the company’s profitability since it is those profits that ultimately will determine the company’s ability to generate cash to pay back the banker. With regard to liquidity, Angel City Greetings looks very strong. The current ratio of 4.31 and quick ratio of 2.49 indicate that Angel City Greetings has sufficient current assets to easily pay its current liabilities. More troubling is the operating cash flow-to-current liabilities ratio of .24. This low value can be explained by the low operating cash flow often associated with start-up companies that require a large investment in working capital. Angel City Greetings is able to collect its receivables on average in just under 15 days, a very good number for a start-up company. Kate’s days’ sales in inventory of 40.6 days is also a good number. Angel City Greetings has a debt to equity ratio of .81, indicating that debt is only 81 percent of stockholders’ equity. A banker will likely be pleased to see this high level of equity, indicating a strong position of solvency. The times-interest-earned ratio of 29.22 provides further support of the company’s strong solvency position. As noted above, the low level of operating cash flow common with start-up companies has lead to a low operating-cash-flowto-capital-expenditures ratio. An additional reason for this low ratio is the need for a large expenditure in the start-up year for equipment. This level of expenditure is unlikely in the near future. Finally, Angel City Greetings reported exceptional profitability year for a start-up company. The company’s gross profit percentage of 46.7 percent indicates Kate is able to charge a high markup on her product sales. A profit margin of 12.2 percent along with return on assets of 60.5 percent and return common TESTonBA NKSELstockholders’ LER.COM equity of 128.6 percent indicate that Kate is also able to control operating costs. Overall, a banker will likely see Kate as a low risk for additional financing.

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EXTENDING YOUR KNOWLEDGE REPORTING AND ANALYSIS EYK12-1. Financial Reporting Problem: Columbia Sportswear Company a. 2013 2014 2015 2016 2017 Net sales 100 125 138 141 146 Net income 100 145 185 203 111 Total assets 100 112 115 125 138 Columbia’s sales increased throughout the five year period. Assets have grown every year in the five year period. Net income increased significantly in the first four years. However, 2017 net income is 111% of 2013’s net income. b. Gross profit percentage:

2017 2016

$1,159,962/$2,466,105= 47.0% $1,110,348/$2,377,045 = 46.7%

Profit margin:

2017 2016

$105,123/$2,466,105 = 4.3% $191,898/$2,377,045 = 8.1%

Return on assets:

2017 2016

$105,123/[($2,013,894+$2,212,902)/2] = 5.0% $191,898/[($1,846,153+$2,013,894)/2] = 9.9%

Columbia experienced aTdecrease ESTBANinKSitsELprofit LERmargin, .COM and return on assets in 2017, despite the increase in sales in 2017 which indicates they may not be effectively controlling costs. c. Current ratio: 2017 2016 Quick ratio:

2017 2016

$1,649,497/$453,636 = 3.64 $1,412,023/$362,851 = 3.89 ($673,166 + $94,983 + $364,862)/$453,636= 2.50 ($551,389 + $472 + $333,678)/$362,851 = 2.44

Operating-cash-flow-to-current-liabilities ratio: 2017 $341,128/[($362,851 + $453,636)/2] = 0.84 2016 $275,167/[($366,070 + $362,851)/2] = 0.75 The quick ratio and operating-cash-flow-to-current-liabilities ratio increased slightly in 2017 for Columbia, but the current ratio decreased slightly. All measures are large enough so as to not create any liquidity concerns. d. Debt-to-equity:

2017 2016

$560,643/$1,652,259 = .34 $432,383/$1,581,511 = .27

Columbia Sportswear’s debt to equity ratio increased in the two-year period. Overall the company has nearly three times the level of equity than debt, indicating a strong solvency position.

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EYK12-2. Inc. a.

Comparative Analysis Problem: Columbia Sportswear vs. Under Armour,

Columbia Sportswear Change in: Net sales 3.7 percent Net income (45.2) percent Cash flow from operating activities 24.0 percent Total assets 9.9 percent

Under Armour 3.1 percent (124.4) percent (35.8) percent 9.9 percent

b. Both companies experienced increases in sales and total assets in 2017. Both companies experienced declines in net income. However, Under Armour’s cash flow from operating activities decreased significantly while Columbia’s increased significantly.

EYK12-3. Business Decision Problem 1. Current ratio: 2020: $912,000/$440,000 = 2.07 2019: $731,000/$310,000 = 2.36 2. Quick ratio: 2020: $376,000/$440,000 = 0.85 2019: $300,000/$310,000 = 0.97 3. Accounts receivable turnover: 2020: $2,000,000/[($250,000 =R 6.72 TEST+B$345,000)/2] ANKSELLE .COM 2019: $1,750,000/[($205,000 + $250,000)/2] = 7.69 4. Average collection period: 2020: 365/6.72 = 54.3 days 2019: 365/7.69 = 47.5 days 5. Inventory turnover: 2020: $1,320,000/[($425,000 + $525,000)/2] = 2.78 2019: $1,170,000/[($350,000 + $425,000)/2] = 3.02 6. Debt-to-equity ratio: 2020: $630,000/$765,000 = 0.82 2019: $560,000/$615,000 = 0.91 7. Return on assets: 2020: $42,000/[($1,175,000 + $1,395,000)/2] = 3.3 percent 2019: $33,600/[($1,100,000 + $1,175,000)/2] = 3.0 percent 8. Profit margin: 2020: $42,000/$2,000,000 = 2.1 percent 2019: $33,600/$1,750,000 = 1.9 percent Continued

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The short-term liquidity ratios of Crescent Paints, Inc., worsened from over the two-year period: The current ratio dropped, the quick ratio dropped, the accounts receivable turnover dropped, the average collection period increased, and the inventory turnover dropped. For all five ratios, the 2020 ratio is less favorable than the industry median. The low quick ratio may signify that the firm is overextended in inventory. Further evidence of this possibility is the firm's low inventory turnover (2020 inventory turnover of 2.78 compared with industry median of 4.9). Although sales did increase in 2020, some of the increase may have resulted from a more liberal credit policy, since the average collection period climbed from 47.5 days to 54.3 days, almost 10 days more than the industry median. The profitability ratios of profit margin and return on assets improved from over the two years, but both rates of return for 2020 are below the industry median. The firm's debt-to-equity ratio decreased in 2020 but is still above the industry median. Before making a loan, the bank should require the firm to (1) forgo dividend payments (2020's payout of $22,000 was more than 52 percent of earnings), (2) reduce the inventory, and (3) tighten its credit policy. If these measures are carried out, the firm's shor-term liquidity position should improve. This implementation will also give additional time to determine whether the favorable trends in profitability performance continue. A loan officer should not make the $50,000 loan until the firm improves its financial position and operating results.

EYK12-4. Financial Analysis Problem a. Dividend Payout Ratio = Annual Dividends per Share / Earnings per Share Honeywell International, Inc. Company TESTBANKSELLThe ERDow .COChemical M Year 1 $0.70/$2.52 = 27.8 percent Year 1 $2.60/$5.10 = 51.0 percent Year 2 $0.77/$2.35 = 32.8 percent Year 2 $2.60/$3.46 = 75.1 percent Year 3 $0.84/$1.78 = 47.2 percent Year 3 $2.60/$0.99 = 262.6 percent Year 4 $0.91/$2.40 = 37.9 percent Year 4 $2.60/$2.33 = 111.6 percent Year 5 $1.00/$2.15 = 46.5 percent Year 5 $2.60/$3.88 = 67.0 percent Abbott Laboratories Year 1 $0.35/$0.96 = 36.5 percent Year 2 $0.42/$1.11 = 37.8 percent Year 3 $0.50/$1.27 = 39.4 percent Year 4 $0.60/$1.47 = 40.8 percent Year 5 $0.68/$1.69 = 40.2 percent b. Honeywell's policy appears to be to show a steady growth in dividend amount per share (growth in annual dividend ranges from $0.07 to $0.09 per share for the period analyzed). Dow Chemical's policy appears to be to pay a constant dividend amount ($2.60) per share. Abbott's policy appears to be to pay a dividend of approximately 37–41 percent of earnings or to show a steady growth of $0.07 to $0.10 per year in the dividend amount per share.

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CRITICAL THINKING EYK12-5. Accounting Research Problem: General Mills, Inc. a. 1. Gross profit percentage 2017: $5,563.8/$15,619.8 = 35.6 percent 2016: $5,829.5/$16,563.1 = 35.2 percent 2. Profit margin 2017: $1,657.5/$15,619.8 = 10.6 percent 2016: $1,697.4/$16,563.1 = 10.2 percent 3. Asset turnover 2017: $15,619.8/[($21,812.6 + $21,712.3)/2] = 0.72 2016: $16,563.1/[($21,712.3 + 21,832.0)/2] = 0.76 4. Return on assets 2017: $1,657.5/[($21,812.6 + $21,712.3)/2] = 7.6 percent 2016: $1,697.4/[($21,712.3 + 21,832.0)/2] = 7.8 percent 5. Return on common stockholders’ equity 2017: ($1,657.5 ‒ $0)/[($4,685.5 + $5,307.1)/2] = 33.2 percent 2016: ($1,697.4 ‒ $0)/[($5,307.1 + $5,392.7)/2] = 31.7 percent 6. Current ratio 2017: $4,061.4/$5,330.8 = 0.76 TESTBANKSELLER.COM 2016: $3,937.2/$5,014.7 = 0.79 7. Quick ratio 2017: ($766.1 + $1,430.1)/$5,330.8 = 0.41 2016: ($763.7 + $1,360.8)/$5,014.7 = 0.42 8. Operating-cash-flow-to-current-liabilities ratio 2017: $2,313.3/[($5,330.8 + $5,014.7)/2] = 0.45 2016: $2,629.8/[($5,014.7 + $4,890.1)/2] = 0.53 9. Accounts receivable turnover 2017: $15,619.8/[($1,430.1 + $1,360.8)/2] = 11.19 2016: $16,563.1/[($1,360.8 + $1,386.7)/2] = 12.06 10. Average collection period: 2017: 365/11.19 = 32.6 days 2016: 365/12.06 = 30.3 days Continued

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11. Inventory turnover 2017: $10,056.0/[($1,483.6 + 1,413.7)/2] = 6.94 2016: $10,733.6/[($1413.7 + $1,540.9)/2] = 7.27 12. Days' sales in inventory 2017: 365/6.94 = 52.6 days 2016: 365/7.27 = 50.2 days 13. Debt-to-equity ratio 2017: $16,216.2/$4,685.5 = 3.46 2016: $15,559.6/$5,307.1 = 2.93 14. Times-interest-earned ratio 2017: ($1,657.5 + $295.1 + $655.2)/$295.1 = 8.84 2016: ($1,697.4 + $303.8 + $755.2)/$303.8 = 9.07 15. Operating-cash-flow-to-capital-expenditures ratio 2017: $2,313.3/($684.4 ‒ $4.2) = 3.40 2016: $2,629.8/($729.3 ‒ $4.4) = 3.63 16. Earnings per share 2017: $2.77 2016: $2.77 17. Price-earnings ratio 2017: $57.32/$2.77 =T20.69 ESTBANKSELLER.COM 2016: $62.87/$2.77 = 22.70 18. Dividend yield 2017: $1.92/$57.32 = 3.3 percent 2016: $1.78/$62.87 = 2.8 percent 19. Dividend payout ratio 2017: $1.92/$2.77 = 69.3 percent 2016: $1.78/$2.77 = 64.3 percent

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b. General Mills' gross profit percentage increased in fiscal 2017, as did its profit margin. This suggests the company has been successful in controlling costs. The asset turnover ratio and the return on assets declined during fiscal 2017. The return on common stockholders’ equity improved from 31.7 to 33.2 percent. Of the ratios dealing with short term liquidity, the current ratio and the quick ratio declined slightly during fiscal 2017. Operating-cash-flow-to-current-liabilities-ratio also declined as did accounts receivable turnover, the average collection period, the inventory turnover and days' sales in inventory. Of the two ratios dealing with long-term solvency, the debt to equity ratio increased, while the times-interest-earned ratio declined. Another long-term solvency ratio, operating cash flow to capital expenditures, declined in fiscal 2017. In both years, however, the company's operations provided more than enough cash flow to cover its capital expenditures. A ratio of primary interest to common stockholders—earnings per share remained the same during fiscal 2017, while the dividend yield, the price-earnings ratio and the dividend payout ratio all improved.

EYK12-6. Accounting Communications Activity Memo: Dear Study Group,

TESTBANKSELLER.COM There are many techniques that can prove useful in the aalysis of financial statements. These techniques include trend analysis, common size statements, and ratios. The reason these techniques are useful is that they can provide some form of benchmark against which to measure any particular item on the financial statements. Any number, when looked at in isolation, cannot be interpreted since there is nothing to judge it as good or bad. Trend analysis is sometimes referred to as horizontal analysis. It involves looking at a measure over time, using the first period as a benchmark. Then each successive period’s measure is computed as a percentage change from the benchmark year. This technique helps identify positive or negative trends in the numbers. Common-size statements help to compare companies that may differ in size. A commonsize income statement has all line items expressed as a percentage of net sales, whereas a common-size balance sheet expresses all line items as a percentage of total assets. While whole numbers differ between companies of different size, these computed percentages are usually quite similar for firms within the same industry. Continued

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Ratios allow the user to see relationships between different line items. Profitability ratios, such as the gross profit percentage ratio, the profit margin ratio, and the return on assets ratio provide an indication of how profitable a company is. Liquidity ratios, such as the current or quick ratio and the operating-cash-flow-to-current-liabilities ratio provide an indication of a company’s short-term ability to pay current liabilities as they become due. Finally, solvency ratios such as the debt-to-equity ratio or the times-interest-earned ratio provide an indication of a firm’s long-term prospects to pay its obligations. Some of the limitations of this analysis include the difficulty in comparing firms that may be using different accounting procedures or may be in different industries. In addition, inflation can make trend analysis difficult to interpret if the data is unadjusted. Sincerely, Your Name

EYK12-7. Accounting Ethics Case a. Due to the accounting for Grand's year-end check, two ratios related to the analysis of short-term liquidity are affected: the current ratio and the quick ratio. Both of these ratios are improved by increasing Cash (a current/quick asset) and decreasing Long-Term Advances to Officers (a long-term asset). b. Points to consider in the discussion of the handling of Jason Grand's advance include the following:

TESTBANKSELLER.COM 1. In general, is it ethical to take deliberate steps at the balance sheet date to produce better ratios (that is, to engage in "window dressing")? 2. Other examples of window dressing not included in the case are accelerating yearend purchases (improves current ratios below 1.0), delaying year-end purchases (improves current ratios above 1.0), paying off short-term loans (improves current ratios above 1.0), and taking out short-term loans (improves current ratios below 1.0). Should any of these year-end actions be considered unethical practices? 3. Is the fact that other firms window-dress a sufficient defense for engaging in the practice? 4. Has Jason Grand, in reality, repaid the advance if his check is not deposited? 5. Do Grand Company's financial statements accurately reflect the firm's relationship with Jason Grand as far as the $1,000,000 is concerned?

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EYK12-8. Corporate Social Responsibility Problem The student answers to this question can vary depending on what is present in the current year sustainability report. As of the writing of this textbook, P&G had programs to provide clean drinking water (PG&E Beauty’s Aqua Collection), hygiene protection (Safeguard in partnership with the Red Cross and China’s Ministry of Health), pneumonia project in Bangladesh (Vicks Breathe for Life program), access to education in India (Shiksha), and sanitary protection (Always and Tampax).

EYK12-9. Forensic Accounting Problem Suppose at the end of the year, Company X recognized revenue and a receivable in the amount of $20,000. In January of the following year, the project is started and completed. The costs related to the project were $12,000 for inventory and $3,000 for labor which were recorded in January. Company X recorded sales that occurred in the month of December but failed to fully record expenses incurred as costs associated with those sales. The effect of this error overstates the net income of the company in the period in which the sales were recorded, and also understates net income when the expenses are reported.

EYK12-10. Working with the Takeaways 1. a. Profit margin 2020: $980/$10,000 = 9.8 percent 2019: $950/$9,500 = 10.0 percent

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b. Return on common stockholders’ equity 2020: $980/[($2,500 + $2,200)/2] = 41.7 percent 2019: $950/[($2,200 + $2,000)/2] = 45.2 percent 2. a. Current ratio 2020: $2,200/$3,000 = 0.73 2019: $2,100/$2,900= 0.72 b. Accounts receivable turnover 2020: $10,000/[($900 + $800)/2] = 11.76 2019: $9,500/[($800 + $780)/2] = 12.03 c. Inventory turnover 2020: $5,500/[($700 + $650)/2] = 8.15 2019: $5,200/[($650 + $620)/2] = 8.19 3. a. Debt-to-equity ratio 2020: $8,000/$2,500 = 3.20 2019: $8,300/$2,200 = 3.77 b. Times-interest-earned ratio 2020: $1,700/$300 = 5.67 2019: $1,600/$250 = 6.40 Continued ©Cambridge Business Publishers, 2020 12-44

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The profitability ratios of profit margin and return on common stockholders’ equity both decreased in 2020. Although sales are increasing, expenses are increasing at a higher rate. For the liquidity ratios, the current ratio increased slightly, while the accounts receivable and inventory turnover ratios both decreased slightly but not enough to create concern. The debt-to-equity ratio improved, while the times-interest-earned ratio decreased. However, it appears that the Fango Company is making enough operating profit to cover current interest expense.

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Appendix C The Language of Accountants: Debits and Credits QUESTIONS 1.

Since debits increase asset accounts but decrease liability accounts, it is possible to understand why some students erroneously think “debits are good but credits are bad.” Credits may also be good, however, because they can represent an increase in stockholders’ equity when a sales transaction occurs. Thus, credits are not necessarily always bad.

Information recorded in an account consists of the account title, the account number, dates, descriptive notations, amounts reflecting increases and decreases, and cross references to other accounting records.

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The term debit refers to the left side of an account. The term credit refers to the right side of an account.

The normal side of any account is always the side on which increases are recorded. Assets and expenses have normal debit balances. Liabilities, revenues, and stockholders’ equity accounts (owner’s capital accounts in a sole proprietorship and in partnerships, and common stock and retained earnings accounts in a corporation) have normal credit balances.

A general journal is a book of original entry that may be used for the initial recording of any type of business transaction. It contains space for dates and for accounts to be debited and credited, columns for the amounts of the debits and credits, and a posting reference column for numbers of the accounts that are posted.

Posting references enable an accountant to trace amounts in the ledger back to the originating journal entry and permits the accountant to know which entries have been posted.

A compound journal entry is a journal entry containing more than two accounts.

The general ledger is the grouping of accounts that are used to prepare a firm’s financial statements. The trial balance is a list of the accounts in the general ledger with their respective debit or credit balances. It is prepared at the end of a period to ensure that the sum of debit balances equals the sum of credit balances. This procedure may reveal the existence of certain errors. It is also useful in preparing financial statements. ©Cambridge Business Publishers, 2020

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10.

11.

The temporary accounts—sometimes called nominal accounts—are closed at year-end. They consist principally of the income statement accounts, but the Income Summary account and the Dividends account are also included. Closing of the temporary accounts to a zero balance allows the account to be ready to start accumulating data for the next accounting period.

12.

A post-closing trial balance ensures that an equality of debits and credits has been maintained throughout the adjusting and closing procedures and that the general ledger is in balance to start the next period. Only balance sheet accounts appear in a post-closing trial balance. Dividends, Depreciation Expense, and Supplies Expense are temporary accounts that should have been closed and should not appear in the post-closing trial balance.

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SHORT EXERCISES SEC-1. Normal Balances (LO1) a. Debit b. Credit c. Debit d. Debit e. Debit f. Credit g. Credit

SEC-2. Debit and Credit Effects (LO1) a. Cash b. Cash c. Accounts receivable d. Inventory e. Cash

SEC-3. Posting Transactions to T-accounts (LO1) TESTBANKSELLER.COM 1) Cash

100,000

Common stock To record issuance of common stock

100,000

2) Retained earnings Cash To record cash dividend

30,000

3) Cash

25,000

30,000

Notes payable To record bank borrowings

25,000

4) Notes payable Cash To record principal payment

2,500

5) Retained earnings Cash To record interest payment

1,200

2,500

1,200

Continued

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(1) (3)

Cash 100,000 30,000 25,000 2,500 1,200

(2) (4) (5)

(4)

Notes Payable 2,500 25,000

Common Stock 100,000

(1)

(2) (5)

Retained Earnings 30,000 1,200

(3)

SEC-4. Posting Transactions to T-accounts (LO1) 1) Equipment Cash To record equipment purchase

100,000

2) Supplies Accounts payable To record purchase of supplies on account

10,000

3) Cash

21,000

100,000

10,000

Accounts receivable To record cash collection from customers

21,000

TESTBANKSELLER.COM 4) Retained earnings Cash To record cash dividend

(3)

Cash 21,000 100,000 (1) 15,000 (4)

Equipment (1) 100,000

15,000 15,000

Accounts Receivable 21,000 (3)

Supplies 10,000

(2)

Accounts Payable 10,000 (2)

Retained Earnings (4) 15,000

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SEC-5. Prepare a Trial Balance (LO1) HOWSER CORPORATION Trial Balance December 31 Cash Accounts receivable Equipment Accounts payable Common stock Dividends Sales revenue Administrative expense Utilities expense Totals

Debit $ 6,000 10,800 30,000

Credit

$ 6,000 36,000 2,400 17,200 8,000 2,000 $59,200

$59,200

SEC-6. Prepare a Corrected Trial Balance (LO1) MAGILL COMPANY TTrial EST BANKSELLER.COM Balance December 31, 2019 Cash Inventory Accounts receivable Accounts payable Common stock Retained earnings Sales revenue Cost of goods sold Selling expenses Totals

Debit $ 20,000 85,000 30,000

Credit

$12,000 40,000 58,000 100,000 60,000 15,000 $210,000

$210,000

SEC-7. The Account (LO1) d. Analysis

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SEC-8. Accrual Adjusting Entries (LO2) a. Salary expense Salary payable

$ 2,500 $ 2,500

b. Interest expense Interest payable

$ 1,200

c. Accounts receivable Revenue

$ 3,500

$ 1,200

$ 3,500

SEC-9. Analyze an Adjusted Trial Balance (LO2) a. Insurance expense b. Depreciation expense c. Supplies expense d. Earned revenue e. Interest expense

SEC-10. Prepare an Income Statement from an Adjusted Trial Balance (LO3) CENTURY COMPANY Income Statement ESTBDecember ANKSELL31ER.COM For YearTEnded Sales $ 20,000 Less: Cost of goods sold $8,000 Selling & administrative expense 3,000 Interest expense 1,500 Total expenses 12,500 Net income $ 7,500

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SEC-11. Prepare Closing Entries to Retained Earnings (LO4) Closing Entries: Retained earnings Cost of goods sold Selling & administrative Interest To close the expense accounts. Sales

12,500 8,000 3,000 1,500

20,000

Retained earnings To close the Sales Revenue account. Retained earnings Dividends To close the Dividends account.

20,000

2,000 2,000

Retained Earnings = [$8,500 - $12,500 + $20,000 - $2,000] = $14,000

SEC-12. Identify Financial Statements from Adjusted Trial Balance Accounts (LO3) a. Balance Sheet b. Income Statement c. Balance Sheet d. Balance Sheet TESTBANKSELLER.COM e. Balance Sheet f. Income Statement

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EXERCISES—SET A EC-1A. Nature of Accounts, Debit and Credit Rules (LO1)

Asset Liability Common stock Dividends Revenue Expense

Increase Debit Credit Credit Debit Credit Debit

Decrease Credit Debit Debit Credit Debit Credit

EC-2A. The Account (LO1) 1) Inventory Accounts Payable To record purchase of inventory on account 2) Inventory Accounts Payable To record purchase of inventory on account

Normal Balance Debit Credit Credit Debit Credit Debit

500 500

300 300

3) Accounts Payable TESTBANKSELLER.COM600 Cash To record payment to suppliers

600

4) Inventory Accounts Payable To record purchase of inventory on account

400 400

5) Accounts Payable Cash To record payment to suppliers

300

(3) (5)

300

Accounts Payable 600 500 (1) 300 300 (2) 400 (4) 300 Bal

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EC-3A. Closing Entries (LO4) General Journal Date Dec. 31

Description Service fees earned Retained earnings To close the revenue account.

Debit 80,500

Retained earnings Rent expense Salaries expense Supplies expense Depreciation expense To close the expense accounts.

89,700

Retained earnings Dividends To close the Dividends account.

10,000

Credit 80,500

20,800 52,000 5,600 11,300

10,000

The balance of Retained Earnings after closing entries are posted is $52,800 credit ($72,000 + $80,500 – 89,700 − $10,000).

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EC-4A. Transaction Analysis (LO1) 1) Cash Common stock To record stockholder contribution

19,500 19,500

2) Office equipment Accounts payable To record office equipment purchased on account 3) Rent expense Cash To record payment of rent expense

10,400 10,400

700 700

4) Legal database subscription Cash To record prepayment for database service

9,600

5) Accounts receivable Legal fees earned To record billing for legal services

11,300

6) Accounts payable Cash To record payment on equipment

6,000

9,600

11,300

6,000

TESTBANKSELLER.COM 7) Salaries expense Cash To record payment of salaries

2,800

8) Cash

9,400

2,800

Accounts receivable To record receipt of cash from customers 9) Utilities expense Accounts payable To record utilities expense

9,400

180 180

10) Dividends Cash To record cash payment of dividends

1,500 1,500

Continued

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(1) (8)

Bal

Cash 19,500 700 9,400 9,600 6,000 2,800 1,500 8,300

(3) (4) (6) (7) (10)

Accounts Receivable (5) 11,300 9,400 (8) Bal 1,900

Legal Database Subscription (4) 9,600

Accounts Payable (6) 6,000 10,400 (2) 180 (9) 4,580 Bal

(10)

Dividends 1,500

Legal Fees Earned 11,300 (5)

(3)

Rent Expense 700

(9)

(2)

Office Equipment 10,400

Common Stock 19,500

(7)

(1)

Salaries Expense 2,800

Utilities Expense 180

DANIEL KELLY, ATTORNEY-AT-LAW Trial Balance TOctober ESTBA31 NKSELLER.COM Cash Accounts receivable Office equipment Legal database subscription Accounts payable Common stock Dividends Legal fees earned Salaries expense Rent expense Utilities expense Totals

Debit $ 8,300 1,900 10,400 9,600

Credit

$ 4,580 19,500 1,500 11,300 2,800 700 180 $35,380

$35,380

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EXERCISES—SET B EC-1B. Nature of Accounts, Debit and Credit Rules (LO1) Increase Decrease Cash ............................... Debit Credit Accounts payable ........... Credit Debit Common stock .............. Credit Debit Retained earnings .......... Credit Debit Fee revenue .................... Credit Debit Wage expense ................ Debit Credit

EC-2B. The Account (LO1) 1) Inventory Accounts Payable To record purchase of inventory on account 2) Inventory Accounts Payable To record purchase of inventory on account

Normal Balance Debit Credit Credit Credit Credit Debit

1,500 1,500

1,300 1,300

3) Cost of goods sold TESTBANKSELLER.CO1,600 M Inventory To record cost of inventory sold

1,600

4) Inventory Accounts Payable To record purchase of inventory on account

1,400 1,400

5) Cost of goods sold Inventory To record cost of inventory sold

1,300

(1) (2) (4) Bal

Inventory 1,500 1,600 1,300 1,300 1,400 1,300

1,300

(3) (5)

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EC-3B. Closing Entries (LO4) General Journal Date Dec. 31

Description Commissions earned Retained earnings To close the revenue account.

Debit 94,900

Retained earnings Wages expense Insurance expense Utilities expense Depreciation expense To close the expense accounts.

57,200

Retained earnings Dividends To close the Dividends account.

12,000

Credit 94,900

36,000 1,900 9,500 9,800

12,000

The balance in Retained Earnings after closing entries are posted is $47,800 credit ($22,100 + $94,900 - $57,200 − $12,000).

TESTBANKSELLER.COM

TESTBANKSELLER.COM #1 TEST BANKS WHOLESALER

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TESTBANKSELLER.COM

PROBLEMS—SET A PC-1A. Transactions Analysis and the Effect of Errors on Trial Balance (LO1) a. (1) Carol Marsh invested $13,000 of her personal funds in the business. (2) Purchased office equipment for cash, $4,800. (3) Purchased office supplies on account, $2,800. (4) Paid May rent, $810. (5) Billed clients for services rendered, $6,400. (6) Paid $1,950 on accounts payable. (7) Received invoice for May utilities, $270. (8) Company paid Marsh a dividend, $600. (9) Collected $3,700 on account from clients. b. Cash should be $8,540 not $8,450 (transposition error). Accounts Receivable should be $2,700 (subtraction error). Dividends is a debit, not a credit, balance. Utilities Expense debit balance of $270 was omitted from the trial balance. The correct total of the trial balance is $20,520. Debit Totals as given $20,560 Transposition error in Cash balance + 90 TESTbalance BANKSELLER-.1,000 COM Error in Accounts Receivable Dividends balance on wrong side + 600 Utilities Expense balance omitted + 270 Correct totals $20,520

PC-2A. Transaction Analysis and Trial Balance (LO1) a. 1) Rent Expense Cash To record payment of rent expense 2) Cash

Credit $21,120

- 600 $20,520

670 670

7,100

Accounts Receivable To record collections from customers

7,100

3) Notes Payable Cash To record payment of notes payable

2,500

4) Accounts Receivable Service Fees Earned To record customer billings

16,550

2,500

16,550

DeFond—Financial Accounting for Decision Makers 2nd Edition

TESTBANKSELLER.COM #1 TEST BANKS WHOLESALER

TESTBANKSELLER.COM

a. continued 5) Cash

1,200

Service Fees Earned To record service fees rendered and collected

1,200

6) Accounts Payable Cash To record payments to creditors

1,400

7) Cash

12,750

1,400

Accounts Receivable To record collections from customers 8) Delivery Expense Cash To record payment of delivery expense 9) Salaries Expense Cash To record salaries expense

12,750

400 400

4,600 4,600

10) Advertising Expense 600 Accounts Payable To record advertising expense to be paid following month

600

TESTBANKSELLER.COM 11) Utilities Expense Cash To record payment of salaries expense

350 350

12) Dividends Cash To record payment of dividends

2,000

13) Supplies Expense Accounts Payable To record supplies expense for the month

2,260

14) Equipment Cash To record purchase of computer

4,300

2,000

2,260

4,300

Continued

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TESTBANKSELLER.COM

a. continued

Beg (2) (5)

Cash 8,500 670 7,100 2,500 1,200 1,400

(7) 12,750

(1) (3) (6)

Accounts Receivable Beg 9,800 7,100 (2) (4) 16,550 12,750 (7) Bal 6,500

Equipment (14) 4,300

400 (8) 4,600 (9) 350 11) 2,000 (12) 4,300 (14)

Bal 13,330

(3)

Notes Payable 2,500 5,000 Beg 2,500 Bal

Retained Earnings 9,200 Beg

Accounts Payable (6) 1,400 2,100 Beg 600 (10) 2,260 (13) 3,560 Bal Dividends (12) 2,000

TESTBANKSELLER.COM

Common Stock 2,000 Beg

Service Fees Earned 16,550 (4) 1,200 (5) 17,750 Bal

Rent Expense (1) 670

Salaries Expense (9) 4,600

Delivery Expense (8) 400

Advertising Expense (10) 600

Utilities Expense (11) 350

Supplies Expense (13) 2,260

DeFond—Financial Accounting for Decision Makers 2nd Edition

TESTBANKSELLER.COM #1 TEST BANKS WHOLESALER

TESTBANKSELLER.COM

b. ART GRAPHICS Trial Balance July 31 Cash Accounts receivable Equipment Accounts payable Notes payable Common stock Retained earnings Dividends Service fees earned Rent expense Salaries expense Delivery expense Advertising expense Utilities expense Supplies expense Totals

Debit $13,330 6,500 4,300

Credit

$3,560 2,500 2,000 9,200 2,000 17,750 670 4,600 400 600 350 2,260 $35,010

$35,010

PC-3A. Transaction Analysis and TETrial STBBalance ANKSELLER.COM (LO1) a. 1) Rent Expense 5,000 Cash To record payment of rental costs 2) Insurance Expense Cash To record payment of insurance premium

1,800

3) Advertising Expense Cash To record payment of advertising expense

1,000

4) Cash Service Fees Earned To record service fees earned

13,750

5) Accounts Receivable Service Fees Earned To record service fees earned

3,200

5,000

1,800

1,000

13,750

3,200

Continued

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TESTBANKSELLER.COM

a. continued 6) Cash Accounts Receivable To record collections from customers

17,400

7) Accounts Payable Cash To record payments on accounts payable

1,500

8) Accounts Receivable Service Fees earned To record billings for service fees earned

16,400

17,400

1,500

16,400

9) Interest Expense Cash To record payment of interest

25 25

10) Wage Expense Cash To record payment of wage expense

12,800

11) Fuel Expense Accounts Payable To record invoice for fuel used in month

3,200

12,800

3,200

TESTBANKSELLER.COM 12) Retained Earnings Cash To record payment of dividends

4,500 4,500

Cash Beg 52,600 5,000 (1) (4) 13,750 1,800 (2) (6) 17,400 1,000 (3) 1,500 (7) 25 (9) 12,800 (10) 4,500 (12) Bal 57,125

Accounts Receivable Beg 23,200 17,400 (6) (5) 3,200 (8) 16,400 Bal 25,400

Notes Payable 3,000 Beg

Accounts Payable 1,500 1,700 Beg 3,200 (11) 3,400 Bal

Common Stock 50,000 Beg

Retained Earnings (12) 4,500 21,100 Beg 16,600 Bal

(7)

Continued

DeFond—Financial Accounting for Decision Makers 2nd Edition

TESTBANKSELLER.COM #1 TEST BANKS WHOLESALER

TESTBANKSELLER.COM

a. continued Service Fees Earned 13,750 (4) 3,200 (5) 16,400 (8) 33,350 Bal

(1)

Rent Expense 5,000

(9)

Interest Expense 25

Wage Expense (10) 12,800

Advertising Expense (3) 1,000

Fuel Expense 3,200

Insurance Expense (2) 1,800

(11)

b. OUTPOST FLY-IN SERVICE, INC. Trial Balance August 31, 2019 Cash Accounts receivable Accounts payable Notes payable Common stock Retained earnings Service fees earned Wage expense Advertising expense Rent expense Fuel expense Insurance expense Interest expense Totals

Debit $ 57,125 25,400

Credit

TESTBANKSELLER.COM$

12,800 1,000 5,000 3,200 1,800 25 $106,350

3,400 3,000 50,000 16,600 33,350

$106,350

TESTBANKSELLER.COM #1 TEST BANKS WHOLESALER

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PC-4A. Transaction Analysis and the Effect of Errors on the Trial Balance (LO1) a. (1) Flores Corporation issued common stock for cash, $20,000. (2) Purchased office equipment for note payable, $5,000. (3) Purchased supplies on account, $1,530. (4) Paid May rent, $1,400. (5) Returned $310 of supplies and reduced amount owed to supplier. (6) Billed clients for services rendered, $8,750. (7) Paid salaries to employees, $5,950. (8) Paid $1,000 on accounts payable. (9) Received invoice for May utilities, $290. (10) Collected $5,200 on account from clients. b. Cash should be $16,850 not $61,850 (transposition error). Office Equipment is a debit, not a credit, balance. Notes Payable should be $5,000, not $50,000 (slide error). Common Stock should be $20,000, not $2,000 (slide error). Professional Fees Earned should be $8,750, not $8,570 (transposition error). The correct total of the trial balance is $34,260. Debit $74,260 - 45,000 + 5,000

Totals as given Transposition error in Cash balance Office Equipment balance on wrong side Slide error in Notes Payable balance Slide error in Common Stock TESTbalance BANKSELLER.COM Transposition error in Professional Fees Earned balance Correct totals $34,260

PC-5A. Transaction Analysis and Trial Balance (LO1) a. 1) Cash Common Stock To record the issuance of common stock

Credit $66,080 - 5,000 - 45,000 + 18,000 + 180 $34,260

18,000 18,000

2) Equipment 4,200 Accounts Payable To record the purchase of equipment on account 3) Accounts Payable Equipment To record the return of equipment

200

4) Supplies Accounts Payable To record purchase of supplies on account

860

4,200

200

860

DeFond—Financial Accounting for Decision Makers 2nd Edition

TESTBANKSELLER.COM #1 TEST BANKS WHOLESALER

TESTBANKSELLER.COM

a. continued 5) Truck Cash Notes Payable To record the purchase of a truck

10,500 5,500 5,000

6) Rent Expense Cash To record the payment of rent expense

875

7) Truck Expense Cash To record payment of fuel cost

875

8) Accounts Receivable Service revenue To record billings for service revenue

13,700

9) Accounts Payable Cash To record payment for equipment purchased

3,000

13,700

3,000

10) Utilities Expense 210 Cash To record payment forTutilities ESTBAexpense NKSELLER.COM

210

11) Advertising Expense Accounts Payable To record advertising invoice

280

12) Wages Expense Cash To record payment of wages expense

3,350

13) Cash Accounts Receivable To record cash collected from customers

8,600

14) Dividends Cash To record dividend payment

1,500

3,350

8,600

1,500

15) Interest Expense Cash To record payment of interest expense

40 40

Continued

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a. continued Cash 18,000 5,500 8,600 875 60 3,000 210 3,350 1,500 40 12,065

(1) (13)

Bal

(5) (6) (7) (9) (10) (12) (14) (15)

Notes Payable 5,000

(14)

Dividends 1,500

(10)

Utilities Expense 210

(15)

Interest Expense 40

(5)

Accounts Receivable (8) 13,700 8,600 (13) Bal 5,100

(2) Bal

(3) (9)

Equipment 4,200 200 4,000

(3)

Supplies 860

(4)

Truck (5) 10,500

Accounts Payable 200 4,200 (2) 3,000 860 (4) 280 (11) 2,140 Bal

Common Stock 18,000 (1)

Service Revenue 13,700 (8)

(6)

(7)

Truck Expense 60

Advertising Expense (11) 280

(12)

Wages Expense 3,350

TESTBANKSELLER.COM

Rent Expense 875

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TESTBANKSELLER.COM #1 TEST BANKS WHOLESALER

TESTBANKSELLER.COM

b. JAMES BEHM, ELECTRICAL CONTRACTOR Trial Balance May 31 Debit Credit Cash $12,065 Accounts receivable 5,100 Supplies 860 Equipment 4,000 Truck 10,500 Accounts payable $2,140 Notes payable 5,000 Common stock 18,000 Dividends 1,500 Service revenue 13,700 Rent expense 875 Utilities expense 210 Truck expense 60 Advertising expense 280 Interest expense 40 Wages expense 3,350 Totals $38,840 $38,840

PC-6A. Adjusting Entries (LO2)

TESTBANKSELLER.COM General Journal

Date Description 1. Dec. 31 Advertising expense Prepaid advertising To record advertising expense ($1,200 − $950 = $250). 2. 31 Wages expense Wages Payable To record accrued wages. 3. 31 Insurance expense Prepaid insurance To record insurance expense ($3,420 − $2,750 = $670). 4. 31 Unearned service fees Service fees earned To transfer fees earned from unearned fees ($5,400 − $2,800 = $2,600). 5. 31 Rent receivable Rent revenue To record rent earned but not yet recorded.

Debit 250

Credit 250

1,600 1,600

670 670

2,600 2,600

1,300 1,300

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PC-7A. Adjusting Entries (LO2) General Journal Date

Description

Debit

1. Dec. 31 Maintenance expense Prepaid maintenance To record four months' maintenance expense ($2,700  4/6 = $1,800). 2. 31 Supplies expense Supplies To record supplies expense ($9,400 − $3,200 = $6,200). 3. 31 Unearned commission fees Commission fees earned To transfer fees earned from unearned fees ($8,500 − $4,000 = $4,500). 4. 31 Fees receivable Commission fees earned To record fees earned but not yet billed. 5. 31 Rent expense Rent payable TESTBANKSELLER.COM To record additional rent [1%  ($86,000 + $4,500 + $3,500) = $940].

Credit

1,800 1,800

6,200 6,200

4,500 4,500

3,500 3,500

940 940

PC-8A. Financial Statements and Closing Entries (LO3, LO4) a. FINE CONSULTING SERVICE Income Statement For Year Ended December 31 Revenue Service fees earned Expenses Rent expense Salaries expense Supplies expense Insurance expense Depreciation expense—Equipment Interest expense Total expenses Net income

$62,400 $15,000 33,400 4,700 3,250 720 630 57,700 $ 4,700

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TESTBANKSELLER.COM #1 TEST BANKS WHOLESALER

TESTBANKSELLER.COM

FINE CONSULTING SERVICE Statement of Stockholders’ Equity For Year Ended December 31

Balance, January 1 Add: Net income Less: Dividends paid Balance, December 31

Common Stock $ 3,000

$ 3,000

Retained Earnings $ 5,205 4,700 ( 2,900) $ 7,005

Total $ 8,205 4,700 (2,900) $ 10,005

FINE CONSULTING SERVICE Balance Sheet December 31 Assets Liabilities Cash $ 2,700 Accounts payable $ 845 Accounts receivable 3,270 Long-term notes payable 7,000 Supplies 5,060 Total Liabilities 7,845 Prepaid insurance 1,500 Equipment $ 6,400 Stockholders’ Equity Less: Accum. depreciation 1,080 5,320 Common stock 3,000 Retained earnings 7,005 Total stockholders’ equity 10,005 TESTBANKSELLER.COMTotal Liabilities and Total Assets $17,850 Stockholders’ Equity $17,850

General Journal Date Dec. 31

Description Service fees earned Retained earnings To close the Revenue account.

Debit 62,400

Retained earnings Rent expense Salaries expense Supplies expense Insurance expense Depreciation expense— Equipment Interest expense To close the expense accounts.

57,700

Retained earnings Dividends To close the Dividends account.

2,900

Credit 62,400

15,000 33,400 4,700 3,250 720 630

2,900

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PC-9A. Closing Entries (LO4) a. General Journal Date Description Dec. 31 Service fees earned Miscellaneous income Retained earnings To close the revenue accounts. 31

Debit 102,200 4,200

Credit

106,400

Retained earnings Salaries expense Rent expense Insurance expense Depreciation expense Income tax expense To close the expense accounts.

74,300

Retained earnings Dividends To close the Dividends account.

7,500

42,800 12,900 1,800 8,000 8,800

7,500

b. After the closing entries are posted, Retained Earnings has a $38,700 credit balance ($14,100 + $106,400 - $74,300 − $7,500 cash dividends). c.

TESTBANKSELLER.COM BAYOU, INC Post-Closing Trial Balance December 31

Cash Accounts receivable Prepaid insurance Equipment Accumulated depreciation Accounts payable Income tax payable Common stock Retained earnings Totals

Debit $ 3,500 8,000 3,600 75,000

$90,100

Credit

$12,000 600 8,800 30,000 38,700 $90,100

DeFond—Financial Accounting for Decision Makers 2nd Edition

TESTBANKSELLER.COM #1 TEST BANKS WHOLESALER

TESTBANKSELLER.COM

PC-10A. Transaction Analysis, Trial Balance, and Financial Statements (LO1, 2, 3, 4) a. General Journal Date

Description

Post Ref.

Debit

June

Rent expense Cash To record payment of studio rent

1 1

975

Rent expense Cash To record payment of piano rent

2 2

240

Cash

3 3

5,320

4 4

1,500

5 5

7,500

Interest expense Cash To record payment of interest.

6 6

Advertising expense Cash To record payment for advertising.

7 7

350

Rent expense Cash To record payment for costume rental.

8 8

550

Cash

9 9

2,100

10 10

480

Accounts receivable To record cash collections from students. Cash Notes payable To record note payable. Accounts receivable Instruction fees earned To record June billings.

Credit 975

240

5,320

1,500

7,500

TESTBANKSELLER.COM

Performance revenue To record receipts for admission fees. Accounts payable Cash To record payment owed on account.

350

550

2,100

480

continued next page

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PC-10A.

continued General Journal Date

Description

Post Ref.

Debit

June Utilities expense Accounts payable To record June utilities invoice.

11 11

465

Dividends Cash To record cash dividend.

12 12

900

Piano

13 13

5,000

Cash To record purchase of a piano

Beg (3) (4) (9)

Bal

Cash 5,930 975 240 5,320 (2) 1,500 30 2,100 350 550 480 900 5,000 6,325

(1)

Beg

465

900

5,000

Piano 5,000

(3)

(13)

(6) Bal 10,180 (7) (8) T(10) ESTBANKSELLER.COM (12) Notes Payable (13) 3,580 1,500 5,080

Beg (4) Bal

(10)

Retained Earnings 2,000

Beg

(12)

Dividends 900

Performance Revenue 2,100

(9)

(1) (2) (8) Bal

Rent Expense 975 240 550 1,765

(6)

Interest Expense 30

(5)

Common Stock 7,870

Beg

Instructional Fees Earned 7,500 (5)

(11)

Accounts Receivable 8,000 5,320

Credit

Utilities Expense 465

(7)

7,500

Advertising Expense 350

Accounts Payable 480 480 Beg 465 (11) 465 Bal

continued next page

DeFond—Financial Accounting for Decision Makers 2nd Edition

TESTBANKSELLER.COM #1 TEST BANKS WHOLESALER

TESTBANKSELLER.COM

PC-10A.

continued

b. MEHL DANCE STUDIO Trial Balance June 30 Debit $ 6,325 10,180 5,000

Cash Accounts receivable Piano Accounts payable Notes payable Common stock Retained earnings Dividends Instructional fees earned Performance revenue Rent expense Utilities expense Advertising expense Interest expense Totals

Credit

$ 465 5,080 7,870 2,000 900 7,500 2,100 1,765 465 350 30 $25,015

$25,015

TESTBANKSELLER.COM

MEHL DANCE STUDIO Income Statement For Month Ended June 30 Revenue Instructional fees earned Performance revenue Total Revenues Expenses Rent expense Utilities expense Advertising expense Interest expense Total Expenses Net income

$7,500 2,100 $9,600 1,765 465 350 30 2,610 $6,990

continued next page

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PC-10A.

continued

d. MEHL DANCE STUDIO Statement of Stockholders’ Equity For Month Ended June 30 COMMONRETAINED STOCKEARNINGS TOTAL $7,870 $2,000 $ 9,870 6,990 6,990 (900) (900) $7,870 $8,090 $15,960

Balance, June 1 Add: Net income for June Less: Dividends Balance, June 30

e. MEHL DANCE STUDIO Balance Sheet June 30 Liabilities $ 6,325 Accounts payable 10,180 Notes payable 5,000 Total Liabilities

Assets Cash Accounts receivable Piano

$ 465 5,080 5,545

TESTBANKSELLStockholders' ER.COM Equity

Total Assets

$21,505

Common stock Retained earnings Total Stockholders’ Equity

7,870 8,090 15,960

Total Liabilities & Stockholders’ Equity

$21,505

General Journal Date

Description

Debit

June

Instructional fees earned Performance revenue Retained earnings To close revenue accounts.

$7,500 2,100

Retained earnings Rent expense Utilities expense Advertising expense Interest expense To close expense accounts.

2,610

Retained earnings Dividends To close dividends account.

Credit

9,600

1,765 465 350 30

900 900

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TESTBANKSELLER.COM #1 TEST BANKS WHOLESALER

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g. MEHL DANCE STUDIO Post-Closing Trial Balance June 30 Cash Accounts receivable Piano Accounts payable Notes payable Common stock Retained earnings Totals

Debit $ 6,325 10,180 5,000

Credit

$ 465 5,080 7,870 8,090 $21,505

$21,505

TESTBANKSELLER.COM

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PROBLEMS—SET B PC-1B. Transactions Analysis and the Effect of Errors on the Trial Balance (LO1) a. (1) Rankine invested $20,000 of her personal funds in the business. (2) Purchased office equipment for cash, $4,800. (3) Purchased office supplies on account, $2,800. (4) Paid May rent, $810. (5) Billed clients for services rendered, $6,400. (6) Paid $1,950 on accounts payable. (7) Received invoice for May utilities, $270. (8) Company paid Rankine a dividend, $600. (9) Collected $3,700 on account from clients. b. Cash should be $15,540 not $15,450 (transposition error). Accounts Receivable should be $2,700 (subtraction error). Dividends is a debit, not a credit, balance. Utilities Expense debit balance of $270 was omitted from the trial balance. The correct total of the trial balance is $27,520. Debit Totals as given $27,560 Transposition error in Cash balance + 90 Error in Accounts Receivable balance − 1,000 TESTBANKSELLER.COM Dividends balance on wrong side + 600 Utilities Expense balance omitted + 270 Correct totals $27,520

PC-2B. Transaction Analysis (LO1) a. 1) Rent Expense Cash To record payment of rent expense

Credit $28,120

- 600 $27,520

670 670

2) Cash Accounts Receivable To record collections from customers

8,100

3) Notes Payable Cash To record payment of notes payable

2,500

4) Accounts Receivable Service Fees Earned To record customer billings

19,550

8,100

2,500

19,550 Continued

DeFond—Financial Accounting for Decision Makers 2nd Edition

TESTBANKSELLER.COM #1 TEST BANKS WHOLESALER

TESTBANKSELLER.COM

a. continued 5) Cash Service Fees Earned To record service fees rendered and collected

1,200

6) Accounts Payable Cash To record payments to creditors

1,700

7) Cash Accounts Receivable To record collections from customers

14,750

8) Delivery Expense Cash To record payment of delivery expense

400

1,200

1,700

9) Salaries Expense Cash To record salaries expense

14,750

400

4,600 4,600

10) Advertising Expense 600 Accounts Payable To record advertising expense to be paid following month

600

TESTBANKSELLER.COM 11) Utilities Expense Cash To record payment of salaries expense

350 350

12) Dividends Cash To record payment of dividends

2,000

13) Supplies Expense Accounts Payable To record supplies expense for the month

2,260

14) Equipment Cash To record purchase of computer

4,300

2,000

2,260

4,300

Continued

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a. continued Cash Beg 10,500 670 (1) (2) 8,100 2,500 (3) (5) 1,200 1,700 (6) (7) 14,750 400 (8) 4,600 (9) 350 (11) 2,000 (12) 4,300 (14) Bal 18,030

Accounts Receivable Beg 9,800 8,100 (2) (4) 19,550 14,750 (7) Bal 6,500

Common Stock 11,200 Beg

Retained Earnings 2,000 Beg

Service Fees Earned 19,550 (4) 1,200 (5) 20,750 Bal

(8)

Delivery Expense 400

(3)

Notes Payable 2,500 5,000 Beg 2,500 Bal

Equipment (14) 4,300

Accounts Payable (6) 1,700 2,100 Beg 600 (10) 2,260 (13) 3,260 Bal Dividends (12) 2,000

Rent Expense 670

(9)

Salaries Expense 4,600

Advertising Expense (10) 600

(11)

Utilities Expense 350

(1)

TESTBANKSELLER.COM (13)

Supplies Expense 2,260

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TESTBANKSELLER.COM #1 TEST BANKS WHOLESALER

TESTBANKSELLER.COM

b. SAN DIEGO ART COMPANY Trial Balance July 31 Debit $18,030 6,500 4,300

Cash Accounts receivable Equipment Accounts payable Notes payable Common stock Retained earnings Dividends Service fees earned Rent expense Salaries expense Delivery expense Advertising expense Utilities expense Supplies expense Totals

Credit

$ 3,260 2,500 11,200 2,000 2,000 20,750 670 4,600 400 600 350 2,260 $39,710

$39,710

PC-3B. Transaction Analysis and Trial Balance TESTBANKSELLER.COM (LO1) a. 1) Rent Expense 6,000 Cash To record payment of rental costs 2) Insurance Expense Cash To record payment of insurance premium

2,800

3) Advertising Expense Cash To record payment of advertising expense

1,500

4) Cash Service Fees Earned To record service fees earned

16,750

5) Accounts Receivable Service Fees Earned To record service fees earned

3,900

6) Cash Accounts Receivable To record collections from customers

20,400

6,000

2,800

1,500

16,750

3,900

20,400

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a. continued 7) Accounts Payable Cash To record payments on accounts payable

1,700

8) Accounts Receivable Service Fees Earned To record billings for service fees earned

19,400

1,700

19,400

9) Interest Expense Cash To record payment of interest

75 75

10) Wages Expense Cash To record payment of wage expense

14,800

11) Fuel Expense Accounts Payable To record invoice for fuel used in month

3,600

12) Retained Earnings Cash To record payment of dividends

4,500

14,800

3,600

4,500

TESTBANKSELLER.COM Beg (4) (6)

Bal

Cash 82,600 6,000 (1) 16,750 2,800 (2) 20,400 1,500 (3) 1,700 (7) 75 (9) 14,800 (10) 4,500 (12)

Accounts Receivable Beg 23,200 20,400 (6) (5) 3,900 (8) 19,400 Bal 26,100

Notes Payable 3,000 Beg

Accounts Payable 1,700 1,700 Beg 3,600 (11) 3,600 Bal

Common Stock 80,000 Beg

(7)

88,375

Retained Earnings (12) 4,500 21,100 Beg 16,600 Bal

Service Fees Earned 16,750 (4) 3,900 (5) 19,400 (8) 40,050 Bal

Advertising Expense (3) 1,500

(1)

Rent Expense 6,000

Insurance Expense 2,800

(9)

Interest Expense 75

(2)

Wages Expense (10) 14,800

(11)

Fuel Expense 3,600

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b. BC BACK-COUNTRY AIRLINES INC. Trial Balance August 31 Cash Accounts receivable Accounts payable Notes payable Common stock Retained earnings Service fees earned Wages expense Advertising expense Rent expense Fuel expense Insurance expense Interest expense Totals

Debit $ 88,375 26,100

Credit

14,800 1,500 6,000 3,600 2,800 75 $143,250

3,600 3,000 80,000 16,600 40,050

$143,250

PC-4B. Transactions Analysis and the Effect of Errors on the Trial Balance (LO1) TESTissued BANKcommon SELLEstock R.COfor M cash, $50,000. a. (1) Claremont Corporation (2) Purchased office equipment for note payable, $5,000. (3) Purchased supplies on account, $1,530. (4) Paid May rent, $1,400. (5) Returned $310 of supplies and reduced amount owed to supplier. (6) Billed clients for services rendered, $8,750. (7) Paid salaries to employees, $5,950. (8) Paid $1,000 on accounts payable. (9) Received invoice for May utilities, $290. (10) Collected $5,200 on account from clients. b. Cash should be $46,850 not $91,850 (calculation error). Office Equipment is a debit, not a credit, balance. Notes Payable should be $5,000, not $50,000 (slide error). Professional Fees Earned should be $8,750, not $8,570 (transposition error). The correct total of the trial balance is $64,260.

Totals as given Calculation error in Cash balance Office equipment balance on wrong side Slide error in Notes payable balance Transposition error in Professional fees earned balance Correct totals

Debit $104,260 - 45,000 + 5,000

$ 64,260

Credit $114,080 - 5,000 - 45,000 + 180 $ 64,260

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PC-5B. Transaction Analysis and Trial Balance (LO1) a. 1) Cash Common Stock To record the issuance of common stock

50,000 50,000

2) Equipment 4,200 Accounts Payable To record the purchase of equipment on account 3) Accounts Payable Equipment To record the return of equipment

200

4) Supplies Accounts Payable To record purchase of supplies on account

860

5) Truck Cash Notes Payable To record the purchase of a truck

4,200

200

860

10,500 5,500 5,000

6) Rent Expense 875 Cash To record the payment TEofSrent TBAexpense NKSELLER.COM

875

7) Truck Expense Cash To record payment of fuel cost

8) Accounts Receivable Service revenue To record billings for service revenue

13,700

9) Accounts Payable Cash To record payment for equipment purchased

3,000

13,700

3,000

10) Utilities Expense Cash To record payment for utilities expense

210

11) Advertising Expense Accounts Payable To record advertising invoice

280

210

280

Continued

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a. continued 12) Wages Expense Cash To record payment of wages expense

3,350

13) Cash Accounts Receivable To record cash collected from customers

8,600

14) Dividends Cash To record dividend payment

1,500

Bal

Cash 50,000 5,500 8,600 875 60 3,000 210 3,350 1,500 80 44,025

Dividends 1,500

(12)

Wages Expense 3,350

80 80

Accounts Receivable (5) (8) 13,700 8,600 (13) (6) Bal 5,100 (7) (9) (10) T(12) ESTBANKSELEquipment LER.COM (14) (2) 4,200 200 (3) (15) Bal 4,000

Notes Payable 5,000

(14)

8,600

1,500

15) Interest Expense Cash To record payment of interest expense

(1) (13)

3,350

Advertising Expense (11) 280

(5)

(3) (9)

Utilities Expense 210

(8)

Supplies 860

Truck (5) 10,500

Accounts Payable 200 4,200 (2) 3,000 860 (4) 280 (11) 2,140 Bal Service Revenue 13,700

(10)

(4)

Common Stock 50,000 (1)

(6)

Rent Expense 875

(7)

Truck Expense 60

Interest Expense (15) 80

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b. WALSH & COMPANY, ELECTRICAL CONTRACTOR Trial Balance May 31 Debit $44,025 5,100 860 4,000 10,500

Cash Accounts receivable Supplies Equipment Truck Accounts payable Notes payable Common stock Dividends Service revenue Rent expense Wages expense Utilities expense Truck expense Advertising expense Interest expense Totals

Credit

$ 2,140 5,000 50,000 1,500 13,700 875 3,350 210 60 280 80 $70,840

$70,840

TESTBANKSELLER.COM

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PC-6B. Adjusting Entries (LO2) General Journal Date

Description

Debit

Credit

a. Dec 31 Advertising expense Prepaid advertising To record advertising expense ($3,200 − $900 = $2,300).

2,300 2,300

b. 31 Wages expense Wages Payable To record accrued wages.

1,700

31 Insurance expense Prepaid insurance To record insurance expense ($6,420 − $2,380 = $4,040).

4,040

31 Unearned service fees Service fees earned To transfer fees earned from unearned fees ($5,400 − $2,500 = $2,900).

2,900

31 Rent receivable Rent revenue TESTBANKSELLER.COM To record rent earned but not yet recorded.

4,000

1,700

c. 4,040

d. 2,900

e. 4,000

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PC-7B. Adjusting Entries (LO2) General Journal Date

Description

Debit

Credit

1. Dec 31 Maintenance expense Prepaid maintenance To record four months' maintenance expense ($6,000  4/6 = $4,000).

4,000 4,000

2. 31 Supplies expense Supplies To record supplies expense ($10,400 − $3,500 = $6,900).

6,900

31 Unearned commission fees Commission fees earned To transfer fees earned from unearned fees ($10,700 − $5,000 = $5,700).

5,700

31 Fees receivable Commission fees earned To record fees earned but not yet billed.

3,800

31 Rent expense Rent payable TESTBANKSELLER.COM To record additional rent [2%  ($97,000 + $5,700 + $3,800) = $1,070.

2,130

6,900

3. 5,700

4. 3,800

5. 2,130

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PC-8B. Financial Statements and Closing Entries (LO3, LO4) a. OUTDOORS, INC. Income Statement For Year Ended December 31 Revenue Subscription revenue Advertising revenue Total Revenues Expenses Salaries expense Printing and mailing expense Rent expense Supplies expense Insurance expense Depreciation expense Income tax expense Total Expenses

$188,300 49,700 $238,000 $120,230 85,600 4,800 6,100 1,860 5,500 1,600 225,690 $ 12,310

Net income

TESTBANKOUTDOORS, SBalance ELLERSheet .CINC. OM December 31 Assets Cash Accounts receivable Supplies Prepaid insurance Office equipment

$ 5,400 18,600 4,200 930

$16,100 10,000 3,500 29,600

$70,000

Less: Accum. depreciation (13,000)

Total Assets

Liabilities Accounts payable Unearned subscription revenue Salaries payable Total Liabilities

57,000

$86,130

Stockholders’ Equity Common Stock $21,000 Retained Earnings 35,530* Total Stockholders’ Equity

56,530

Total Liabilities & Stockholders’ Equity

$86,130

*Retained Earnings balance from adjusted trial balance + $12,310 Net Income.

continued next page

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PC-8B. b.

continued General Journal Date

Description

Debit

Dec 31 Subscription revenue Advertising revenue Retained earnings To close the revenue accounts. 31 Retained earnings Salaries expense Printing and mailing expense Rent expense Supplies expense Insurance expense Depreciation expense Income tax expense To close the expense accounts.

Credit

188,300 49,700 238,000

225,690 120,230 85,600 4,800 6,100 1,860 5,500 1,600

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PC-9B. Closing Entries (LO4) a. Date

General Journal

Description

Debit

Dec 31 Service fees earned Retained earnings To close the revenue account.

Credit

80,500 80,500

31 Retained earnings Wages expense Rent expense Insurance expense Supplies expense Advertising expense Depreciation expense – Trucks Depreciation expense – Equipment To close the expense accounts.

62,800

31 Retained earnings Dividends To close the Dividends account.

7,500

29,800 10,200 4,900 5,100 8,000 4,000 800

7,500

b. The balance of retained earnings after closing entries are posted is $26,250 credit ($16,050 + $80,500 - $62,800 − $7,500).

TESTBANKSELLER.COM

OKAY MOVING SERVICE Post-Closing Trial Balance December 31 Cash Accounts receivable Supplies Prepaid advertising Trucks Accumulated depreciation—Trucks Equipment Accumulated depreciation—Equipment Accounts payable Unearned service fees Common stock Retained earnings Totals

Debit $ 4,800 5,250 5,300 3,000 30,300

Credit

$10,000 7,600

$56,250

2,100 1,200 6,700 10,000 26,250 $56,250

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PC-10B. Transaction Analysis, Trial Balance, and Financial Statements (LO1, 2, 3, 4) a. General Journal Date

Description

Post Ref.

Debit

June

Rent expense Cash To record payment of studio rent

1 1

2,075

Rent expense Cash To record payment of piano rent

2 2

800

Cash

3 3

14,320

4 4

6,500

5 5

9,600

Interest expense Cash To record payment of interest.

6 6

Advertising expense Cash To record payment for advertising.

7 7

550

Rent expense Cash To record payment for costume rental.

8 8

800

Cash

9 9

6,100

10 10

780

Accounts receivable To record cash collections from students. Cash Notes payable To record note payable. Accounts receivable Instruction fees earned To record June billings.

Credit 2,075

800

14,320

6,500

9,600

TESTBANKSELLER.COM

Performance revenue To record receipts for admission fees. Accounts payable Cash To record payment owed on account.

550

800

6,100

780

continued next page

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PC-10B.

continued

General Journal Date

Description

Post Ref.

Debit

June Utilities expense Accounts payable To record June utilities invoice.

11 11

480

Dividends Cash To record cash dividend.

12 12

850

Piano

13 13

6,000

Cash To record purchase of a piano Beg (3) (4) (9)

Bal

Cash 10,930 2,075 14,320 800 6,500 90 6,100 550 800 780 850 6,000 25,905 Common Stock 11,870 Beg

Accounts Receivable (1) Beg 17,420 14,320 (3) (2) (5) 9,600 (6) Bal 12,700 (7) (8) Notes Payable (10) T(12) ESTBANKSELLER.C3,000 OM Beg 6,500 (4) (13) 9,500 Bal

Instructional Fees Earned 9,600 (5)

(11)

Utilities Expense 480

(7)

480

850

6,000

(13)

(10)

Retained Earnings 13,000

Beg

(12)

Performance Revenue 6,100

(9)

(1) (2) (8)

Advertising Expense 550

Credit

Piano 6,000

Accounts Payable 780 480 Beg 480 (11) 180 Bal Dividends 850

Rent Expense 2,075 800 800 Bal 3,675 Interest Expense (6) 90

continued next page

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PC-10B.

continued

b. MILLER DANCE STUDIO Trial Balance June 30 Debit $25,905 12,700 6,000

Credit

180 9,500 11,870 13,000

850 9,600 6,100 3,675 480 550 90 $50,250

$50,250

TMILLER ESTBADANCE NKSEL LER.COM STUDIO Income Statement For Month Ended June 30 Revenue Instructional fees earned Performance revenue Total Revenues Expenses Rent expense Utilities expense Advertising expense Interest expense Total Expenses Net income

$9,600 6,100 $15,700 3,675 480 550 90 4,795 $ 10,905

continued next page

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PC-10B.

continued

MILLER DANCE STUDIO Statement of Stockholders’ Equity For Month Ended June 30 Common Stock Balance, June 1 $11,870 Add: Net income for June Less: Dividends paid Balance, June 30 $11,870

Retained Earnings $13,000 10,905 ( 850) $23,055

Total $24,870 10,905 (850) $34,925

Assets Cash Accounts receivable Piano

MILLER DANCE STUDIO Balance Sheet June 30 Liabilities $25,905 Accounts payable 12,700 Notes payable 6,000 Total TESTBANKSELLER. COMLiabilities Stockholders' Equity Common stock Retained earnings Total Stockholders’ Equity

Total Assets

$44,605

180 9,500 9,680

11,870 23,055 34,925

Total Liabilities & Stockholders’ Equity $44,605

continued next page

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PC-10B.

continued

General Journal Date

Description

Debit

June

Instructional fees earned Performance revenue Retained earnings To close revenue accounts.

$9,600 6,100

Retained earnings Rent expense Utilities expense Advertising expense Interest expense To close expense accounts.

4,795

Credit

15,700

3,675 480 550 90

Retained earnings Dividends To close dividends account.

850 850

g. MILLER DANCE STUDIO Post-Closing Trial Balance June 30

TESTBANKSELLER.COM

Cash Accounts receivable Piano Accounts payable Notes payable Common stock Retained earnings Totals

Debit $ 25,905 12,700 6,000

$44,605

Credit

$ 180 9,500 11,870 23,055 $44,605

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TESTBANKSELLER.COM

Appendix D Accounting for Investments and Consolidated Financial Statements QUESTIONS 1.

The investment categories for debt security investments are trading securities, available-for-sale securities, and held-to-maturity securities.

The investment categories for equity security investments are trading securities, available-for-sale securities, influential securities, and controlling securities.

The Caldwell Company bonds belong in the available-for-sale investment category. Accordingly, the bond premium beEamortized TESTshould BANKS LLER.Cas OMan adjustment of interest income. The bonds should be reported at their fair value in the year-end balance sheet.

Trading securities are reported at their fair value in the balance sheet. Available-for-sale securities are reported at their fair value in the balance sheet. Held-to-maturity securities are reported at their amortized cost in the balance sheet.

An unrealized gain is an increase in the fair value of an asset (in this case, an investment security) that is still owned. An unrealized loss is a decrease in the fair value of an asset (in this case, an investment security) that is still owned.

Unrealized gains and losses related to trading securities are reported in the current year income statement. Unrealized gains and losses related to available-for-sale securities are reported as a separate component of stockholders' equity titled Unrealized Gain/Loss on Investments (Equity).

An influential stock investment is an investment that gives the owner of the stock the ability to influence significantly the operating and financing activities of the company whose stock is owned. Normally, this is accomplished with a 20 to 50 percent ownership of the company's voting stock. The equity method is used to account for influential investments. Such an investment is initially recorded at cost; the investment and investment income accounts are increased by the proportionate share of the investee company's net income; the investment account is decreased by dividends received on the investment; and the investment account is reported in the balance sheet at its book value. ©Cambridge Business Publishers, 2020

Solutions Manual, Appendix D

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Mower Company's investment in Starr Company is an influential investment. At year-end, the investment should be reported in the balance sheet at $258,000 [$250,000 + (40%  $80,000) ‒ (40% x $60,000)].

A stock investment representing more than 50 percent of the investee company's voting stock is classified within the controlling securities category. As such, the equity method is used to account for the investment—initially, the investment is recorded at cost, the investment and investment income accounts are increased by the proportionate share of the investee company's net income; and the investment account is decreased by dividends received on the investment. When financial statements are prepared, the investment account balance is eliminated as part of the consolidation procedures.

10.

Consolidated financial statements portray the financial position, operating results, and cash flows of affiliated companies as a single economic unit so that the scope of the group enterprise is more realistically conveyed.

11.

Limitations of consolidated statements include the possibility that the performances of poor companies in a group may be "masked" in consolidation. Likewise, rates of return, other ratios, and trend percentages calculated from consolidated statements might prove deceptive because they are composite calculations. Consolidated statements also eliminate detail about product lines, divisional operations, and the relative profitability of various business segments. (Some of this information may be available for certain public firms.) Finally, shareholders and creditors of subsidiary companies find it difficult to isolate amounts related to their legal rights by inspecting only consolidated statements.

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EXERCISES—SET A ED-1A. Accounting for Debt Securities—Trading (LO2) INCO M E STATE M E NT

BALANCE SHEET

Assets

Liabilities

Revenues

Stockholders' Equity

−

Expenses

Net Income

2019 Oct. 1

Bond investment trading (Skyline)

486,000

Cash

-486,000 Record purchase of $500,000 of Skyline, Inc. bonds at 97 plus $1,000 commission. ($500,000 x 0.97) + $1,000 = $486,000

Dec. 31

Bond interest receivable

8,750

Retained earnings

8,750

Bond interest income

8,750

Retained earnings

4,000

Unrealized gain on investments

4,000

8,750

Bond interest income

8,750

2,300

Record 3 months' interest earned on bonds ($500,000 x 0.07) x 3/12 = $8,750

Dec. 31

Bond investment trading (Skyline)

4,000

Adjust trading debt securites to year-end fair value of $490,000. ($490,000 - $486,000 = $4,000 unrealized gain.)

2020 Mar. 31 Cash

17,500

Bond interest receivable

Retained earnings

-8,750

Record receipt of semiannual interest on Skyline bond investment ($500,000 x 0.07) x 6/12 = $17,500

Apr. 1

Cash Bond investment trading (Skyline)

492,300 -490,000

TESTBANKSELLER.COM Retained earnings

2,300

Gain on sale of investments

Record sale of trading debt secutiies for $492,300 ($492,300 - $490,000 = $2,300 realized gain.)

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ED-2A. Accounting for Debt Securities—Available for Sale (LO2) BALANCE SHEET

Assets

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

Revenues

−

Expenses

Net Income

2019 Jan. 1

Bond investmentavailable for sale (Cynad)

793,400

Cash

-793,400 Record purchase of $800,000 of Cynad, Inc. bonds at 99 plus $1,400 commission. ($800,000 x 0.99) + $1,400 = $793,400

Jun. 30

Cash Bond investmentavailable for sale (Cynad)

36,000 Retained earnings

220

36,220

Bond interest income

36,220

-1,560

Record receipt of semiannual interest and discount amortization on Cynad bonds. ($800,000 x 0.09) x 6/12 = $36,000; ($800,000 - $793,400)/30 periods = $220

Dec. 31

Cash Bond investmentavailable for sale (Cynad)

36,000 Retained earnings

220

36,220

Bond interest income

Record receipt of semiannual interest and discount amortization on Cynad bonds.

Dec. 31

Fair value adjustment to bond investment

Unrealized gain/loss on investments

-3,840

Adjust available-for-sale debt securites to year-end fair value of $790,000 ($793,840 - $790,000 = $3,840 unrealized loss)

2020 Jun.30 Cash

36,000

Bond investmentavailable for sale (Cynad)

TESTBANKSELLER.COM Retained earnings

220

36,220

Bond interest income

Record receipt of semiannual interest and discount amortization on Cynad bonds.

Jul. 1

Cash Bond investmentavailable for sale (Cynad)

792,500 Retained earnings

-794,060

-1,560

Loss on sale of investments

Record sale of available-for-sale debt securities for $792,500 ($794,060 amortized cost - $792,500 = $1,560 realized loss)

Dec. 31

Fair value adjustment to bond investment

Unrealized gain/loss on investments

3,840

Adjust account balances to zero.

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TESTBANKSELLER.COM

ED-3A. Accounting for Debt Securities—Held to Maturity (LO2) BALANCE SHEET

Assets

Liabilities

INCO ME STATE ME NT +

Stockholders' Equity

Revenues

−

Expenses

Net Income

2019 Jan. 1

Bond investment-held to maturity (Sphere)

612,900

Cash

-612,900 Record purchase of $600,000 of Sphere, Inc. bonds at 102 plus $900 commission ($600,000 x 1.02) + 900 = $612,900

Jun. 30

Cash Bond investment-held to maturity (Sphere)

27,000 Retained earnings

-645

26,355

Bond interest income

26,355

Record receipt of semiannual interest and premium amortization on Sphere bonds ($600,000 x 0.09) x 6/12 = $27,000; $12,900/20 periods = $645

2028 Dec. 31 Cash

27,000

Bond investment-held to maturity (Sphere)

Retained earnings

-645

26,355

Bond interest income

Record receipt of semiannual interest and premium amortization on Sphere bonds

Dec. 31

Cash Bond investment-held to maturity (Sphere)

600,000 -600,000 Record redemption of bonds at maturity.

ED-4A. Accounting for Equity Securities—Trading TESTBANKSELLER.COM (LO3) BALANCE SHEET

Assets

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

Revenues

−

Expenses

Net Income

2019 Nov. 15

Stock investment trading (Erie)

72,750

Cash

-72,750 Record purchase of 6,000 shares of Erie, Inc. stock for $72,750 (6,000 x $!2) + $750 = $72,750

Dec. 22

Cash

Retained earnings

6,600

Dividend income

6,600

-5,250

Unrealized loss on investments

-5,250

Loss on sale of investment

-600

Record receipt of cash dividend on Erie common stock 6,000 x $1.10 = $6,600

Dec. 31

Stock investment trading (Erie)

Retained earnings

-5,250

Adjust trading equity securites to year-end fair value of $67,500 (6,000 x $11.25 = $67,500; $72,750 - $67,500 = $5,250 unrealized loss)

2020 Jan. 20 Cash

66,900

Stock investment trading (Erie)

Retained earnings

-67,500

-600

Record sale of Erie, Inc. common stock for $66,900. $67,500 - $66,900 = $600 realized loss

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ED-5A. Accounting for Equity Securities—Available for Sale (LO3) BALANCE SHEET

Assets

Liabilities

INCO M E STATE M E NT

Stockholders' Equity

Revenues

Expenses

−

Net Income

2019 Nov. 15

Stock investment available for sale (Erie)

72,750

Cash

-72,750 Record purchase of 6,000 shares of Erie, Inc. stock for $72,750 (6,000 x $!2) + $750 = $72,750

Dec. 22

Cash

Retained earnings

6,600

Dividend income

6,600

Loss on sale of investment

-5,850

Record receipt of cash dividend on Erie common stock 6,000 x $1.10 = $6,600

Dec. 31

Fair value adjustment to stock investment

Unrealized gain/ loss on investments

-5,250

Adjust available for sale equity securites to year-end fair value of $67,500 (6,000 x $11.25 = $67,500; $72,750 - $67,500 = $5,250 unrealized loss)

2020 Jan. 20 Cash

66,900

Stock investment trading (Erie)

Retained earnings

-72,750

-5,850

Record sale of Erie, Inc. common stock for $66,900. $72,750 - $66,900 = $5,850 realized loss

Dec. 31

Fair value adjustment to stock investment

Unrealized gain/ loss on investments

5,250

Adjust account balances to zero.

TESTBANKSELLER.COM ED-6A. Accounting for Equity Securities—Influential (LO3) BALANCE SHEET

Assets

Liabilities

INCO M E STATE M E NT

Stockholders' Equity

Revenues

−

Expenses

Net Income

2019 Jan. 15

Stock investmentinfluential (Van)

108,900

Cash

-108,900 Record purchase of 12,000 shares of Van, Inc. common stock for $108,900; shares represent 30% ownership. (12,000 x $9) + $900 = $108,900

Dec. 31

Cash Stock investmentinfluential (Van)

15,000 -15,000 Record receipt of cash dividend on Van common stock. 12,000 x $1,25 = $15,000

Dec. 31

Stock investmentinfluential (Van)

Retained earnings

24,000

Income from stock investments

24,000

2,600

Gain on sale of investments

2,600

Record as income 30% of Van's net income of $80,000 $80,000 x 0.30 = $24,000

2020 Jan. 20 Cash

120,500

Stock investmentinfluential (Van)

Retained earnings

-117,900

Record sale of Van, Inc. common stock for $120,500 $120,500 - $117,900 = $2,600 realized gain. $108,900 - $15,000 + $24,000 = $117,900 book value.

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ED-7A. Accounting for Equity Securities (LO3) a. As available-for-sale securities because the intent is to hold for the unforeseeable future and a clearly determinable market value exists. b. Cost = 200 x $15 = $3,000; Year-end market value = 200 x $14 = $2,800 BALANCE SHEET

Assets

Mar. 15

Liabilities

Stock Investment Available for sale securites (Scott)

3,000

Cash

-3,000

INCO ME STATE ME NT

Stockholders' Equity

Revenues

−

Expenses

Net Income

Record the purchase of Scott Company stock.

Dec. 31

Fair value adjustments to stock investments

Unrealized gain/loss on investments

-200

Record change in market value of Scott Company investment.

ED-8A. Recording Influential Securities (LO3)

TESTBANKSELLER.COM BALANCE SHEET

Assets Jan. 3

Stock investment Watson

80,000

Cash

-80,000

Liabilities

Stockholders' Equity

INCO ME STATE ME NT

Revenues

−

Expenses

Net Income

Record the purchase of Watson stock

Dec. 31

Cash Stock investment Watson

14,000 -14,000 Record receipt of dividends from Watson

Dec. 31

Stock investment Watson

Retained earnings

18,000

Income from stock investments

18,000

Record as income 20% of Watson's net income of $90,000

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18,000

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ED-9A. Accounting for Equity Securities (LO3) 1. Portfolio classified as trading securities: Investment income Unrealized gain on trading securities Total

$2.0 billion 1.5 billion $3.5 billion

2. Portfolio classified as available-for-sale securities: Investment income

$2.0 billion

ED-10A. Consolidation Accounting (LO4) a. Fletcher should use the equity method of accounting during the year. b. At year-end the individual line item stock investment – Denfork will be replaced with the individual assets and liabilities accounts of Denfork. c. It may be difficult for the reader of the consolidated financial statements to determine the impact of Denfork on the combined statements. In addition, since the accounts of Denfork, a mining company, are likely much different than those of Fletcher, a manufacturer, ratios may be hard to interpret.

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D-9

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EXERCISES—SET B ED-1B. Accounting for Debt Securities—Trading (LO2) BALANCE SHEET

Assets

Liabilities

INCO M E STATE M E NT

Stockholders' Equity

Revenues

−

Expenses

Net Income

2019 Nov. 1

Bond investment trading (Batem)

306,900

Cash

-306,900 Record purchase of $300,000 of Batem, Inc. bonds at 102 plus $900 commission. ($300,000 x 1.02) + $900 = $306,900

Dec. 31

Bond interest receivable

4,500

Retained earnings

4,500

Bond interest income

4,500

Retained earnings

-5,400

Unrealized loss on investments

-5,400

9,000

Bond interest income

9,000

-600

Record 2 months' interest earned on bonds ($300,000 x 0.09) x 2/12 = $4,500

Dec. 31

Bond investment trading (Batem)

-5,400

Adjust trading debt securites to year-end fair value of $301,500. ($306,900 - $301,500 = $5,400 unrealized loss.)

2020 Apr. 30 Cash

13,500

Bond interest receivable

Retained earnings

-4,500

Record receipt of semiannual interest on Batem bond investment ($300,000 x 0.09) x 6/12 = $13,500

TESTBANKSELLER.COM

May. 1

Cash Bond investment trading (Skyline)

300,900 Retained earnings

-301,500

-600

Loss on sale of investments

Record sale of trading debt secutiies for $300,900. ($301,500 - $300,900 = $600 realized loss.)

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ED-2B. Accounting for Debt Securities-Available for Sale (LO2) BALANCE SHEET

Assets

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

Revenues

−

Expenses

Net Income

2019 Jan. 1

Bond investmentavailable for sale (Chevy)

607,400

Cash

-607,400 Record purchase of $600,000 of Chevy, Inc. bonds at 101 plus $1,400 commission. ($600,000 x 1.01) + $1,400 = $607,400

Jun. 30

Cash

24,000

Bond investmentavailable for sale (Chevy)

Retained earnings

-370

23,630

Bond interest income

23,630

2,210

Record receipt of semiannual interest and discount amortization on Chevy bonds. ($600,000 x 0.08) x 6/12 = $24,000; ($607,400 - $600,000)/20 periods = $370

Dec. 31

Cash

24,000

Bond investmentavailable for sale (Chevy)

Retained earnings

-370

23,630

Bond interest income

Record receipt of semiannual interest and discount amortization on Chevy bonds.

Dec. 31

Fair value adjustment to bond investment

Unrealized gain/loss on investments

2,340

Adjust available-for-sale debt securites to year-end fair value of $609,000 ($609,000 - $606,660 = $2,340 unrealized gain)

2020 Jun.30 Cash

24,000

Bond investmentavailable for sale (Chevy)

TESTBANKSELLER.COM Retained earnings

-370

23,630

Bond interest income

Record receipt of semiannual interest and discount amortization on Chevy bonds.

Jul. 1

Cash

608,500

Bond investmentavailable for sale (Chevy)

-606,290

Retained earnings

2,210

Gain on sale of investments

Record sale of available-for-sale debt securities for $608,500 ($608,500 - $606,290 amortized cost = $2,210 realized gain)

Dec. 31

Fair value adjustment to bond investment

Unrealized gain/loss on investments

-2,340

Adjust account balances to zero.

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ED-3B. Accounting for Debt Securities—Held to Maturity (LO2) BALANCE SHEET

Assets

Liabilities

INCO ME STATE ME NT +

Stockholders' Equity

Revenues

−

Expenses

Net Income

2019 Jan. 1

Bond investment-held to maturity (Lowe)

245,500

Cash

-245,500 Record purchase of $600,000 of Lowe, Inc. bonds at 98 plus $500 commission ($250,000 x 0.98) + $500 = $245,500

Jun. 30

Cash Bond investment-held to maturity (Lowe)

7,500 Retained earnings

150

7,650

Bond interest income

7,650

Bond interest income

7,650

Record receipt of semiannual interest and discount amortization on Lowe bonds ($250,000 x 0.06) x 6/12 = $7,500; $4,500/30 periods = $150

2033 Dec. 31 Cash

7,500

Bond investment-held to maturity (Lowe)

Retained earnings

150

7,650

Record receipt of semiannual interest and discount amortization on Lowe bonds

Dec. 31

Cash Bond investment-held to maturity (Lowe)

250,000 -250,000 Record redemption of bonds at maturity.

TESTBANKSELLER.COM

ED-4B. Accounting for Equity Securities—Trading (LO3) BALANCE SHEET

Assets

Liabilities

INCO ME STATE ME NT +

Stockholders' Equity

Revenues

−

Expenses

Net Income

2019 Stock investment -

Nov. 15 trading (Lake)

80,900

Cash

-80,900 Record purchase of 5,000 shares of Lake, Inc. stock for $80,900 (5,000 x $!6) + $900 = $80,900

Dec. 22 Cash

Retained earnings

6,250

Dividend income

6,250

6,600

Unrealized gain on investments

6,600

Loss on sale of investment

-1,100

Record receipt of cash dividend on Lake common stock 5,000 x $1.25 = $6,250 Stock investment -

Dec. 31 trading (Lake)

Retained earnings

6,600

Adjust trading equity securites to year-end fair value of $87,500 (5,000 x $17.50 = $87,500; $87,500 - $80,900 = $6,600 unrealized gain)

2020 Jan. 20 Cash

86,400

Stock investment trading (Lake)

Retained earnings

-87,500

-1,100

Record sale of Lake, Inc. common stock for $86,400. $87,500 - $86,400 = $1,100 realized loss

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ED-5B. Accounting for Equity Securities—Available for Sale (LO3) BALANCE SHEET

Assets

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

Revenues

−

Expenses

Net Income

2019 Nov. 15

Stock investment available for sale (Lake)

80,900

Cash

-80,900 Record purchase of 5,000 shares of Lake, Inc. stock for $80,900 (5,000 x $!6) + $900 = $80,900

Dec. 22

Cash

Retained earnings

6,250

Dividend income

6,250

Gain on sale of investments

5,500

Record receipt of cash dividend on Lake common stock 5,000 x $1.25 = $6,250

Dec. 31

Fair value adjustment to stock investment

Unrealized gain/loss on investments

6,600

Adjust available for sale equity securites to year-end fair value of $87,500 (5,000 x $17.50 = $87,500; $87,500 - $80,900 = $6,600 unrealized gain)

2020 Jan. 20 Cash

86,400

Stock investment available for sale (Lake)

Retained earnings

-80,900

5,500

Record sale of Lake, Inc. common stock for $86,400 $86,400 - $80,900 = $5,500 realized gain.

Dec. 31

Fair value adjustment to stock investment

Unrealized gain/loss on investments

-6,600

Adjust account balances to zero.

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ED-6B. Accounting for Equity Securities—Influential (LO3)

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BALANCE SHEET

Assets

Liabilities

INCO M E STATE M E NT

Stockholders' Equity

Revenues

−

Expenses

Net Income

2019 Jan. 15

Stock investmentinfluential (Park)

121,000

Cash

-121,000 Record purchase of 15,000 shares of Park, Inc. common stock for $121,000; shares represent 25% ownership. (15,000 x $8) + $1,000 = $121,000

Dec. 31

Cash Stock investmentinfluential (Park)

12,000 -12,000 Record receipt of cash dividend on Park common stock. 15,000 x $0.80 = $12,000

Dec. 31

Stock investmentinfluential (Park)

Retained earnings

30,000

Income from stock investments

30,000

-7,000

Loss on sale of investments

-7,000

Record as income 25% of Park's net income of $120,000 $120,000 x 0.25 = $30,000

2020 Jan. 20 Cash

132,000

Stock investmentinfluential (Park)

Retained earnings

-139,000

Record sale of Park, Inc. common stock for $132,000 $132,000 - $139,000 = $7,000 realized loss $121,000 - $12,000 + $30,000 = $139,000

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ED-7B. Accounting for Equity Securities (LO3) a. As trading securities because the intent is to sell the stock soon and a clearly determinable market value exists. b. Cost = 400 x $25 = $10,000; Year-end market value = 400 x $27 = $10,800

BALANCE SHEET

Assets

Mar. 15

Stock Investment Trading securities (Murat)

10,000

Cash

-10,000

Liabilities

INCO ME STATE ME NT

Stockholders' Equity

Revenues

−

Expenses

Net Income

Record the purchase of Murat Company stock.

Dec. 31

Trading securities

Retained earnings

800

Unrealized gain/loss on investments

800

Record change in market value of Murat Company investment.

ED-8B. Recording Influential Securities (LO3) TESTBANKSELLER.COM BALANCE SHEET

Assets Jan. 3

Stock investment Philip

90,000

Cash

-90,000

Liabilities

INCO ME STATE ME NT +

Stockholders' Equity

Revenues

−

Expenses

Net Income

Record the purchase of Philip stock

Dec. 31

Cash Stock investment Philip

20,000 -20,000 Record receipt of dividends from Philip

Dec. 31

Stock investment Philip

25,000

Retained earnings

25,000

Income from stock investments

25,000

Record as income 25% of Philip's net income of $100,000

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ED-9B. Accounting for Equity Securities (LO3) 1. Portfolio classified as trading securities: Investment income Unrealized gain on trading securities Total 2. Portfolio classified as available-for-sale securities: Investment income

$3.0 billion 4.5 billion $7.5 billion

$3.0 billion

ED-10B. Consolidation Accounting (LO4) a. Peyton should use the equity method of accounting during the year. b. At year-end the individual line item stock investment – Visik will be replaced with the individual assets and liabilities accounts of Visik. c. It may be difficult for the reader of the consolidated financial statements to determine the impact of Visik on the combined statements. In addition, since the accounts of Visik, a manufacturer of mobile computing devices, are likely much different than those of Peyton, a chip manufacturer, ratios may be hard to interpret.

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PROBLEMS—SET A PD-1A. The Analysis of Bond Investments (LO2) a. The trading bond investments will be reported at $375,300, their market value at year-end ($105,300 + $270,000 = $375,300). b. The available-for-sale bond investments will be reported at $359,000, their market value at year-end ($199,000 + $160,000 = $359,000), using a valuation account to the asset account. c. The held-to-maturity bond investments will be reported at $237,200, their amortized cost at year-end ($101,200 + $136,000 = $237,200). d. Unrealized gains of $10,400 will appear in the 2019 income statement. These gains relate to the trading securities (Ling: $105,300 ‒ $102,400 = $2,900; Wren: $270,000 ‒ $262,500 = $7,500; $2,900 + $7,500 = $10,400). e. Unrealized gains of $8,000 will appear in the stockholders' equity section of the December 31, 2019, balance sheet. These gains relate to the available-for-sale securities (Olanamic: $199,000 ‒ $197,000 = $2,000; Fossil: $160,000 ‒ $154,000 = $6,000; $2,000 + $6,000 = $8,000). f.

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A fair value adjustment to bond investments of $8,000 will appear in the December 31, 2019, balance sheet. The adjustment relates to the available-for-sale securities. See part (e) for the supporting computations. The fair value adjustment increases the book value of the available-for-sale securities to their year-end market value.

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PD-2A. Accounting for Bond Investments (LO2) BALANCE SHEET

Assets

Liabilities

INCO M E STATE M E NT

Stockholders' Equity

Revenues

−

Expenses

Net Income

2019 Jun. 30

Bond investment available for sale Dynamo

215,200

Cash

-215,200 Record purchase of $200,000 of Dynamo, Inc. bonds for $215,200.

Dec. 31

Cash Bond investment available for sale Dynamo

9,000 Retained earnings

-380

8,620

Bond interest income

8,620

10,650

2,060

Bond interest income

10,650

800

Bond interest income

800

-1,300

Unrealized loss on investments

-1,300

Record receipt of semiannual interest and premium amortization on Dynamo bonds. ($200,000 x 0.09) x 6/12 = $9,000; ($215,200 - $200,000)/40 periods = $380

Dec. 31

Bond investment - held to maturity - Link

297,000

Cash

-297,000 Record purchase of $300,000 of Link, Inc. bonds for $297,000

Dec. 31

Fair value adjustment to bond investment

Unrealized gain/loss on investments

1,180

Adjust available for sale debt securities (Dynamo) to year-end market value of $216,000. $216,000 - $214,820 =$1,180 unrealized gain

2020 Jun. 30 Cash

9,000

Bond investment available for sale Dynamo

Retained earnings

-380

8,620

Bond interest income

Record receipt of semiannual interest and premium amortization on Dynamo bonds.

TESTBANKSELLER.COM

Jun. 30

Cash Bond investment - held to maturity - Link

10,500 Retained earnings

150

10,650

Bond interest income

Receipt of semiannual interest and discount amortizaton on Link bonds. ($300,000 x 0.07) x 6/12 = $10,500; ($300,000 - $297,000)/20 periods = $150

Jul. 1

Cash Bond investment available for sale Dynamo

216,500 Retained earnings

-214,440

2,060

Gain on sale of investments

Sale of available for sale debt securitie for $216,500. $216,500 - $214,440 = $2,060 realized gain; $215,200 - $380 - $380 = $214,440

Oct. 31

Bond investment trading -Taxco

60,500

Cash

-60,500 Purchase of $60,000 of Taxco, Inc. bonds for $60,500.

Dec. 31

Cash Bond investment - held to maturity - Link

10,500 Retained earnings

150

10,650

Receipt of semiannual interest and discount amortizaton on Link bonds.

Dec. 31

Bond interest receivable

Retained earnings

800

Two months' accrued interest on Taxco bonds. ($60,000 x 0,08) x 2/12 = $800

Dec. 31

Bond investment trading -Taxco

Retained earnings

-1,300

Adjust trading debt securities to year-end fair value of $59,200. ($60,500 - $59,200 = $1,300 unrealized loss

Dec. 31

Fair value adjustment to bond investment

Unrealized gain/loss on investments

-1,180

Adjust account balances to zero.

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PD-3A. Accounting for Stock Investments (LO3) BALANCE SHEET

Assets

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

Revenues

−

Expenses

Net Income

2019 Jul. 1

Stock investment trading - Polk

66,200

Cash

-66,200 Purchase of 1,000 shares of Polk, Inc. common stock for $66,200.

Oct. 1

Stock investmentavailable for sale - Wynn Stock investmentavailable for sale -Maple Cash

78,000 64,000 -142,000 Purchase of 3,000 shares of Wynn, Inc. common stock for $78,000 and 2,000 shares of Maple, Inc. common stock for $64,000.

Nov. 9

Cash

Retained earnings

2,700

Dividend income

2,700

-3,200

Unrealized loss on investments

-3,200

Receipt of cash dividend on Wynn common stock. 3,000 x $0.90 = $2,700

Dec. 31

Stock investment trading - Polk

Retained earnings

-3,200

Adjust trading equity securities to year-end fair value of $63,000 1,000 x $63 = $63,000; $66,200 - 63,000 = $3,200 unrealized loss.

Dec. 31

Fair value adjustment to stock investments

Unrealized gain/loss on investments

2,500

Adjust portfolio of available for sale equiety securities to yearend fair value of $144,500 Wynn: 3,000 x 27.50 = $82,500 ; Maple: 2,000 x $31 = $62,000; $82,500 + $62,000 = $144,500; $144,500 - $142,000 = $2,500 unrealized gain

2020 Feb. 1 Cash

62,000

Stock investment trading - Polk

TESTBANKSELLER.COM Retained earnings

-63,000

-1,000

Loss on sale of investments

-1,000

Sale of Polk common stock for $62,000 1,000 x $62 = $62,000; $63,000 - $62,000 = $1,000 realized loss

Dec. 31

Fair value adjustment to stock investments

Unrealized gain/loss on investments

11,500

Adjust portfolio of available for sale equiety securities to yearend fair value of $156,000 Wynn: 3,000 x $30,00 = $90,000 ; Maple: 2,000 x $33 = $66,000; $90,000 + $66,000 = $156,000; $156,000 - $144,500 = $11,500 unrealized gain

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-1,000

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PD-4A. Contrasting Entries for Stock Investments: Trading and Equity Methods (LO3) a. BALANCE SHEET

Assets

Liabilities

INCO ME STATE ME NT

Stockholders' Equity

Revenues

Expenses

−

Net Income

2019 Jan. 2

Stock investmenttrading - Forge

150,000

Cash

-150,000 Purchase of 10,000 shares of Forge Company common stock for $150,000.

Dec. 31

Stock investmenttrading - Forge

Retained earnings

40,000

Unrealized gain on investments

40,000

Dividend income

11,000

Adjust trading equity securities to yearend fair value of $190,000. 10,000 x $19 = $190,000; $190,000 - $150,000 = $40,000 unrealized gain.

Dec. 31

Cash

Retained earnings

11,000

Receipt of cash dividend on Forge common stock. 10,000 x $1.10 = $11,000

b. BALANCE SHEET

Assets

Liabilities

INCO ME STATE ME NT +

Stockholders' Equity

Revenues

−

Expenses

Net Income

2019 Jan. 2

Stock investmentinfluential - Forge

150,000

Cash

-150,000

TESTBANKSELLER.COM Purchase of 10,000 shares of Forge Company common stock for $150,000; shares represent 25% ownership.

Dec. 31

Stock investmentinfluential - Forge

Retained earnings

20,000

Income from stock investments

20,000

Report as income 25% of Forge's net income of $80,000 $80,000 x 0.25= $20,000

Dec. 31

Cash Stock investmentinfluential - Forge

11,000 -11,000 Receipt of cash dividend on Forge common stock 10,000 x $1.10 = $11,000

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PD-5A. Recording Influential Securities (LO3) a. Earnings of Icehouse Brewery (30% × $5 million)

$ 1.5

million

b. Cost basis of investment Add: Earnings (30% × $5,000,000) Less: Dividend (30% × $800,000) End-of-year value

$30.0 million 1.5 million 0.24 million $31.26 million

c. Cost basis of investment Less: Loss in equity (30% × $3,000,000) Dividend End-of-year value

$30.0 million 0.9 million 0.24 million $28.86 million

PD-6A. Accounting for Equity Securities (LO3) a. The Answa investment should be accounted for as a trading security because Susan intends to hold the investment for only the very short-term. The Smiler Company securities should be accounted for as available-for-sale securities as they are being held for longterm growth purposes. b.

TESTBANBalance KSELLSheet ER.COM December 31, 2020

Current assets Investment in trading securities

$58,000

Long-term investments Investment in available-for-sale securities

85,300

Shareholders' equity Unrealized gain on available-for-sale securities

5,300

Income Statement For Year Ending December 31, 2020 Other revenue Dividend revenue

Other expenses Unrealized loss on trading securities

( 2,000)

700

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PROBLEMS—SET B PD-1B. The Analysis of Stock Investments (LO3) a. The trading stock investments will be reported at $225,300, their market value at year-end ($65,300 + $160,000 = $225,300). b. The available-for-sale stock investments will be reported at $346,700, their market value at year-end ($192,000 + 154,700 = $346,700). c. The influential stock investments will be reported at $236,000, their equity method value at year-end ($100,000 + $136,000 = $236,000). d. Unrealized losses of $5,200 will appear in the 2019 income statement. These losses relate to the trading securities (Lisle: $68,000 ‒ $65,300 = $2,700; Owl: $162,500 ‒ $160,000 = $2,500; $2,700 + $2,500 = $5,200). e. Unrealized losses of $7,300 will appear in the stockholders' equity section of the December 31, 2019, balance sheet. These losses relate to the available-for-sale securities (Bionamic: $197,000 ‒ $192,000 = $5,000; Foote: $157,000 ‒ $154,700 = $2,300; $5,000 + $2,300 = $7,300). f.

A fair value adjustment toTE stock ofR$7,300 STBinvestments ANKSELLE .COMwill appear in the December 31, 2019, balance sheet. The adjustment relates to the available-for-sale securities. See part (e) for the supporting computations. The fair value adjustment decreases the book value of the available-for-sale securities to their year-end market value.

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PD-2B. Accounting for Bond Investments (LO2) BALANCE SHEET

Assets

INCO M E STATE M E NT

Liabilities

Stockholders' Equity

Revenues

−

Expenses

Net Income

2019 Jun. 30

Bond investment available for sale - Alamo

97,200

Cash

-97,200 Record purchase of $100,000 of Alamo, Inc. bonds for $97,200.

Dec. 31

Cash

3,500

Bond investment available for sale - Alamo

Retained earnings

3,570

Bond interest income

3,570

11,800

Loss on sale of investments

-840

Bond interest income

11,800

1,009

Bond interest income

1,009

900

Unrealized gain on investments

900

Record receipt of semiannual interest and discount amortization on Alamo bonds. ($100,000 x 0.07) x 6/12 = $3,500; ($100,000 - $97,200)/40 periods = $70

Dec. 31

Bond investment - held to maturity - Lyme

304,000

Cash

-304,000 Record purchase of $300,000 of Lyme, Inc. bonds for $304,000

Dec. 31

Fair value adjustment to bond investment

Unrealized gain/loss on investments

-870

Adjust available for sale debt securities (Alamo) to year-end market value of $96,400. $97,270 - $96,400 =$870 unrealized loss

2020 Jun. 30 Cash

3,500

Bond investment available for sale - Alamo

Retained earnings

3,570

Bond interest income

Record receipt of semiannual interest and discount amortization on Alamo bonds.

TESTBANKSELLER.COM

Jun. 30

Cash Bond investment - held to maturity - Lyme

12,000 Retained earnings

-200

11,800

Bond interest income

Receipt of semiannual interest and premium amortizaton on Lyme bonds. ($300,000 x 0.08) x 6/12 = $12,000; ($300,000 - $304,000)/20 periods = $200

Jul. 1

Cash

96,500

Bond investment available for sale - Alamo

-97,340

Retained earnings

-840

Sale of available for sale debt securities for $96,500. $96,500 - $97,340 = $840 realized loss; $97,200 + $70 + $70 = $97,340

Oct. 31

Bond investment trading -Weir

79,000

Cash

-79,000 Purchase of $80,000 of Weir, Inc. bonds for $79,000.

Dec. 31

Cash Bond investment - held to maturity - Lyme

12,000 Retained earnings

-200

11,800

Receipt of semiannual interest and premium amortizaton on Lyme bonds.

Dec. 31

Bond interest receivable

Retained earnings

1,009

Two months' accrued interest on Weir bonds. ($80,000 x 0.0757) x 2/12 = $1009.33

Dec. 31

Bond investment trading -Weir

Retained earnings

900

Adjust trading debt securities to year-end fair value of $79,900. ($79,900 - $79,000 = $900 unrealized gain

Dec. 31

Fair value adjustment to bond investment

Unrealized gain/loss on investments

870

Adjust account balances to zero.

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PD-3B. Accounting for Stock Investments (LO3) BALANCE SHEET

Assets

Liabilities

INCO M E STATE M E NT +

Stockholders' Equity

Revenues

−

Expenses

Net Income

2019 Jul.1

Stock investment trading - Cook

96,200

Cash

-96,200 Purchase of 2,000 shares of Cook, Inc. common stock for $96,200.

Oct. 1

Stock investmentavailable for sale -Fox Stock investmentavailable for sale - Dent Cash

28,000 75,000 -103,000 Purchase of 1,000 shares of Fox, Inc. common stock for $28,000 and 5,000 shares of Dent, Inc. common stock for $75,000.

Nov. 9

Cash

Retained earnings

3,500

Dividend income

3,500

4,800

Unrealized gain on investments

4,800

Receipt of cash dividend on Dent common stock. 5,000 x $0.70 = $3,500

Dec. 31

Stock investment trading - Cook

Retained earnings

4,800

Adjust trading equity securities to year-end fair value of $101,000 2,000 x $50.50 = $101,000; $101,000 - $96,200 = $4,800 unrealized gain.

Dec. 31

Fair value adjustment to stock investments

Unrealized gain/loss on investments

-6,750

Adjust portfolio of available for sale equiety securities to yearend fair value of $96,250 Fox: 1,000 x 26.25 = $26,250 ; Dent: 5,000 x $14 = $70,000; $26,250 + $70,000 = $96,250; $103,000 - $96,250 = $6,750 unrealized loss

2020 Feb. 1 Cash

104,000

Stock investment trading - Cook

TESTBANKSELLER.COM Retained earnings

-101,000

3,000

Gain on sale of investments

3,000

Sale of Cook common stock for $104,000 2,000 x $52 = $104,000; $104,000 - $101,000 = $3,000 realized gain

Dec. 31

Fair value adjustment to stock investments

-11,250

Unrealized gain/loss on investments

-11,250

Adjust portfolio of available for sale equiety securities to yearend fair value of $85,000 Fox: 1,000 x $25 = $25,000 ; Dent: 5,000 x $12 = $60,000; $25,000 + $60,000 = $85,000; $96,250 - $85,000 = $11,250 unrealized loss

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PD-4B. Contrasting Entries for Stock Investments: Trading and Equity Methods (LO3) a. BALANCE SHEET

Assets

Liabilities

INCO ME STATE ME NT +

Stockholders' Equity

Revenues

−

Expenses

Net Income

2019 Jan. 2

Stock investmenttrading -Baer

420,000

Cash

-420,000 Purchase of 20,000 shares of Baer Company common stock for $420,000.

Dec. 31

Stock investmenttrading -Baer

Retained earnings

-60,000

Unrealized loss on investments

-60,000

Dividend income

16,000

Adjust trading equity securities to yearend fair value of $360,000. 20,000 x $18 = $360,000; $420,000 - $360,000 = $60,000 unrealized loss.

Dec. 31

Cash

Retained earnings

16,000

Receipt of cash dividend on Baer common stock. 20,000 x $0.80 = $16,000

b. BALANCE SHEET

Assets 2019 Jan. 2

420,000 Cash

Liabilities

-420,000

INCO ME STATE ME NT +

Stockholders' Equity

Revenues

−

Expenses

Net Income

TESTBANKSELLER.COM Purchase of 20,000 shares of Baer Company common stock for $420,000; shares represent 40% ownership.

Dec. 31

Stock investmentinfluential - Baer

Retained earnings

112,000

Income from stock investments

112,000

Report as income 40% of Baer's net income of $280,000 $280,000 x 0.40= $112,000

Dec. 31

Cash Stock investmentinfluential - Baer

16,000 -16,000 Receipt of cash dividend on Baer common stock 20,000 x $0.80 = $16,000

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112,000

TESTBANKSELLER.COM

PD-5B. Recording Influential Securities (LO3) a. Earnings of Flanagan Brewery (40% × $7 million)

$ 2.8

million

b. Cost basis of investment Add: Earnings (40% × $7,000,000) Less: Dividend (40% × $1,200,000) End-of-year value

$40.0 million 2.8 million 0.48 million $42.32 million

c. Cost basis of investment Less: Loss in equity (40% × $4,000,000) Dividend End-of-year value

$40.0 million 1.6 million 0.48 million $37.92 million

PD-6B. Accounting for Equity Securities (LO3) a. The Peach investment should be accounted for as a trading security because Sally intends to hold the investment for only the very short term. The Gordon Company securities should be accounted for as available-for-sale securities as they are being held for longterm growth purposes. b.

TESTBANBalance KSELLSheet ER.COM December 31, 2020

Current assets Investment in trading securities

$ 85,000

Long-term investments Investment in available-for-sale securities

130,300

Shareholders' equity Unrealized gain on available-for-sale securities

10,300

Income Statement For Year Ending December 31, 2020 Other revenue Dividend revenue Other expenses Unrealized loss on trading securities

900

(5,000)

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Appendix E Accounting and the Time Value of Money EXERCISES—SET A EE-1A. Simple and Compound Interest (LO1) a. 1: $10,000 x .02 x 6 = $1,200 2: $10,000 x .04 x 4 = $1,600 3: $10,000 x .06 x 3 = $1,800 b. 1: $10,000 x 1.12616 = $11,261.60 TESTBAN-K$10,000.00 SELLER.=C$1,261.60 OM 2: $10,000 x 1.16986 = $11,698.60 - $10,000 = $1,698.60 3: $10,000 x 1.19102 = $11,910.20 - $10,000 = $1,910.20

EE-2A. Future Value Computation (LO2) $3,000 x 1.25971 = $3,779.13

EE-3A. Future Value Computation (LO2) $3,000 x 3.24640 = $9,739.20

EE-4A. Present Value Computation (LO3) $3,000 x 0.79383 = $2,381.49

EE-5A. Present Value Computation (LO3) $3,000 x 2.57710 = $7,731.30

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EE-6A. Future Value Computation (LO2) $10,000 x 1.33823 = $13,382.30

EE-7A. Present Value Computation (LO3) $10,000 x 0.74726 = $7,472.60

EE-8A. Future Value Computation (LO2) $10,000 x 12.57789 = $125,778.90

EE-9A. Future Value Computation (LO2) $10,000 x 12.00611 = $120,061.10

EE-10A. Present Value Computation (LO3) $100,000 x 0.78353 = $78,353.00

TESTBANKSELLER.COM EE-11A. Future Value Computation (LO2) (a) $10,000 x 1.46933 =$14,693.30 (b) $10,000 x 1.48024 = $14,802.40 (c) $10,000 x 1.48595 = $14,859.50

EE-12A. Future Value Computation (LO2) (a) $5,000 x 1.25971 = $6,298.55 (b) $5,000 x 1.26532 = $6,326.60 (c) $5,000 x 1.26824 = $6,341.20

EE-13A. Present Value Computation (LO3) (a) $25,000 x 0.79383 = $19,845.75 (b) $25,000 x 0.79031 = $19,757.75 (c) $25,000 x 0.78849 = $19,712.25

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EE-14A. Future Value Computation (LO2) $2,500 x 30.90565 = $77,264.13. Since this is greater than the required $70,000, it appears the plan will be successful.

EE-15A. Present Value Computation (LO3) 1. $400,000 2. $432,000 x 0.92593 = $400,001.76 3. $40,000 x 9.81815 = $392,726.00 4. $36,000 x 11.25778 = $405,280.08 Option #4 is the best choice.

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EXERCISES—SET B EE-1B. Simple and Compound Interest (LO1) a. 1: $8,000 x .08 x 8 = $5,120 2: $8,000 x .12 x 5 = $4,800 3: $8,000 x .04 x 2 = $ 640 b. 1: $8,000 x 1.85093 = $14,807.44 ‒ $8,000.00 = $6,807.44 2: $8,000 x 1.76234 = $14,098.72* – $8,000.00 = $6,098.72 3: $8,000 x 1.08160 = $8,652.80 – $8,000.00 = $652.80

EE-2B. Future Value Computation (LO2) $2,500 x 1.26248 = $3,156.20

EE-3B. Future Value Computation (LO2) TESTBANKSELLER.COM $2,500 x 4.37462 = $10,936.55

EE-4B. Present Value Computation (LO3) $2,500 x 0.79209 = $1,980.23

EE-5B. Present Value Computation (LO3) $2,500 x 3.46511 = $8,662.78

EE-6B. Future Value Computation (LO2) $5,000 x 1.34010 = $6,700.50

EE-7B. Present Value Computation (LO3) $5,000 x 0.62741 = $3,137.05

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$3,000 x 10.94972 = $32,849.16

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EE-9B. Future Value Computation (LO2) $5,000 x 9.21423 = $46,071.15

EE-10B. Present Value Computation (LO3) $150,000 x 0.59190 = $88,785.00

EE-11B. Future Value Computation (LO2) (a) $9,500 x 1.46933 = $13,958.64 (b) $9,500 x 1.48024 = $14,062.28 (c) $9,500 x 1.48595 = $14,116.53

EE-12B. Future Value Computation (LO2) (a) $2,000 x 1.40493 = $2,809.86 (b) $2,000 x 1.41852 = $2,837.04 (c) $2,000 x 1.42576 = $2,851.52

TESTBANKSELLER.COM EE-13B. Present Value Computation (LO3) (a) $40,000 x 0.63552 = $25,420.80 (b) $40,000 x 0.62741 = $25,096.40 (c) $40,000 x 0.62317 = $24,926.80

EE-14B. Future Value Computation (LO2) $3,000 x 30.90565 = $92,716.95. Since this is greater than the required $90,000, it appears the plan will be successful.

EE-15B. Present Value Computation (LO3) 1. $1,000,000 2. $1,040,000 x 0.96154 = $1,000,001.60 3. $150,000 x 6.73274 = $1,009,911.00 4. $57,500 x 17.29203 = $994,291.73 Option #3 is the best choice.

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