SOLUTIONS MANUAL For Financial Accounting Tools for Business Decision Making 8e Paul Kimmel Jerry We by StudyGuide

CHAPTER 1 Introduction to Financial Statements Learning Objectives 1. 2. 3.

Identify the forms of business organization and the uses of accounting information. Explain the three principal types of business activity. Describe the four financial statements, and how they are prepared.

Summary of Questions by Learning Objectives and Bloom’s Taxonomy Item

Item

Questions 1. 2. 3. 4. 5. 1. 2. 3.

1 1 1 1 1 1 1 2

K K K C C K K K

6. 7. 8. 9.

4. 5.

1 2 3 3

3 3

C C K C

10. 11. 12. 13.

3 3 3 3

C K C AP

14. 15. 16. 17.

3 3 3 3

K K AP C

18. 19. 20. 21.

3 3 3 3

K C K C

C AP

Brief Exercises 6. 3 K 7. 3 K

8. 9.

3 3

AP AP

10. 11.

3 3

K K

3b.

12. 13. 14.

3 3 3

AP AP AP

15. 16. 17.

3 3 3

AP AN K

Do It! Exercises 1.

3a.

Exercises 1. 1, 2, 3 K 2. 2 C 3. 2, 3 C 4. 3 AP

5. 6. 7. 8.

3 3 3 3

AP AP AP C

9. 10. 11.

3 3 3

AN AP AP

Problems: Set A 1.

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Determine forms of business organization.

Simple

15–20

Identify users and uses of financial statements.

Simple

15–20

Prepare an income statement, retained earnings statement, and balance sheet; discuss results.

Moderate

40–50

Determine items included in a statement of cash flows, prepare the statement, and comment.

Moderate

30–40

Comment on proper accounting treatment and prepare a corrected balance sheet.

Moderate

40–50

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ANSWERS TO QUESTIONS 1.

The three basic forms of business organizations are (1) sole proprietorship, (2) partnership, and (3) corporation.

LO 1 BT: K Diff: E TOT: 1 min. AACSB: None AICPA BB: Legal/Regulatory Perspective

Advantages of a corporation are limited liability (stockholders not being personally liable for corporate debts), easy transferability of ownership, and ease of raising funds. Disadvantages of a corporation are increased taxation and government regulations.

LO 1 BT: K Diff: E TOT: 1 min. AACSB: None AICPA BB: Legal/Regulatory Perspective

Proprietorships and partnerships receive favorable tax treatment compared to corporations and are easier to form than corporations. They are also owner controlled. Disadvantages of proprietorships and partnerships are unlimited liability (proprietors/partners are personally liable for all debts) and difficulty in obtaining financing compared to corporations.

LO 1 BT: K Diff: E TOT: 1 min. AACSB: None AICPA BB: Legal/Regulatory Perspective

Yes. A person cannot earn a living, spend money, buy on credit, make an investment, or pay taxes without receiving, using, or dispensing financial information. Accounting provides financial information to interested users through the preparation and distribution of financial statements.

LO 1 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting

Internal users are managers who plan, organize, and run a business. To assist management, accounting provides timely internal reports. Examples include financial comparisons of operating alternatives, projections of income from new sales campaigns, forecasts of cash needs for the next year, and financial statements.

LO 1 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting

External users are those outside the business who have either a present or potential direct financial interest (investors and creditors) or an indirect financial interest (taxing authorities, regulatory agencies, labor unions, customers, and economic planners).

LO 1 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting

The three types of business activities are financing activities, investing activities, and operating activities. Financing activities include borrowing money and selling shares of stock. Investing activities include the purchase and sale of property, plant, and equipment. Operating activities include selling goods, performing services, and purchasing inventory.

LO 2 BT: K Diff: M TOT: 2 min. AACSB: None AICPA FC: Reporting

(a) Income statement. (b) Balance sheet. (c) Income statement.

(d) Balance sheet. (e) Balance sheet. (f) Balance sheet.

LO 3 BT: K Diff: M TOT: 2 min. AACSB: None AICPA FC: Reporting

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When a company pays dividends, it reduces the amount of assets available to pay creditors. Therefore, banks and other creditors monitor dividend payments to ensure they do not put a company’s ability to make debt payments at risk.

LO 3 BT: AN Diff: M TOT: 2 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking

10.

Yes. Net income does appear on the income statement—it is the result of subtracting expenses from revenues. In addition, net income appears in the retained earnings statement—it is shown as an addition to the beginning-of-period retained earnings. Indirectly, the net income of a company is also included in the balance sheet. It is included in the retained earnings account which appears in the stockholders’ equity section of the balance sheet.

LO 3 BT: C Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting

11.

The primary purpose of the statement of cash flows is to provide financial information about the cash receipts and cash payments of a business for a specific period of time.

LO 3 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting

12.

The three categories of the statement of cash flows are operating activities, investing activities, and financing activities. The categories were chosen because they represent the three principal types of business activities.

LO 3 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting

13.

Retained earnings is the net income retained in a corporation. Retained earnings is increased by net income and is decreased by dividends and a net loss.

LO 3 BT: C Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting

14.

The basic accounting equation is Assets = Liabilities + Stockholders’ Equity.

LO 3 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting

15.

(a) Assets are resources owned by a business. Liabilities are amounts owed to creditors. Put more simply, liabilities are existing debts and obligations. Stockholders’ equity is the ownership claim on net assets. (b) The items that affect stockholders’ equity are common stock, retained earnings, dividends, revenues, and expenses.

LO 3 BT: K Diff: E TOT: 2 min. AACSB: None AICPA FC: Reporting

16.

The liabilities are (b) Accounts payable and (g) Salaries and wages payable.

LO 3 BT: C Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting

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17.

(a) Net income from the income statement is reported as an increase to retained earnings on the retained earnings statement. (b) The ending amount on the retained earnings statement is reported as the retained earnings amount on the balance sheet. (c)

The ending amount on the statement of cash flows is reported as the cash amount on the balance sheet.

LO 3 BT: C Diff: M TOT: 2 min. AACSB: None AICPA FC: Reporting

18.

The purpose of the management discussion and analysis section is to provide management’s views on its ability to pay short-term obligations, its ability to fund operations and expansion, and its results of operations. The MD&A section is a required part of the annual report.

LO 3 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting

19.

An unqualified opinion shows that, in the opinion of an independent auditor, the financial statements have been presented fairly, in conformity with generally accepted accounting principles. This gives investors more confidence that they can rely on the figures reported in the financial statements.

LO 3 BT: C Diff: E TOT: 2 min. AACSB: None AICPA FC: Reporting

20.

Information included in the notes to the financial statements clarifies information presented in the financial statements and includes descriptions of accounting policies, explanations of uncertainties and contingencies, and statistics and details too voluminous to be reported in the financial statements.

LO 3 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting

21.

Using dollar amounts, Apple’s accounting equation is: Assets $231,839,000

Liabilities $120,292,000

Stockholders’ Equity $111,547,000

LO 3 BT: AP Diff: E TOT: 2 min. AACSB: Analytic AICPA FC: Reporting

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SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 1-1 (a)

Shared control, tax advantages, increased skills and resources.

(b)

Simple to set up and maintains control with owner.

(c)

Easier to transfer ownership and raise funds, no personal liability.

LO 1 BT: K Difficulty: Easy TOT: 2.0 min. AACSB: None AICPA BB: Legal

BRIEF EXERCISE 1-2 (a) (b) (c) (d) (e)

4 3 2 5 1

Investors in common stock Marketing managers Creditors Chief Financial Officer Internal Revenue Service

LO 1 BT: K Difficulty: Easy TOT: 2.0 min. AACSB: None AICPA FC: Measurement

BRIEF EXERCISE 1-3 O F F O I

(a) (b) (c) (d) (e)

Cash received from customers. Cash paid to stockholders (dividends). Cash received from issuing new common stock. Cash paid to suppliers. Cash paid to purchase a new office building.

LO 2 BT: K Difficulty: Easy TOT: 2.0 min. AACSB: None AICPA FC: Measurement & Reporting

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BRIEF EXERCISE 1-4 E R E E D R E NSE C

(a) (b) (c) (d) (e) (f) (g) (h) (i)

Advertising expense Service revenue Insurance expense Salaries and wages expense Dividends Rent revenue Utilities expense Cash purchase of equipment Issued common stock for cash.

LO 3 BT: C Difficulty: Easy TOT: 3.0 min. AACSB: None AICPA FC: Measurement & Reporting

BRIEF EXERCISE 1-5 KAROL COMPANY Balance Sheet December 31, 2017 Assets Cash ............................................................................... Accounts receivable ..................................................... Total assets ...................................................................

$22,000 71,000 $93,000

Liabilities and Stockholders’ Equity Liabilities Accounts payable .................................................. Stockholders’ equity Common stock ....................................................... Retained earnings.................................................. Total liabilities and stockholders’ equity.....................

$65,000 $18,000 10,000

28,000 $93,000

LO 3 BT: AP Difficulty: Medium TOT: 4.0 min. AACSB: Analytic AICPA FC: Reporting

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BRIEF EXERCISE 1-6 IS BS BS BS BS IS IS BS BS IS

(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)

Income tax expense Inventory Accounts payable Retained earnings Equipment Sales revenue Cost of goods sold Common stock Accounts Receivable Interest expense

LO 3 BT: K Difficulty: Easy TOT: 3.0 min. AACSB: None AICPA FC: Reporting

BRIEF EXERCISE 1-7 IS BS SCF BS

(a) (b) (c) (d)

Revenue during the period. Supplies on hand at the end of the year. Cash received from issuing new bonds during the period. Total debts outstanding at the end of the period.

LO 3 BT: K Difficulty: Easy TOT: 2.0 min. AACSB: None AICPA FC: Reporting

BRIEF EXERCISE 1-8 (a) $90,000 + $230,000 = $320,000 (Total assets) (Liabilities + Stockholder’s equity = Assets)

(b) $170,000 – $80,000 = $90,000 (Total liabilities) (Assets – Stockholder’s equity = Liabilities)

(c) $800,000 – 0.25($800,000) = $600,000 (Stockholders’ equity) (Assets – (1/4 × Assets) = Stockholder’s equity) LO 3 BT: AP Difficulty: Medium TOT: 4.0 min. AACSB: Analytic AICPA: FC: Measurement

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BRIEF EXERCISE 1-9 (a) ($800,000 + $150,000) – ($500,000 – $80,000) = $530,000 (Stockholders’ equity) [(Assets ± Change in assets) – (Liabilities ± Change in liabilities) = Stockholders’ equity]

(b) ($500,000 + $100,000) + ($800,000 – $500,000 – $70,000) = $830,000 (Assets) [(Liabilities ± Change in liabilities) + (Stockholders’ equity ± Change in stockholders’ equity) = Assets]

(c) ($800,000 – $80,000) – ($800,000 – $500,000 + $110,000) = $310,000 (Liabilities) [(Assets ± Change in assets) – (Stockholders’ equity ± Change in stockholders’ equity) = Liabilities] LO 3 BT: AP Difficulty: Medium TOT: 5.0 min. AACSB: Analytic AICPA FC: Measurement

BRIEF EXERCISE 1-10 A L A A SE L

(a) (b) (c) (d) (e) (f)

Accounts receivable Salaries and wages payable Equipment Supplies Common stock Notes payable

LO 3 BT: K Difficulty: Easy TOT: 3.0 min. AACSB: None AICPA FC: Reporting

BRIEF EXERCISE 1-11 (d) All of these are required. LO 3 BT: K Difficulty: Easy TOT: 2.0 min. AACSB: None AICPA FC: Reporting

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SOLUTIONS TO DO IT! EXERCISES DO IT! 1-1 (a) Easier to transfer ownership: corporation (b) Easier to raise funds: corporation (c) More owner control: sole proprietorship (d) Tax advantages: sole proprietorship and partnership (e) No personal legal liability: corporation LO 1 BT: C Difficulty: Easy TOT: 2.0 min. AACSB: None AICPA BB: Legal

DO IT! 1-2 (a) Issuance of ownership shares is classified as common stock. (b) Land purchased is classified as an asset. (c) Amounts owed to suppliers are classified as liabilities. (d) Bonds payable are classified as liabilities. (e) Amount earned from selling a product is classified as revenue. (f) Cost of advertising is classified as expense. LO 2 BT: K Difficulty: Easy TOT: 2.0 min. AACSB: None AICPA FC: Reporting

DO IT! 1-3a GRAY CORPORATION Income Statement For the Year Ended December 31, 2017 Revenues Service revenue........................................... Expenses Rent expense ............................................... Advertising expense ................................... Supplies expense ........................................ Total expenses.................................. Net income ..........................................................

$25,000 $10,000 4,000 1,700 15,700 $ 9,300

[Revenues – Expenses = Net income or (loss)]

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DO IT! 1-3a (Continued) GRAY CORPORATION Retained Earnings Statement For the Year Ended December 31, 2017 $ –0– 9,300 9,300 2,500 $6,800

Retained earnings, January 1 .................................. Add: Net income .................................................... Less: Dividends ....................................................... Retained earnings, December 31 ............................

(Beginning retained earnings ± Changes in retained earnings = Ending retained earnings)

GRAY CORPORATION Balance Sheet December 31, 2017 Assets Cash .......................................................................... Accounts receivable ................................................ Supplies .................................................................... Equipment................................................................. Total assets ..............................................................

$ 3,100 2,000 1,900 26,800 $33,800

Liabilities and Stockholders’ Equity Liabilities Notes payable.................................................... Account payable ............................................... Total liabilities ........................................ Stockholder’s equity Common stock .................................................. Retained earnings ............................................. Total stockholders’ equity ..................... Total liabilities and stockholder’s equity................

$ 7,000 5,000 $12,000 15,000 6,800 21,800 $33,800

(Assets = Liabilities + Stockholders’ equity) LO 3 BT: AP Difficulty: Hard TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

1-11

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DO IT! 1-3b (a) Description of ability to pay near-term obligations: MD&A (b) Unqualified opinion: auditor’s report (c) Details concerning liabilities, too voluminous to be included in the statements: notes (d) Description of favorable and unfavorable trends: MD&A (e) Certified Public Accountant (CPA): auditor’s report (f) Descriptions of significant accounting policies: notes LO 3 BT: K Difficulty: Easy TOT: 3.0 min. AACSB: None AICPA FC: Reporting

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SOLUTIONS TO EXERCISES EXERCISE 1-1 (a) (b) (c) (d) (e) (f) (g) (h)

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

Auditor’s opinion Corporation Common stock Accounts payable Accounts receivable Creditor Stockholder Partnership

LO 1-3 BT: K Difficulty: Easy TOT: 2.0 min. AACSB: None AICPA FC: Measurement & Reporting

EXERCISE 1-2 (a)

Answers will vary.

Abitibi Consolidated Inc. Cal State—Northridge Stdt Union

Borrow money from a bank

Investing Purchase long-term investments Purchase office equipment

Oracle Corporation

Sale of bonds

Purchase other companies

Sportsco Investments

Payment of dividends to stockholders Distribute earnings to partners Sale of stock

Purchase hockey equipment

Grant Thornton LLP

Southwest Airlines

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Financing Sale of stock

Purchase computers Purchase airplanes

Kimmel, Financial Accounting, 8/e, Solutions Manual

Operating Sale of newsprint Payment of wages and benefits Payment of research expenses Payment for rink rentals Bill clients for professional services Payment for jet fuel

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EXERCISE 1-2 (Continued) (b) Financing Sale of stock is common to all corporations. Borrowing from a bank is common to all businesses. Payment of dividends is common to all corporations. Sale of bonds is common to large corporations. Investing Purchase and sale of property, plant, and equipment would be common to all businesses—the types of assets would vary according to the type of business and some types of businesses require a larger investment in long-lived assets. A new business or expanding business would be more apt to acquire property, plant, and equipment while a mature or declining business would be more apt to sell it. Operating The general activities identified would be common to most businesses, although the service or product would differ. LO 2 BT: C Difficulty: Easy TOT: 3.0 min. AACSB: None AICPA FC: Measurement & Reporting

EXERCISE 1-3 Accounts payable Accounts receivable Equipment Sales revenue Service revenue Inventory Mortgage payable Supplies expense Rent expense Salaries and wages expense

L A A R R A L E E E

LO 3 BT: C Difficulty: Easy TOT: 3.0 min AACSB: None AICPA FC: Measurement & Reporting

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EXERCISE 1-4 BENSER CO. Income Statement For the Year Ended December 31, 2017 Revenues Service revenue ...................................................... Expenses Salaries and wages expense ................................. Rent expense .......................................................... Utilities expense ..................................................... Advertising expense ............................................... Total expenses ................................................ Net income ......................................................................

$58,000 $30,000 10,400 2,400 1,800 44,600 $13,400

BENSER CO. Retained Earnings Statement For the Year Ended December 31, 2017 Retained earnings, January 1 .......................................................... Add: Net income ............................................................................ Less: Dividends ............................................................................... Retained earnings, December 31 ....................................................

$67,000 13,400 80,400 6,000 $74,400

[Revenues – Expenses = Net income or (loss)] (Beginning retained earnings ± Changes in retained earnings = Ending retained earnings) LO 3 BT: AP Difficulty: Medium TOT: 6.0 min. AACSB: Analytic AICPA FC: Reporting

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EXERCISE 1-5 (a)

MERCK AND CO. Income Statement For the Year Ended December 31, 2017 (in millions) Revenues Sales revenue ................................................. $38,576.0 Expenses Cost of goods sold......................................... $ 9,018.9 Selling and administrative expenses............ 8,543.2 Research and development expense ........... 5,845.0 Income tax expense ....................................... 2,267.6 Total expenses ........................................... 25,674.7 Net income .............................................................. $12,901.3 MERCK AND CO. Retained Earnings Statement For the Year Ended December 31, 2017 (in millions) Retained earnings, January 1 ................................ Add: Net income ................................................... Less: Dividends ..................................................... Retained earnings, December 31 ...........................

$43,698.8 12,901.3 56,600.1 3,597.7 $53,002.4

[Revenues – Expenses = Net income or (loss)] (Beginning retained earnings ± Changes in retained earnings = Ending retained earnings)

(b) The short-term implication would be a decrease in expenses of $2,922.5 ($5,845 X 50%) resulting in a corresponding increase in income (ignoring income taxes). If all other revenues and expenses remain unchanged, decreasing research and development expenses would produce 22.7% more net income ($2,922.5 ÷ $12,901.3).

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EXERCISE 1-5 (Continued) The long-term implications would be more difficult to quantify but it is safe to predict that a reduction in research and development expenses would probably result in lower sales revenues in the future. Pharmaceutical companies are usually able to charge higher prices for newly developed products while lower cost generic versions usually replace older products. Decreasing research and development activities will probably mean fewer new products. The stock market’s initial reaction might be positive since Merck’s net income would increase significantly. Such a reaction would probably be very short-lived as more knowledgeable investors reviewed Merck’s financial statements and discovered the cause of the increase. LO 3 BT: AP Difficulty: Hard TOT: 8.0 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 1-6 ZHENG INC. Retained Earnings Statement For the Year Ended December 31, 2017 Retained earnings, January 1 .................................. Add: Net income ....................................................

$130,000 225,000* 355,000 65,000 $290,000

Less: Dividends ....................................................... Retained earnings, December 31 ............................ *Service revenue ...................................................... *Total expenses ........................................................ *Net income ..............................................................

$400,000 175,000 $225,000

(Beginning retained earnings ± Changes in retained earnings = Ending retained earnings) LO 3 BT: AP Difficulty: Medium TOT: 4.0 min. AACSB: Analytic AICPA FC: Reporting

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EXERCISE 1-7 (a) Lee Corporation is distributing nearly all of this year’s net income as dividends. This suggests that Lee is not pursuing rapid growth. Companies that have a lot of opportunities for growth pay low dividends. (b) Steele Corporation is not generating sufficient cash provided by operating activities to fund its investing activities. Instead it generates additional cash through financing activities. This is common for companies in their early years of existence. LO 3 BT: AP Difficulty: Medium TOT: 4.0 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 1-8 (a)

A SE E E A A A R L L R E

Cash Retained earnings Cost of goods sold Salaries and wages expense Prepaid insurance Inventory Accounts receivable Sales revenue Notes payable Accounts payable Service revenue Interest expense

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EXERCISE 1-8 (Continued) (b)

LONYEAR INC. Income Statement For the Year Ended December 31, 2017 Revenues Sales revenue...................................... Service revenue .................................. Total revenues ................................. Expenses Cost of goods sold ............................. Salaries and wages expense.............. Interest expense ................................. Total expenses ................................ Net income ..................................................

$584,951 4,806 $589,757 438,458 115,131 1,882 555,471 $ 34,286

[Revenues – Expenses = Net income or (loss)] LO 3 BT: C Difficulty: Medium TOT: 5.0 min. AACSB: Analytic AICPA FC: Measurement & Reporting

EXERCISE 1-9 First note that the retained earnings statement shows that (b) equals $27,000. Accounts payable + Common stock + Retained earnings = Total liabilities and stockholders’ equity

$5,000 + a + $27,000 = $62,000 a + $32,000 = $62,000 a = $30,000 Beginning retained earnings + Net income – Dividends = Ending retained earnings

$12,000 + e – $5,000 = $27,000 $7,000 + e = $27,000 e = $20,000

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EXERCISE 1-9 (Continued) From above, we know that net income (d) equals $20,000. Revenue – Cost of goods sold – Salaries and wages expense = Net income

$85,000 – c – $10,000 = $20,000 $75,000 – c = $20,000 c = $55,000 LO 3 BT: AN Difficulty: Hard TOT: 7.0 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 1-10 (a) Service revenue ............................................ Sales revenue................................................ Total revenue ......................................... Expenses ....................................................... Net income ....................................................

$132,000 25,000 $157,000 126,000 $ 31,000

[Revenues – Expenses = Net income or (loss)]

(b)

OTAY LAKES PARK Retained Earnings Statement For the Year Ended December 31, 2017 Retained earnings, January 1 ................................................ Add: Net income ................................................................... Less: Dividends ..................................................................... Retained earnings, December 31 ...........................................

$ 5,000 31,000 36,000 9,000 $27,000

(Beginning retained earnings ± Changes in retained earnings = Ending retained earnings)

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EXERCISE 1-10 (Continued) OTAY LAKES PARK Balance Sheet December 31, 2017 Assets Cash.................................................................... Supplies ............................................................. Equipment .......................................................... Total assets ........................................................

8,500 5,500 114,000 $128,000

Liabilities and Stockholders’ Equity Liabilities Notes payable ............................................. Accounts payable ...................................... Total liabilities..................................... Stockholders’ equity Common stock ........................................... Retained earnings ...................................... Total liabilities and stockholders’ equity .........

$50,000 11,000 $ 61,000 40,000 27,000

67,000 $128,000

(Assets = Liabilities + Stockholders’ equity)

(c) The income statement indicates that revenues from the general store were only about 16% ($25,000 ÷ $157,000) of total revenue which tends to support Walt’s opinion. In order to decide if the store is “more trouble than it is worth,” I would need to know the amount of expenses attributable to the general store. The income statement reports all expenses in a single category rather than separating them into camping and general store expenses to correspond with revenues. A break down into two categories would help me decide if the general store is generating a profit or loss. Even if the general store is operating at a loss, I might recommend retaining it if campers indicated that the convenience of having a general store on site was an important amenity in selecting a camp ground. LO 3 BT: AP Difficulty: Hard TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

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EXERCISE 1-11 (a)

(b)

SE E E A L E L A R L SE E

Retained earnings Cost of goods sold Selling and administrative expenses Cash Notes payable Interest expense Bonds payable Inventory Sales revenue Accounts payable Common stock Income tax expense KELLOGG COMPANY Income Statement For the Year Ended December 31, 2017 (in millions)

Revenues Sales revenue ........................................... Expenses Cost of goods sold ................................... Selling and administrative expenses ...... Income tax expense ................................. Interest expense ....................................... Total expenses .................................. Net income .......................................................

$12,575 $7,184 3,390 498 295 11,367 $ 1,208

[Revenues – Expenses = Net income or (loss)] LO 3 BT: AP Difficulty: Medium TOT: 6.0 min. AACSB: Analytic AICPA FC: Reporting

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EXERCISE 1-12 (a)

WILLIAMS CORPORATION Statement of Cash Flows For the Year Ended December 31, 2017 Cash flows from operating activities Cash received from customers ...................... $ 50,000) Cash paid to suppliers .................................... (16,000) Net cash provided by operating activities ..... $ 34,000) Cash flows from investing activities Cash paid for new equipment ........................ (28,000) Net cash used by investing activities ............ (28,000) Cash flows from financing activities Cash received from lenders ........................... 20,000 Cash dividends paid ....................................... (8,000) Net cash provided by financing activities ..... 12,000 Net increase in cash ............................................... ) 18,000 Cash at beginning of period ................................... 12,000 Cash at end of period ............................................. $ 30,000

(Cash flows from operating, investing, and financing activities = Net change in cash)

(b) As a creditor, I would feel reasonably confident that Williams has the ability to repay its lenders. During 2017, Williams generated $34,000 of cash from its operating activities. This amount more than covered its expenditures for new equipment but not both equipment purchases and dividends. LO 3 BT: AP Difficulty: Medium TOT: 6.0 min. AACSB: Analytic AICPA FC: Reporting

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EXERCISE 1-13 (a)

SOUTHWEST AIRLINES Statement of Cash Flows For the Year Ended December 31, 2017 (in millions) Cash flows from operating activities Cash received from customers ......................... Cash paid for goods and services .................... Net cash provided by operating activities ........ Cash flows from investing activities Cash paid for property and equipment ............. Net cash used by investing activities ............... Cash flows from financing activities Cash received from issuance of long-term debt ................................................. Cash received from issuance of common stock................................................. Cash paid for repurchase of common stock ..... Cash paid for repayment of debt........................ Cash paid for dividends...................................... Net cash used by financing activities ................ Net increase in cash.................................................. Cash at beginning of period ..................................... Cash at end of period................................................

$9,823 (6,978) $2,845 (1,529) (1,529) 500 144 (1,001) (122) (14) (493) 823 1,390 $2,213

(Cash flows from operating, investing, and financing activities = Net change in cash)

(b) Southwest reported $2,845,000,000 cash from operating activities but spent $1,529,000,000 to invest in new property and equipment. Its cash from operating activities was sufficient to finance its investing activities. Southwest supplemented the cash from operating activities by issuing long-term debt and additional shares of common stock. It used excess cash to repurchase stock, pay down debt, and pay dividends. In total, it generated more cash from operating activities than it paid for investing and financing activities resulting in a net increase in cash for 2017. LO 3 BT: AP Difficulty: Hard TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

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EXERCISE 1-14 BEESON COMPANY Balance Sheet December 31, 2017 Assets Cash .............................................................................. Accounts receivable .................................................... Supplies ........................................................................ Equipment..................................................................... Total assets ..................................................................

$18,000 12,000 9,500 40,000 $79,500

Liabilities and Stockholders’ Equity Liabilities Accounts payable ................................................. Stockholders’ equity Common stock ...................................................... Retained earnings................................................. Total liabilities and stockholders’ equity....................

$16,000 $40,000 23,500*

63,500 $79,500

*$31,500 – $8,000 (Assets = Liabilities + Stockholders’ equity) LO 3 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

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Kimmel, Financial Accounting, 8/e, Solutions Manual

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EXERCISE 1-15 All dollars are in millions. (a) Assets Cash ........................................................................................... $ 2,291.1 Accounts receivable ................................................................. 2,883.9 Inventory ................................................................................... 2,357.0 Equipment ................................................................................. 1,957.7 Buildings ................................................................................... 3,759.9 Total assets ............................................................................... $13,249.6 Liabilities Notes payable ........................................................................... $ 342.9 Accounts payable ..................................................................... 2,815.8 Mortgage payable ..................................................................... 1,311.5 Income taxes payable ............................................................... 86.3 Total liabilities ........................................................................... $ 4,556.5 Stockholders’ Equity Common stock .......................................................................... $ 2,874.2 Retained earnings ..................................................................... 5,818.9 Total stockholders’ equity........................................................ $ 8,693.1 (b)

Assets $13,249.6

Liabilities $4,556.5

Stockholders’ Equity $8,693.1

(c) Nike has relied more heavily on equity than debt to finance its assets. Debt (liabilities) financed 34% of its assets ($4,556.5 ÷ $13,249.6) compared to equity financing of 66% ($8,693.1 ÷ $13,249.6). LO 3 BT: AP Difficulty: Medium TOT: 8.0 min. AACSB: Analytic AICPA FC: Reporting

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EXERCISE 1-16 (a)

Assets $110,000 (a)

= = =

Liabilities $70,000 $40,000

+ +

Stockholders’ Equity (a)

(b)

Assets (b) (b)

= = =

Liabilities $120,000 $180,000

+ +

Stockholders’ Equity $60,000

(c)

Beginning Stockholders’ Equity $40,000(a)

Revenues –

215,000 $ 90,000

– –

Expenses

– Dividends

165,000 (c) (c)

– (c)

= = =

Ending Stockholders’ Equity $60,000 $60,000 $30,000

(d)

Assets $150,000 (d)

= = =

Liabilities (d) $80,000

+ +

Stockholders’ Equity $70,000

(e)

Assets $180,000 (e)

= = =

Liabilities $ 55,000 $125,000

+ +

Stockholders’ Equity (e)

(f)

Beginning Stockholders’ Equity $70,000 (f)

Revenues –

+ =

(f) $140,000

–

Expenses

– Dividends

80,000

– 5,000

Ending Stockholders’ Equity $125,000(e)

LO 3 BT: AN Difficulty: Hard TOT: 12.0 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 1-17 (a) (b) (c) (d) (e) (f)

Financial statements Auditor’s opinion Notes to the financial statements Financial statements Management discussion and analysis Not disclosed

LO 3 BT: K Difficulty: Easy TOT: 3.0 min. AACSB: None AICPA FC: Reporting 1-27

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SOLUTIONS TO PROBLEMS PROBLEM 1-1A

(a) The concern over legal liability would make the corporate form a better choice over a partnership. Also, the corporate form will allow the business to raise cash more easily, which may be of importance in a rapidly growing industry. (b) Bob should run his business as a sole proprietor. He has no real need to raise funds, and he doesn’t need the expertise provided by other partners. The sole proprietorship form would provide the easiest form. One should avoid a more complicated form of business unless the characteristics of that form are needed. (c) The fact that the combined business expects that it will need to raise significant funds in the near future makes the corporate form more desirable in this case. (d) It is likely that this business would form as a partnership. Its needs for additional funds would probably be minimal in the foreseeable future. Also, the three know each other well and would appear to be contributing equally to the firm. Service firms, like consulting businesses, are frequently formed as partnerships. (e) One way to ensure control would be for Don to form a sole proprietorship. However, in order for this business to thrive it will need a substantial investment of funds early. This would suggest the corporate form of business. In order for Don to maintain control over the business he would need to own more than 50 percent of the voting shares of common stock. In order for the business to grow, he may have to be willing to give up some control. LO 1 BT: C Difficulty: Medium TOT: 6.0 min. AACSB: None AICPA BB: Legal

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PROBLEM 1-2A

(a) In deciding whether to extend credit for 30 days, The North Face would be most interested in the balance sheet because the balance sheet shows the assets on hand that would be available for settlement of the debt in the near-term. (b) In purchasing an investment that will be held for an extended period, the investor must try to predict the future performance of Amazon.com. The income statement provides the most useful information for predicting future performance. (c) In extending a loan for a relatively long period of time, the lender is most interested in the probability that the company will generate sufficient income to meet its interest payments and repay its principal. The lender would therefore be interested in predicting future net income using the income statement. It should be noted, however, that the lender would also be very interested in both the balance sheet and statement of cash flows—the balance sheet because it would show the amount of debt the company had already incurred, as well as assets that could be liquidated to repay the loan. And the company would be interested in the statement of cash flows because it would provide useful information for predicting the company’s ability to generate cash to repay its obligations. (d) The president would probably be most interested in the statement of cash flows since it shows how much cash the company generates and how that cash is used. The statement of cash flows can be used to predict the company’s future cash-generating ability. LO 3 BT: C Difficulty: Medium TOT: 6.0 min AACSB: None AICPA FC: Reporting

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PROBLEM 1-3A

(a)

ELITE SERVICE CO. Income Statement For the Month Ended June 30, 2017 Revenues Service revenue .............................................. Expenses Salaries and wages expense .......................... Supplies expense............................................ Maintenance and repairs expense ................. Advertising expense ....................................... Utilities expense.............................................. Total expenses ........................................ Net income ...............................................................

$7,500 $1,400 1,000 600 400 300 3,700 $3,800

ELITE SERVICE CO. Retained Earnings Statement For the Month Ended June 30, 2017 Retained earnings, June 1 ....................................................... Add: Net income..................................................................... Less: Dividends ....................................................................... Retained earnings, June 30 .....................................................

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$ 0 3,800 3,800 1,400 $2,400

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PROBLEM 1-3A (Continued) ELITE SERVICE CO. Balance Sheet June 30, 2017 Assets Cash ........................................................................... Accounts receivable .................................................. Supplies ..................................................................... Equipment .................................................................. Total assets................................................................

$ 4,600 4,000 2,400 26,000 $37,000

Liabilities and Stockholders’ Equity Liabilities Notes payable .................................................... $12,000 Accounts payable .............................................. 500 Total liabilities ............................................ Stockholders’ equity Common stock ................................................... 22,100 Retained earnings .............................................. 2,400 Total liabilities and stockholders’ equity ....................

$12,500 24,500 $37,000

[Revenues – Expenses = Net income or (loss)] (Beginning retained earnings ± Changes in retained earnings = Ending retained earnings) (Assets = Liabilities + Stockholders’ equity)

(b) Elite had a very successful first month, earning $3,800 or 51% of service revenues ($3,800 ÷ $7,500). Its net income represents a 17% return on the initial investment ($3,800 ÷ $22,100). (c) Distributing a dividend after only one month of operations is probably unusual. Most new businesses choose to build up a cash balance to provide for future operating and investing activities or pay down debt. Elite distributed 37% ($1,400 ÷ $3,800) of its first month’s income but it had adequate cash to do so and still showed a significant increase in retained earnings. LO 3 BT: AP Difficulty: Hard TOT: 15.0 min. AACSB: Analytic AICPA FC: Reporting

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PROBLEM 1-4A

(a) Rojo Corporation should include the following items in its statement of cash flows: Cash paid to suppliers Cash dividends paid Cash at beginning of period Cash paid to purchase equipment Cash received from customers Cash received from issuing common stock ROJO CORPORATION Statement of Cash Flows For the Year Ended December 31, 2017 Cash flows from operating activities Cash received from customers ........................ $132,000) Cash paid to suppliers ...................................... (104,000) Net cash provided by operating activities ....... $28,000) Cash flows from investing activities Cash paid to purchase equipment ................... (12,000) Net cash used by investing activities .............. (12,000) Cash flows from financing activities Cash received from issuing common stock .... 22,000) Cash dividends paid.......................................... (7,000) Net cash provided by financing activities ....... 15,000) Net increase in cash ................................................ 31,000) Cash at beginning of period .................................... 9,000 Cash at end of period .............................................. $40,000

(Cash flows from operating, investing, and financing activities = Net change in cash)

(b) Rojo Corporation’s operating activities provided $28,000 cash which was adequate to fund its investing activities ($12,000) and make ($7,000) of dividend payments. LO 3 BT: AP Difficulty: Medium TOT: 10.0 min. AACSB: Analytic AICPA FC: Reporting

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PROBLEM 1-5A

(a) 1.

Since the boat actually belongs to Miko Liu—not to Micado Corporation—it should not be reported on the corporation’s balance sheet. Likewise, the boat loan is a personal loan of Miko’s—not a liability of Micado Corporation.

The inventory should be reported at $25,000, the amount paid when it was purchased. Micado Corporation will record $36,000 as revenues when the inventory is sold.

The $10,000 receivable is not an asset of Micado Corporation—it is a personal asset of Miko Liu.

(b)

MICADO CORPORATION Balance Sheet December 31, 2017 Assets Cash .......................................................................... Accounts receivable ................................................ Inventory .................................................................. Total assets ..............................................................

$20,000* 40,000* 25,000* $85,000*

Liabilities and Stockholders’ Equity Liabilities Notes payable ...................................................... Accounts payable ................................................ Total liabilities .......................................................... Stockholders’ equity ................................................ Total liabilities and stockholders’ equity ...............

$15,000 30,000

* $45,000* 40,000** $85,000*

**$50,000 – $10,000 **$85,000 – $45,000 (Total assets minus total liabilities) (Assets = Liabilities + Stockholders’ equity) LO 3 BT: AN Difficulty: Medium TOT: 12.0 min. AACSB: Analytic AICPA FC: Reporting

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CT 1-1

FINANCIAL REPORTING PROBLEM

(a) Apple’s total assets at September 27, 2014 were $231,839,000 and at September 28, 2013 were $207,000,000. (b) Apple had $13,844,000 of cash and cash equivalents at September 27, 2014. (c) Apple had accounts payable totaling $30,196,000 on September 27, 2014 and $22,367,000 on September 28, 2013. (d) Apple reported net sales in 2014 of $182,795,000, in 2013 of $170,910,000, and in 2012 of $156,508,000. (e) Apple’s net income increased by $2,473,000 from 2013 to 2014, from $37,037,000 to $39,510,000. LO 3 BT: AN Difficulty: Medium TOT: 5.0 min. AACSB: Analytic AICPA FC: Reporting

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Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 1-2

COMPARATIVE ANALYSIS PROBLEM

(a) (amounts in thousands) 1. Total liabilities 2. Net property, plant and equipment 3. Net cash provided (used) by investing activities. 4. Net income

Columbia Sportswear Company $436,975

VF Corporation

$291,563

$ 942,181

$(184,027) $141,859

$(329,555) $1,047,505

$4,349,258*

*$1,620,241 + $1,423,581 + $1,305,436 (b) Both companies are profitable. VF’s net property, plant, and equipment and net income suggest that it is a substantially bigger company than Columbia. VF’s net property, plant, and equipment are more than three times as big as those of Columbia and its net income is more than 7 times as big as that of Columbia. LO 3 BT: AN Difficulty: Medium TOT: 8.0 min. AACSB: Analytic AICPA FC: Reporting

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CT 1-3

(a)

COMPARATIVE ANALYSIS PROBLEM

(in millions) 1. Total assets 2. Accounts receivable (net) 3. Net sales 4. Net income (loss)

Amazon $54,505 $5,612 $88,988 $(241)

Wal-Mart $203,706 $6,778 $482,229 $16,363

(b) Wal-Mart’s total assets were approximately 374% greater than Amazon’s total assets, and Wal-Mart’s net sales were over 5 times greater than Amazon’s net sales. Wal-Mart’s accounts receivable were 21% greater than Amazon’s and represent about 1% of its net sales. Amazon’s accounts receivable amount to 6% of its net sales. Both Amazon’s and Wal-Mart’s accounts receivable are at satisfactory levels. Wal-Mart’s net income was substantially greater than Amazon’s, since Amazon reported a loss. It appears that these two companies’ operations are comparable in some ways, but Wal-Mart’s operations are substantially more profitable. LO 3 BT: AN Difficulty: Medium TOT: 10.0min AACSB: Analytic AICPA FC: Reporting

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CT 1-4

INTERPRETING FINANCIAL STATEMENTS

(a) Creditors lend money to companies with the expectation that they will be repaid at a specified point in time in the future. If a company is generating cash from operations in excess of its investing needs, it is more likely that it will be able to repay its creditors. Not only did Xerox actually have negative cash from operations, but all of the cash it received in order to meet its cash deficiency was from issuing new debt. Both of these facts would be of concern to the company’s creditors, since it would suggest it will be less likely to be able to repay its debts. (b) As a stockholder you are interested in the long-term performance of a company and how that translates into its stock price. Often during the early years of a company’s life its cash provided by operations is not sufficient to meet its investment needs, so the company will have to get cash from outside sources. However, in the case of Xerox, the company has operated for many years and has a well-established name brand. The negative cash from operations might suggest operating deficiencies. (c) The statement of cash flows reports information on a cash basis. An investor cannot get the complete story on the company’s performance and financial position without looking at the income statement and balance sheet. Also, investors would want to look at more than one year’s worth of data. The current year might not be representative of past or future years. (d) Xerox is a well known company. It has a past record of paying dividends. Its management probably decided to continue to pay a dividend to demonstrate confidence in the company’s future. They may have felt that by not paying the dividend for the year they would send a negative message to investors. However, by choosing to pay a cash dividend the company obviously weakened its cash position, and decreased its ability to repay its debts. LO 3 BT: S Difficulty: Hard TOT: 15.0 min. AACSB: Analytic AICPA FC: Reporting and PC: Problem Solving/Decision Making

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CT 1-5

REAL-WORLD FOCUS

Answers to this question will differ depending on the companies chosen by the student, and the year. We provide the following solution for Apple for the year ended September 27, 2014. (a) During the year ended September 27, 2014, Apple reported net income of $39,510 million. (b) During the year ended September 27, 2014, Apple reported sales of $182,795 million. (c) The “Industry” label on the left side of the Profile site tells us that Apple is in the Electronic Equipment industry. (d) Companies also in this industry would include Daktronics, Inc., e. Digital Corporation, Sony Corporation, and Universal Electronics Inc. (e) We chose Sony. During the year ended March 31, 2014, Sony reported sales of $75.421 million and net loss of $1,246 million. LO 3 BT: AP Difficulty: Medium TOT: 15.0 min. AACSB: Technology AICPA FC: Reporting

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Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 1-6

RESEARCH CASE

(a) The ideas that the Public Company Accounting Oversight Board proposed for expanding the role of auditors in “passing judgement on more of what a company does and says” include weighing in on the quality of a company’s disclosures in its earnings releases and commenting on what the company says in its Management’s Discussion and Analysis section of its annual report. (b) Many people were surprised by the fact that many of the financial institutions that failed or required government support received “clean” audit opinions shortly before they announced their troubles. This caused some people to think that auditors should reveal more specific information. (c) The proposed Auditor’s Discussion and Analysis report would include information about the auditor’s views on the company’s use of judgments, estimates and accounting policies. The auditor would also discuss whether it believes the company’s financial reporting practices are aggressive. (d) It is likely that auditors would have mixed opinions of these proposals. On-the-one-hand, the expansion of the auditor’s role would create new revenue opportunities for auditors. However, the expansion of duties could very well create additional tension between the auditor and the client. Since the company is actually the one that hires the auditor, auditors might be reluctant to reveal too much. Also, many of these new duties appear to be less clearly defined than expressing an opinion on whether statements are presented in accordance with GAAP. This lack of clearly defined criteria could increase the auditor’s legal exposure. LO 3 BT: S Difficulty: Hard TOT: 25.0 min. AACSB: Technology and Reflective-Thinking AICPA PC: Problem Solving/Decision Making

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CT 1-7

DECISION-MAKING ACROSS THE ORGANIZATION

(a) The Report of Independent Registered Public Accounting Firm indicates that Ernst & Young LLP performed the audit of Apple’s financial statements. (b) The Consolidated Statements of Operations states that its earnings per share were $6.49 in 2014. (c) Management Discussion and Analyses of Financial Condition and Results of Operations, Item 7, Sales Data indicates that net sales in foreign countries were $96,101 million in 2014. (d) Per Part II, Item 6, Selected Financial Data, Net Sales in 2012 were $156,508 million. (e) The Shareholders’ Equity section of the Consolidated Balance Sheets states that 12,600,000,000 shares were authorized. (f) Per the Consolidated Statements of Cash Flows, $9,571 million was spent on capital expenditures. (g) Note 1 states that depreciation is based on “the lesser of 30 years or the remaining life of the underlying buildings.” (h) Per the Consolidated Statement of Financial Position, inventories were $2,111 million in 2013. LO 3 BT: AN Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

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Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 1-8

COMMUNICATION ACTIVITY

To:

Marci Ling

From:

Student

I have received the balance sheet of Samco Company, Inc. as of December 31, 2017. The purpose of a balance sheet is to report a company’s financial position at a point in time. It reports what the company owns (assets) and what it owes (liabilities) and the net amount attributed to owners (equity). A number of items in this balance sheet are not properly reported. They are: (1) The balance sheet should be dated as of a specific date, not for a period of time. Therefore, it should be stated “December 31, 2017.” (2) Equipment should be below Supplies on the balance sheet. (3) Accounts receivable should be shown as an asset and reported between Cash and Supplies on the balance sheet. (4) Accounts payable should be shown as a liability, not an asset. Therefore, it should be reported in the liability section, after notes payable. (5) Liabilities and stockholders’ equity should be shown separately on the balance sheet. Common stock, Retained earnings, and Dividends are not liabilities. (6) Common stock, Retained earnings, and Dividends are part of stockholders’ equity. The Dividends account is not reported on the balance sheet but is subtracted from beginning retained earnings to arrive at the ending balance. A correct balance sheet is as follows:

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CT 1-8 (Continued) SAMCO COMPANY, INC. Balance Sheet December 31, 2017 Assets Cash .............................................................................. Accounts receivable .................................................... Supplies ........................................................................ Equipment..................................................................... Total assets ..................................................................

$ 9,000 6,000 1,000 18,000 $34,000

Liabilities and Stockholders’ Equity Liabilities Notes payable ....................................................... Accounts payable ................................................. Total liabilities ............................................... Stockholders’ equity Common stock ...................................................... Retained earnings................................................. Total liabilities and stockholders’ equity.................... *Retained earnings ....................................................... *Less: Dividends ......................................................... *Ending retained earnings ...........................................

$10,000 4,000 $14,000 12,000 8,000*

20,000 $34,000

$10,000 2,000 $ 8,000

(Assets = Liabilities + Stockholders’ equity)

LO 3 BT: C Difficulty: Medium TOT: 15.0 min. AACSB: None AICPA FC: Reporting

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Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 1-9

ETHICS CASE

(a) Investors rely on auditors to perform an independent assessment of a company. If the auditor owns stock in that company, he or she might not be able to act in an independent and impartial manner. (b) There are pros and cons to this argument. On the positive side, it could be argued that as long as a person has no direct relationship with a client company, that person will not influence the findings of the work. However, a counter argument is that an influential partner within a firm, who had an investment in a client that he or she didn’t work on, might be tempted to try to influence the findings of the audit if he or she feared that the findings were going to negatively affect the value of his or her investment. (c) The fact that four firms have become so big means that prohibiting employees of those accounting firms from buying stock in clients of the firm would bar those employees from investing in roughly 25% of publicly traded firms. Some have argued that such restrictive rules would create undue hardship, and unfairly restrict the investment options of these people. They also argue that in such a large organization it is increasingly unlikely that an individual who does not work on a particular audit will be able to influence the outcome of that audit. As a consequence, rules that focus on restricting investments by those employees actually involved in the audit of a client may be most reasonable and most effective. (d) Answers to this question will vary. This is a particularly difficult issue since the rule effectively eliminates the individual’s control over their investment portfolio. They did nothing wrong when they bought the shares, but now they are being forced to sell when it is not advantageous. (e) The management of PricewaterhouseCoopers noted that auditor independence is vitally important to the audit function. If investors don’t think the auditor is independent of the client they will lose faith in auditing, which would have dire consequences for securities markets. Therefore, it was important that the firm make a bold, unambiguous response to address this problem. LO 3 BT: E Difficulty: Hard TOT: 30.0 min. AACSB: Ethics AICPA FC: Reporting and PC: Professional Demeanor

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CT 1-10 (a)

ALL ABOUT YOU

Answers to the following will vary depending on students’ opinions. (i)

(b)

(c)

(d)

This does not represent the hiding of assets, but rather a choice as to the order of use of assets. This would seem to be ethical. (ii) This does not represent the hiding of assets, but rather is a change in the nature of assets. Since the expenditure was necessary, although perhaps accelerated, it would seem to be ethical. (iii) This represents an intentional attempt to deceive the financial aid office. It would therefore appear to be both unethical and potentially illegal. (iv) This is a difficult issue. By taking the leave, actual net income would be reduced. The form asks the applicant to report actual net income. However, it is potentially deceptive since you do not intend on taking unpaid absences in the future, thus future income would be higher than reported income. Companies might want to overstate net income in order to potentially increase the stock price by improving investors’ perceptions of the company. Also, a higher net income would make it easier to receive debt financing. Finally, managers would want a higher net income to increase the size of their bonuses. Sometimes companies want to report a lower income if they are negotiating with employees. For example, professional sports teams frequently argue that they cannot increase salaries because they aren’t making enough money. This also occurs in negotiations with unions. For tax accounting (as opposed to the financial accounting in this course) companies frequently try to minimize the amount of reported taxable income. Unfortunately many times people who are otherwise very ethical will make unethical decisions regarding financial reporting. They might be driven to do this because of greed. Frequently it is because their superiors have put pressure on them to take an unethical action, and they are afraid to not follow directions because they might lose their job. Also, in some instances top managers will tell subordinates that they should be a team player, and do the action because it would help the company, and therefore would help fellow employees.

LO3 BT: E Difficulty: Hard TOT: 30.0 min. AACSB: Reflective Thinking AICPA FC: Reporting and PC: Problem Solving/Decision Making

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CT 1-11

FASB CODIFICATION ACTIVITY

No solution necessary.

CT 1-12

CONSIDERING PEOPLE, PLANET AND PROFIT

(a)

The 5 aspirations relate to the company’s goals related to sustaining its business, its brands, its people, its community and the planet.

(b)

The annual reports discussed in the chapter report on a company’s financial results and financial position. Financial annual reports have a format and content that follows requirements specified by

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accounting regulators. The primary contents of a financial annual report is the company’s financial statements, which are audited by independent accountants. The Clif Bar & Company Annual Report describes the company's goals and results related to its 5 aspirations. The report does not follow a prescribed format, but instead can take whatever form, and include any content that the company chooses. The report is not audited by an outside body. LO 3 BT: AN Difficulty: Medium TOT: 15.0 min. AACSB: Analytic and Technology AICPA FC: Reporting

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IFRS CONCEPTS AND APPLICATION IFRS1-1 The International Accounting Standards Board, IASB, and the Financial Accounting Standards Board, FASB, are two key players in developing international accounting standards. The IASB releases international standards known as International Financial Reporting Standards (IFRS). The FASB releases US standards, referred to a Generally Accepted Accounting Standards or GAAP. LO4 BT: C Difficulty: Easy TOT: 5.0 min. AACSB: Diversity AICPA FC: Reporting and BB: International/Global

IFRS1-2 A single set of high-quality accounting standards is needed because of increases in multinational corporations, mergers and acquisitions, use of information technology, and international financial markets. LO 4 BT: C Difficulty: Easy TOT: 3.0 min. AACSB: Diversity AICPA FC: Reporting and BB: International/Global

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IFRS1-3

(a) (b) (c)

INTERNATIONAL FINANCIAL REPORTING PROBLEM

Ernst & Young et Autres; Deloitte & Associes 22 avenue Montaigne, Paris, France 75008 The company reports in Euros.

LO 4 BT: AN Difficulty: Medium TOT: 5.0 min. AACSB: Technology and Diversity AICPA FC: Reporting and BB: International/Global

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CHAPTER 2 A Further Look at Financial Statements Learning Objectives 1. 2. 3.

Identify the sections of a classified balance sheet. Use ratios to evaluate a company’s profitability, liquidity, and solvency. Discuss financial reporting concepts.

Summary of Questions by Learning Objectives and Bloom’s Taxonomy Item 1. 2. 3. 4.

LO 1 1 1 1

BT K K C C

Item 5. 6. 7. 8.

LO 1 2 2 2

Item

K C K C

Questions 9. 2 C 10. 2 K 11. 2 C 12. 3 K

13. 14. 15. 16.

3 3 3 3

K C C C

17. 18. 19. 20.

3 3 3 1

C C C C

7. 8.

3 3

K K

9. 10.

3 3

K K

10. 11.

2 2

AP AP

12. 13.

3 3

K C

7. 8.

2 3

AP E

1. 2.

1 1

K AP

3. 4.

2 2

AP AP

1a.

1b.

Brief Exercises 5. 2 AP 6. 3 K Do It! Exercises 2. 2 AP Exercises

1. 2. 3. 1. 2.

1 1 1 1 1

AP AP AP AP AP

4. 5. 6. 3. 4.

1 1 1 1 2

AP AP AP

7. 8. 9.

2 1, 2 2

AP AP AP

AP AN

Problems: Set A 5. 2 AP 6. 2 AP

Kimmel, Financial Accounting, 8/e, Solutions Manual

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2-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

2-2

Description

Difficulty Level

Time Allotted (min.)

Prepare a classified balance sheet.

Simple

10–20

Prepare financial statements.

Moderate

20–30

Prepare financial statements.

Moderate

20–30

Compute ratios; comment on relative profitability, liquidity, and solvency.

Moderate

20–30

Compute and interpret liquidity, solvency, and profitability ratios.

Simple

10–20

Compute and interpret liquidity, solvency, and profitability ratios.

Moderate

15–25

Compute ratios and compare liquidity, solvency, and profitability for two companies.

Moderate

15–25

Comment on the objectives and qualitative characteristics of financial reporting.

Simple

10–20

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ANSWERS TO QUESTIONS 1.

A company’s operating cycle is the average time that is required to go from cash to cash in producing revenue.

LO 1 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Measurement

Current assets are assets that a company expects to convert to cash or use up within one year of the balance sheet date or the company’s operating cycle, whichever is longer. Current assets are listed in the order in which they are expected to be converted into cash.

LO 1 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting

Long-term investments are investments in stocks and bonds of other companies where the conversion into cash is not expected within one year or the operating cycle, whichever is longer and plant assets not currently in operational use. Property, plant, and equipment are tangible resources of a relatively permanent nature that are being used in the business and not intended for sale.

LO 1 BT: C Diff: M TOT: 2 min. AACSB: None AICPA FC: Reporting

Current liabilities are obligations that will be paid within the coming year or operating cycle, whichever is longer. Long-term liabilities are obligations that will be paid after one year.

LO 1 BT: C Diff: M TOT: 1 min. AACSB: None AICPA FC: Reporting

The two parts of stockholders’ equity and the purpose of each are: (1) Common stock is used to record investments of assets in the business by the owners (stockholders). (2) Retained earnings is used to record net income retained in the business.

LO 1 BT: K Diff: M TOT: 2 min. AACSB: None AICPA FC: Reporting

(a) Geena is not correct. There are three characteristics: liquidity, profitability, and solvency. (b) The three parties are not primarily interested in the same characteristics of a company. Short-term creditors are primarily interested in the liquidity of the company. In contrast, long-term creditors and stockholders are primarily interested in the profitability and solvency of the company.

LO 2 BT: C Diff: M TOT: 3 min. AACSB: None AICPA FC: Reporting

(a) Liquidity ratios: Working capital and current ratio. (b) Solvency ratios: Debt to assets and free cash flow. (c)

Profitability ratio: Earnings per share.

LO 2 BT: K Diff: E TOT: 2 min. AACSB: None AICPA FC: Reporting

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2-3

Debt financing is riskier than equity financing because debt must be repaid at specific points in time, whether the company is performing well or not. Thus, the higher the percentage of assets financed by debt, the riskier the company.

LO 2 BT: C Diff: E TOT: 2 min. AACSB: None AICPA FC: Reporting

(a) Liquidity ratios measure the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash. (b) Profitability ratios measure the income or operating success of a company for a given period of time. (c)

Solvency ratios measure the company’s ability to survive over a long period of time.

LO 2 BT: K Diff: E TOT: 2 min. AACSB: None AICPA FC: Reporting

10.

(a) The increase in earnings per share is good news because it means that profitability has improved. (b) An increase in the current ratio signals good news because the company improved its ability to meet maturing short-term obligations. (c)

The increase in the debt to assets ratio is bad news because it means that the company has increased its obligations to creditors and has lowered its equity “buffer.”

(d) A decrease in free cash flow is bad news because it means that the company has become less solvent. The higher the free cash flow, the more solvent the company. LO 2 BT: AN Diff: M TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

11.

(a) The debt to assets ratio and free cash flow indicate the company’s ability to repay the face value of the debt at maturity and make periodic interest payments. (b) The current ratio and working capital indicate a company’s liquidity and short-term debtpaying ability. (c)

Earnings per share indicates the earning power (profitability) of an investment.

LO 2 BT: C Diff: M TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

12.

(a) Generally accepted accounting principles (GAAP) are a set of rules and practices, having substantial support, that are recognized as a general guide for financial reporting purposes. (b) The body that provides authoritative support for GAAP is the Financial Accounting Standards Board (FASB).

LO 3 BT: K Diff: E TOT: 2 min. AACSB: None AICPA FC: Measurement

13.

(a) The primary objective of financial reporting is to provide information useful for decision making. (b) The fundamental qualitative characteristics are relevance and faithful representation. The enhancing qualities are comparability, consistency, verifiability, timeliness, and understandability.

2-4

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LO 3 BT: K Diff: M TOT: 2 min. AACSB: None AICPA FC: Measurement

14.

Dietz is correct. Consistency means using the same accounting principles and accounting methods from period to period within a company. Without consistency in the application of accounting principles, it is difficult to determine whether a company is better off, worse off, or the same from period to period.

LO 3 BT: AN Diff: M TOT: 2 min. AACSB: Analytic AICPA FC: Measurement and Reporting

15.

Comparability results when different companies use the same accounting principles. Consistency means using the same accounting principles and methods from year to year within the same company.

LO 3 BT: C Diff: E TOT: 1 min. AACSB: None AICPA FC: Measurement

16.

The cost constraint allows accounting standard-setters to weigh the cost that companies will incur to provide information against the benefit that financial statement users will gain from having the information available.

LO 3 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Measurement

17.

Accounting standards are not uniform because individual countries have separate standardsetting bodies. Currently many non-U.S. countries are choosing to adopt International Financial Reporting Standards (IFRS). It appears that accounting standards in the United States will move toward compliance with IFRS.

LO 3 BT: C Diff: M TOT: 2 min. AACSB: None AICPA FC: Measurement

18.

Accounting relies primarily on two measurement principles. Fair value is sometimes used when market price information is readily available. However, in many situations reliable market price information is not available. In these instances, accounting relies on historical cost as its basis.

19.

The economic entity assumption states that every economic entity can be separately identified and accounted for. This assumption requires that the activities of the entity be kept separate and distinct from (1) the activities of its owners (the shareholders) and (2) all other economic entities. A shareholder of a company charging personal living costs as expenses of the company is an example of a violation of the economic entity assumption.

20.

At September 27, 2014 Apple’s largest current asset was Cash and cash equivalents of $14,557 million, its largest current liability is Accounts payable of $16,459 million and its largest item under “Assets” was Property and equipment, net of $16,967 million.

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SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 2-1 CL Accounts payable CA Accounts receivable PPE Accumulated depreciation PPE Buildings CA Cash IA Goodwill

CL Income taxes payable LTI Investment in long-term bonds PPE Land CA Inventory IA Patent CA Supplies

LO 1 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

BRIEF EXERCISE 2-2 CHIN COMPANY Partial Balance Sheet Current assets Cash ......................................................................................... Debt investments .................................................................... Accounts receivable ............................................................... Supplies ................................................................................... Prepaid insurance ................................................................... Total current assets ........................................................

$10,400 8,200 14,000 3,800 2,600 $39,000

LO 1 BT: AP Difficulty: Medium TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 2-3 Net income — Preferred dividends Average common shares outstanding $220 million – $0 = = $.66 per share 333 million shares

Earnings per share =

LO 2 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Reporting

2-6

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BRIEF EXERCISE 2-4 Working capital = Current assets – Current liabilities Current assets Current liabilities Working capital

($102,500,000 201,200,000 ($ 98,700,000)

Current ratio:

Current assets $102,500,000 = Current liabilities $201,200,000 = .51:1 LO 2 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 2-5 (a) Current ratio æ Current assets ÷ ö çç ÷ ÷ èCurrent liabilities ø (b) Debt to assets æTotal liabilities ö ÷ çç ÷ ÷ è Total assets ø

$262,787 = 0.89:1 $293,625

$62,300 – $24,787 – $12,000 = $25,513

$376,002 = 85.5% $439,832

LO 2 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 2-6 (a) True. (b) False. LO 3 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

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BRIEF EXERCISE 2-7 (a) (b) (c) (d) (e) (f) (g) (h)

Predictive value. Confirmatory value. Materiality Complete. Free from error. Comparability. Verifiability. Timeliness.

LO 3 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement

BRIEF EXERCISE 2-8 (a) Relevant. (b) Faithful representation. (c) Consistency. LO 3 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

BRIEF EXERCISE 2-9 (a) (b) (c) (d)

1. 2. 3. 4.

Predictive value. Neutral. Verifiable. Timely.

LO 3 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

BRIEF EXERCISE 2-10 (c) LO 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement

2-8

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SOLUTIONS TO DO IT! EXERCISES DO IT! 2-1a MYLAR CORPORATION Balance Sheet (partial) December 31, 2017 Assets Current assets Cash .................................................................. Accounts receivable ........................................ Inventory ........................................................... Supplies ............................................................ Total current assets ............................... Property, plant, and equipment Equipment......................................................... Less: Accumulated depreciation— equipment .............................................. Total assets ..............................................................

$ 13,000 22,000 58,000 7,000 $100,000 180,000 50,000

130,000 $230,000

LO 1 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

DO IT! 2-1b IA CL NA CL LTI CL

Trademarks Notes payable (current) Interest revenue Income taxes payable Debt investments (long-term) Unearned sales revenue

CA PPE PPE SE NA LTL

Inventory Accumulated depreciation Land Common stock Advertising expense Mortgage payable (due in 3 years)

LO 1 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

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2-9

DO IT! 2-2 (a)

2017

2016

($80,000 – $6,000) = $1.29 (40,000 + 75,000)/2

($40,000 – $6,000) = $0.97 (30,000 + 40,000)/2

Nguoi’s profitability, as measured by the amount of income available for each share of common stock, increased by 33 percent (($1.29 – $0.97)/$0.97) during 2017. Earnings per share should not be compared across companies because the number of shares issued by companies varies widely. Thus, we cannot conclude that Nguoi Corporation is more profitable than Matisse Corporation based on its higher EPS in 2017. æ Net Income - Preferred Dividends ö ÷ çç ÷ çèAverage Common Shares Outstanding ÷ ø

(b)

2017

2016

$54,000 = 2.45:1 $22,000

Current ratio

$36,000 = 1.20:1 $30,000

æ Current assets ö ÷ çç ÷ ÷ çèCurrent liabilities ø

Debt to assets ratio

$72,000 = 30% $240,000

$100,000 = 49% $205,000

æTotal liabilities ö ÷ çç ÷ ÷ çè Total assets ø

The company’s liquidity, as measured by the current ratio improved from 1.20:1 to 2.45:1. Its solvency also improved, because the debt to assets ratio declined from 49% to 30%. (c) Free cash flow

2017: $90,000 – $6,000 – $3,000 – $27,000 = $54,000 2016: $56,000 – $6,000 – $1,500 – $12,000 = $36,500

The amount of cash generated by the company above its needs for dividends and capital expenditures increased from $36,500 to $54,000. LO 1 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

2-10

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DO IT! 2-3 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

Monetary unit assumption Faithful representation Economic entity assumption Cost constraint Consistency Historical cost principle Relevance Periodicity assumption Full disclosure principle Materiality Going concern assumption Comparability

LO 2 BT: K Difficulty: Hard TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

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2-11

SOLUTIONS TO EXERCISES EXERCISE 2-1 CL CA PPE PPE CA CL IA CL

Accounts payable Accounts receivable Accumulated depreciation—equip. Buildings Cash Interest payable Goodwill Income taxes payable

CA CA PPE LTL CA PPE CA

Inventory Stock investments Land (in use) Mortgage payable Supplies Equipment Prepaid rent

LO 1 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 2-2 CA Prepaid advertising PPE Equipment IA Trademarks CL Salaries and wages payable CL Income taxes payable SE Retained earnings CA Accounts receivable LTI Land (held for future use)

IA Patents LTL Bonds payable SE Common stock PPE Accumulated depreciation—equipment CL Unearned sales revenue CA Inventory

LO 1 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

2-12

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EXERCISE 2-3 THE BOEING COMPANY Partial Balance Sheet December 31, 2017 (in millions) Assets Current assets Cash....................................................................... Debt investments .................................................. Accounts receivable ............................................. Notes receivable ................................................... Inventory ............................................................... Total current assets ...................................... Long-term investments Notes receivable ................................................... Property, plant, and equipment Buildings ............................................................... Less: Accumulated depreciation—buildings.....

$ 9,215 2,008 5,785 368 16,933 $34,309 5,466 21,579 12,795

Intangible assets Patents .................................................................. Total assets ..................................................................

8,784 12,528 $61,087

LO 1 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

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2-13

EXERCISE 2-4 H. J. HEINZ COMPANY Partial Balance Sheet April 30, 2017 (in thousands) Assets Current assets Cash .................................................. Accounts receivable ........................ Inventory ........................................... Prepaid insurance ............................ Total current assets ..................

$ 373,145 1,171,797 1,237,613 125,765 $ 2,908,320

Property, plant, and equipment Land .................................................. 76,193 Buildings........................................... $4,033,369 Less: Accumulated depreciation— Buildings .................................. 2,131,260 1,902,109 Intangible assets Goodwill ............................................ Trademarks....................................... Total assets.............................................

3,982,954 757,907

1,978,302

4,740,861 $ 9,627,483

LO 1 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

2-14

Kimmel, Financial Accounting, 8/e, Solutions Manual

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EXERCISE 2-5 LONGHORN COMPANY Balance Sheet December 31, 2017 Assets Current assets Cash..................................................... Accounts receivable ........................... Prepaid insurance............................... Total current assets ................................... Property, plant, and equipment Land ..................................................... Buildings ............................................. Less: Accumulated depreciation— buildings .................................. Equipment ........................................... Less: Accumulated depreciation— equipment ................................ Total assets .................................

$11,840 12,600 3,200 $ 27,640 61,200 $105,800 45,600 82,400

60,200

18,720

63,680

185,080 $212,720

Liabilities and Stockholders’ Equity Current liabilities Accounts payable ............................... Current maturity of note payable ........ Interest payable .................................. Total current liabilities ................ Long-term liabilities Note payable ($93,600 – $13,600) ...... Total liabilities ............................. Stockholders’ equity Common stock .................................... Retained earnings ($40,000 + $6,020*) ............................ Total stockholders’ equity .......... Total liabilities and stockholders’ equity ...........................................

$ 9,500 13,600 3,600 $ 26,700 80,000 106,700 60,000 46,020 106,020 $212,720

*Net income = $14,700 – $780 – $5,300 – $2,600 = $6,020 (Assets = Liabilities + Stockholders’ Equity) LO 1 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting Copyright © 2016 John Wiley & Sons, Inc.

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2-15

EXERCISE 2-6 TEXAS INSTRUMENTS, INC. Balance Sheet December 31, 2017 (in millions) Assets Current assets Cash ......................................................................... Debt investments ..................................................... Accounts receivable ................................................ Inventory .................................................................. Prepaid rent .............................................................. Total current assets ......................................... Long-term investments Stock investments ................................................... Property, plant, and equipment Equipment ............................................................... Less: Accumulated depreciation—equipment...... Intangible assets Patents...................................................................... Total assets......................................................................

$ 1,182 1,743 1,823 1,202 164 $ 6,114 637 6,705 3,547

3,158 2,210 $12,119

Liabilities and Stockholders’ Equity Current liabilities Accounts payable .................................................... Income taxes payable .............................................. Total current liabilities ..................................... Long-term liabilities Notes payable .......................................................... Total liabilities .......................................................... Stockholders’ equity Common stock ......................................................... Retained earnings .................................................... Total stockholders’ equity ............................... Total liabilities and stockholders’ equity .......................

$1,459 128 $ 1,587 810 2,397 2,826 6,896 9,722 $12,119

(Assets = Liabilities + Stockholders’ Equity) LO 1 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

2-16

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EXERCISE 2-7

(a) Earnings per share =

Net income − Preferred dividends Average common shares outstanding

2017 :

$66,176,000 – 0 = $ 1.01 (66,282,000 + 64,507,000) / 2

2016 :

$54,587,000 – 0 = $ .78 (73,139,000 + 66,282,000) / 2

(b) Using net income (loss) as a basis to evaluate profitability, Callaway Golf’s income improved by 21% [($66,176 – $54,587) ÷ 54,587] between 2016 and 2017. Its earnings per share increased by 29% [($1.01 – $0.78) ÷ $0.78]. (c) To determine earnings per share, dividends on preferred stock are subtracted from net income, but dividends on common stock are not subtracted. LO 2 BT: AP Difficulty: Medium TOT: 7 min. AACSB: Analytic AICPA FC: Reporting

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2-17

EXERCISE 2-8 (a)

FAIRVIEW CORPORATION Income Statement For the Year Ended July 31, 2017 Revenues Service revenue ............................................. Rent revenue ................................................. Total revenues ....................................... Expenses Salaries and wages expense ........................ Supplies expense .......................................... Depreciation expense ................................... Total expenses ....................................... Net loss..................................................................

$66,100 8,500 $74,600 57,500 15,600 4,000 77,100 $ (2,500)

FAIRVIEW CORPORATION Retained Earnings Statement For the Year Ended July 31, 2017 Retained earnings, August 1, 2013 ...................... Less: Net loss ..................................................... Dividends .................................................. Retained earnings, July 31, 2014 .........................

$34,000 $2,500 4,000

6,500 $27,500

[Revenues – Expenses = Net income or (loss)] (Beginning retained earnings ± Changes in retained earnings = Ending retained earnings)

(b)

FAIRVIEW CORPORATION Balance Sheet July 31, 2017 Assets Current assets Cash ............................................................... Accounts receivable ..................................... Total current assets ............................... Property, plant, and equipment Equipment...................................................... Less: Accumulated depreciation— equipment....................................... Total assets ...........................................................

2-18

$29,200 9,780 $38,980) 18,500 6,000

Kimmel, Financial Accounting, 8/e, Solutions Manual

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EXERCISE 2-8 (Continued) (b)

FAIRVIEW CORPORATION Balance Sheet (Continued) July 31, 2017 Liabilities and Stockholders’ Equity Current liabilities Accounts payable ............................................ Salaries and wages payable ........................... Total current liabilities................................. Long-term liabilities Notes payable .................................................. Total liabilities .............................................. Stockholders’ equity Common stock................................................. Retained earnings ........................................... Total stockholders’ equity .......................... Total liabilities and stockholders’ equity ...............

$ 4,100 2,080 $ 6,180 1,800 7,980 16,000 27,500 43,500 $51,480

(Assets = Liabilities + Stockholders’ equity)

(c)

$38,980 = 6.3 :1 $6,180 $7,980 Debt to assets ratio = = 15.5% $51,480 Current ratio =

(Current assets ÷ Current liabilities) and (Total liabilities ÷ Total assets)

(d) The current ratio would not change because equipment is not a current asset and a 5-year note payable is a long-term liability rather than a current liability. The debt to assets ratio would increase from 15.5% to 39.1%*. Looking solely at the debt to assets ratio, I would favor making the sale because Fairview’s debt to assets ratio of 15.5% is very low. Looking at additional financial data, I would note that Fairview reported a significant loss for the current year which would lead me to question its ability to make interest and loan payments (and even remain in business) in the future. I would not make the proposed sale unless Fairview convinced me that it would be capable of earnings in the future rather than losses.

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2-19

EXERCISE 2-8 (Continued) I would also consider making the sale but requiring a substantial downpayment and smaller note. *($7,980 + $20,000) ÷ ($51,480 + $20,000) LO 1, 2 BT: AP Difficulty: Hard TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 2-9 (a)

Beginning of Year

End of Year

Working capital

$3,361 – $1,635 = $1,726

$3,217 – $1,601 = $1,616

Current ratio

$3,361 = 2.06:1 $1,635

$3,217 = 2.01:1 $1,601

(Current assets – Current liabilities) and (Current assets ÷ Current liabilities)

(b) Nordstrom’s liquidity decreased slightly during the year. Its current ratio decreased from 2.06:1 to 2.01:1. Also, Nordstrom’s working capital decreased by $110 million. (c) Nordstrom’s current ratio at both the beginning and the end of the recent year exceeds Best Buy’s current ratio for 2014 (and 2013). Nordstrom’s end-of-year current ratio (2.01) exceeds Best Buy’s 2014 current ratio (1.41*). Nordstrom would be considered much more liquid than Best Buy for the recent year. *(see text, pg. 55) LO 2 BT: AP Difficulty: Medium TOT: 10 min. Difficulty: Analytic AICPA FC: Reporting

EXERCISE 2-10

$60,000 = 2.0: 1 $30,000 Working capital = $60,000 – $30,000 = $30,000

(a) Current ratio =

(Current assets ÷ Current liabilities) and (Current assets – Current liabilities)

2-20

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EXERCISE 2-10 (Continued) $40,000* = 4.0: 1 $10,000** Working capital = $40,000 – $10,000 = $30,000

(b) Current ratio =

*$60,000 – $20,000

**$30,000 – $20,000

(Current assets ÷ Current liabilities) and (Current assets – Current liabilities)

(c) Liquidity measures indicate a company’s ability to pay current obligations as they become due. Satisfaction of current obligations usually requires the use of current assets. If a company has more current assets than current liabilities it is more likely that it will meet obligations as they become due. Since working capital and the current ratio compare current assets to current liabilities, both are measures of liquidity. Payment of current obligations frequently requires cash. Neither working capital nor the current ratio indicate the composition of current assets. If a company’s current assets are largely comprised of items such as inventory and prepaid expenses it may have difficulty paying current obligations even though its working capital and current ratio are large enough to indicate favorable liquidity. In Myeneke’s case, payment of $20,000 of accounts payable will leave only $5,000 cash. Since salaries payable will require $10,000, the company may need to borrow in order to make the required payment for salaries. (d) The CFO’s decision to use $20,000 of cash to pay off accounts payable is not in itself unethical. However, doing so just to improve the year-end current ratio could be considered unethical if this action misled creditors. Since the CFO requested preparation of a “preliminary” balance sheet before deciding to pay off the liabilities he seems to be “managing” the company’s financial position, which is usually considered unethical. LO 2 BT: AP Difficulty: Medium TOT: 15 min. Difficulty: Analytic AICPA FC: Reporting

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EXERCISE 2-11 2017

(a) Current ratio (b) Earnings per share (c) Debt to assets ratio

$925,359 = 2.30 : 1 $401,763 $179,061 = $0.87 205,169 $554, 645

$1, 963, 676

(d) Free cash flow

= 28.2%

2016 $1,020,834 = 2.71: 1 $376,178 $400,019 = $1.85 216,119

$527, 216 $1, 867, 680

= 28.2%

$302,193 – $265,335 – $82,394 $464,270 – $250,407 – $80,796 = ($45,536) = $133,067

(e) Using the debt to assets ratio and free cash flow as measures of solvency produces deteriorating results for American Eagle Outfitters. Its debt to assets ratio remained constant from 2016 to 2017. However, its free cash flow decreased by 134% indicating a significant decline in solvency. (f) In 2016 American Eagle Outfitters’s cash provided by operating activities was greater than the cash used for capital expenditures. It was generating plenty of cash from operations to cover its investing needs. In 2017, American Eagle Outfitters experienced negative free cash flow. This deficiency could have been covered by issuing stock or debt. LO 2 BT: AP Difficulty: Medium TOT: 15 min. Difficulty: Analytic AICPA FC: Reporting

EXERCISE 2-12 (a) (b) (c) (d) (e) (f)

2 6 3 4 5 1

Going concern assumption Economic entity assumption Monetary unit assumption Periodicity assumption Historical cost principle Full disclosure principle

LO 3 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

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Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 2-13 (a) This is a violation of the historical cost principle. The inventory was written up to its fair value when it should have remained at cost. (b) This is a violation of the economic entity assumption. The treatment of the transaction treats Victor Lopez and Lopez Co. as one entity when they are two separate entities. The cash used to purchase the truck should have been treated as part of salaries and wages expense. (c) This is a violation of the periodicity assumption. This assumption states that the economic life of a business can be divided into artificial time periods (months, quarters, or a year). By adding two more weeks to the year, Lopez Co. would be misleading financial statement readers. In addition, 2017 results would not be comparable to previous years’ results. The company should use a 52 week year. LO 3 BT: C Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Measurement

Kimmel, Financial Accounting, 8/e, Solutions Manual

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2-23

SOLUTIONS TO PROBLEMS PROBLEM 2-1A YAHOO! INC. Balance Sheet December 31, 2017 (Amounts are in millions) Assets Current assets Cash ..................................................... Debt investments ................................ Accounts receivable ........................... Prepaid rent ......................................... Total current assets .................... Long-term investments Stock investments .............................. Property, plant, and equipment Equipment ........................................... Less: Accumulated depreciation— equipment....................................... Intangible assets Goodwill .............................................. Patents ................................................ Total assets.................................................

$2,292 1,160 1,061 233 $ 4,746 3,247 1,737 201

1,536

3,927 234

4,161 $13,690

Liabilities and Stockholders’ Equity Current liabilities Accounts payable ............................... Unearned sales revenue .................... Total current liabilities ................ Long-term liabilities Notes payable ..................................... Total liabilities .......................... Stockholders’ equity Common stock .................................... Retained earnings ............................... Total stockholders’ equity .............. Total liabilities and stockholders’ equity ...................................................

152 413 $ 565 734 1,299 6,283 6,108 12,391 $13,690

(Assets = Liabilities + Stockholders’ equity) LO 1 BT: AP Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Measurement 2-24

Kimmel, Financial Accounting, 8/e, Solutions Manual

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PROBLEM 2-2A

MARTIN CORPORATION Income Statement For the Year Ended December 31, 2017 Revenues Service revenue .................................................... Expenses Salaries and wages expense ............................... Depreciation expense ........................................... Insurance expense ............................................... Utilities expense ................................................... Maintenance and repairs expense ....................... Total expenses .............................................. Net income ....................................................................

$68,000 $37,000 3,600 2,200 2,000 1,800 46,600 $21,400

MARTIN CORPORATION Retained Earnings Statement For the Year Ended December 31, 2017 Retained earnings, January 1, 2017 .............................................. Add: Net income .......................................................................... Less: Dividends ............................................................................. Retained earnings, December 31, 2017 ........................................

Kimmel, Financial Accounting, 8/e, Solutions Manual

$31,000 21,400 52,400 12,000 $40,400

(For Instructor Use Only)

2-25

PROBLEM 2-2A (Continued) MARTIN CORPORATION Balance Sheet December 31, 2017 Assets Current assets Cash ....................................................................... Accounts receivable ............................................. Prepaid insurance ................................................. Total current assets ...................................... Property, plant, and equipment Equipment ............................................................. Less: Accumulated depreciation—equipment... Total assets...................................................................

$10,100 11,700 3,500 $25,300 66,000 17,600

48,400 $73,700

Liabilities and Stockholders’ Equity Current liabilities Accounts payable ................................................. Salaries and wages payable................................. Total current liabilities .................................. Stockholders’ equity Common stock ...................................................... Retained earnings ................................................. Total stockholders’ equity ............................ Total liabilities and stockholders’ equity ....................

$18,300 3,000 $21,300 12,000 40,400 52,400 $73,700

[Revenues – Expenses = Net income or (loss)] (Beginning retained earnings ± Changes in retained earnings = Ending retained earnings) (Assets = Liabilities + Stockholders’ equity) LO 1 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Measurement

2-26

Kimmel, Financial Accounting, 8/e, Solutions Manual

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PROBLEM 2-3A

(a)

LAZURIS ENTERPRISES Income Statement For the Year Ended April 30, 2017 Sales revenue ....................................................... Expenses Cost of goods sold ....................................... Salaries and wages expense ....................... Interest expense ........................................... Depreciation expense ................................... Insurance expense ....................................... Income tax expense ...................................... Total expenses ....................................... Net income ............................................................

$5,100 $1,060 700 400 335 210 165 2,870 $2,230

LAZURIS ENTERPRISES Retained Earnings Statement For the Year Ended April 30, 2017 Retained earnings, May 1, 2013 ........................... Add: Net income .................................................

$1,600 2,230 3,830 325 $3,505

Less: Dividends ................................................... Retained earnings, April 30, 2014 ........................

[Revenues – Expenses = Net income or (loss)] (Beginning retained earnings ± Changes in retained earnings = Ending retained earnings)

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PROBLEM 2-3A (Continued) (b)

LAZURIS ENTERPRISES Balance Sheet April 30, 2017 Assets Current assets Cash ...................................................... Stock investments ................................ Accounts receivable............................. Inventory ............................................... Prepaid insurance ................................ Total current assets...................... Property, plant, and equipment Land....................................................... Equipment ............................................. $2,420 Less: Accumulated depreciation—equipment.................. 670 Total assets..................................................

$1,270 1,200 810 967 60 $4,307 3,100 1,750

4,850 $9,157

Liabilities and Stockholders’ Equity Current liabilities Notes payable .................................................... Accounts payable ............................................. Salaries and wages payable ............................. Income taxes payable ....................................... Total current liabilities .............................. Mortgage payable.............................................. Total liabilities............................................ Stockholders’ equity Common stock .................................................. Retained earnings ............................................. Total stockholders’ equity ........................ Total liabilities and stockholders’ equity ...............

$ 61 834 222 135 $1,252 3,500 4,752 900 3,505 4,405 $9,157

(Assets = Liabilities + Stockholders’ equity) LO 1 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Measurement

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Kimmel, Financial Accounting, 8/e, Solutions Manual

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PROBLEM 2-4A

(a) Loeb Company’s net income for 2017 is $248,000 ($1,800,000 – $1,175,000 – $283,000 – $9,000 – $85,000). Its earnings per share is $3.10 ($248,000 ÷ 80,000 shares outstanding). Bowsh’s net income for 2017 is $142,200 ($620,000 – $340,000 – $98,000 – $3,800 – $36,000). Its earnings per share is $2.84 ($142,200 ÷ 50,000 shares outstanding). (b) Loeb appears to be more liquid. Loeb’s 2017 working capital of $340,875 ($407,200 – $66,325) is more than twice as high as Bowsh’s working capital of $156,620 ($190,336 – $33,716). In addition, Loeb’s 2017 current ratio of 6.1:1 ($407,200 ÷ $66,325) is higher than Loeb’s current ratio of 5.6:1 ($190,336 ÷ $33,716). (c) Loeb appears to be slightly more solvent. Loeb’s 2017 debt to total assets ratio of 18.6% ($174,825 ÷ $939,200)a is lower than Bowsh’s ratio of 22.5% ($74,400 ÷ $330,064)b. The lower the percentage of debt to assets, the lower the risk is that a company may be unable to pay its debts as they come due. Another measure of solvency, free cash flow, also indicates that Loeb is more solvent. Loeb had $12,000 ($138,000 – $90,000 – $36,000) of free cash flow while Bowsh had only $1,000 ($36,000 – $20,000 – $15,000). a

$174,825 ($66,325 + $108,500) is Loeb’s 2017 total liabilities. $939,200 ($407,200 + $532,000) is Loeb’s 2017 total assets.

$74,400 ($33,716 + $40,684) is Bowsh’s 2017 total liabilities. $330,064 ($190,336 + $139,728) is Bowsh’s 2017 total assets.

LO 2 BT: AN Difficulty: Hard TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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2-29

PROBLEM 2-5A

(a) (i)

Working capital = $458,900 – $195,500 = $263,400.

(ii) Current ratio =

$458,900 = 2.35:1. $195,500

(iii) Free cash flow = $190,800 – $92,000 – $31,000 = $67,800 (iv) Debt to assets ratio =

$395,500 = 38.2%. $1,034,200

(v) Earnings per share =

$153,100 = $3.06. 50,000 shares

(b) During 2017, the company’s current ratio increased from 1.65:1 to 2.35:1 and its working capital increased from $160,500 to $263,400. Both measures indicate an improvement in liquidity during 2017. The company’s debt to assets ratio increased from 31.0% in 2016 to 38.2% in 2017 indicating that the company is less solvent in 2017. Another measure of solvency, free cash flow, increased from $48,700 to $67,800. This suggests an improvement in solvency, thus we have conflicting measures of solvency. Earnings per share decreased from $3.15 in 2016 to $3.06 in 2017. This indicates a decline in profitability during 2017. LO 2 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

2-30

Kimmel, Financial Accounting, 8/e, Solutions Manual

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PROBLEM 2-6A

2016 (a) Earnings per share.

2017

$60,000 = $2.00 30,000 shares

$70,000 = $2.12 33,000 shares

(b) Working capital. ($20,000 + $62,000 + $73,000) – $70,000 = $85,000

($28,000 + $70,000 + $90,000) – $75,000 = $113,000

$155,000 = 2.2:1 $70,000

$188,000 = 2.5:1 $75,000

(d) Debt to assets ratio.

$155,000 = 20.4% $760,000

$160,000 = 23.4% $685,000 (e) Free cash flow. $56,000 – $38,000 – $15,000 = $3,000 (f)

$82,000 – $45,000 – $20,000 = $17,000

Net income and earnings per share have increased, indicating that the underlying profitability of the corporation has improved. The liquidity of the corporation as shown by the working capital and the current ratio has improved slightly. Also, the corporation improved its solvency by improving its debt to assets ratio as well as free cash flow.

LO 2 BT: AP Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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2-31

PROBLEM 2-7A

Ratio

Target Wal-Mart (All Dollars are in Millions)

(a)

Working capital

$17,488 – $10,512 = $6,976

$48,949 – $55,390 = ($6,441)

(b)

Current ratio

1.66:1 ($17,488 ÷ $10,512)

.88:1 ($48,949 ÷ $55,390)

(c)

Debt to assets ratio

68.9% ($30,394 ÷ $44,106)

60.0% ($98,144 ÷ $163,429)

(d)

Free cash flow

$4,430 – $3,547 – $465 = $418

$23,147 – $11,499 – $3,746 = $7,902

(e)

Earnings per share

$2.86 =

(f)

The comparison of the two companies shows the following:

$2,214 774

$3.39 =

$13,400 3,951

Liquidity—Target’s current ratio of 1.66:1 is much better than WalMart’s .88:1 and Target has significantly higher working capital than Wal-Mart. Solvency—Wal-Mart’s debt to assets ratio is about 13% less than Target’s and its free cash flow is much larger. LO 2 BT: AP Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

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Kimmel, Financial Accounting, 8/e, Solutions Manual

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PROBLEM 2-8A

(a)

Accounting information is the compilation and presentation of financial information for a company. It provides information in the form of financial statements and additional disclosures that is useful for decision making. The accounting rules and practices that have substantial authoritative support and are recognized as a general guide for financial reporting purposes are referred to as generally accepted accounting principles (GAAP). The biotechnology company that employs Saira will follow GAAP to report its assets, liabilities, stockholders’ equity, revenues, and expenses as it prepares financial statements.

(b) Saira is correct in her understanding that the low success rate for new biotech products will be a cause of concern for investors. Her suggestion that detailed scientific findings be reported to prospective investors might offset some of their concerns but it probably won’t conform to the qualitative characteristics of accounting information. These characteristics consist of relevance, faithful representation, comparability, consistency, verifiability, timeliness, and understandability. They apply to accounting information rather than the scientific findings that Saira wants to include. LO 3 BT: E Difficulty: Medium TOT: 15 min. AACSB: Reflective Thinking AICPA FC: Measurement and Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 2-1

FINANCIAL REPORTING PROBLEM

(a) Total current assets were $68,531,000 at September 27, 2014, and $73,286,000 at September 28, 2013. (b) Current assets are properly listed in the order of liquidity. As you will learn in a later chapter, inventories are considered to be less liquid than receivables. Thus, they are listed below receivables and before prepaid expenses. (c) The asset classifications are similar to the text: (a) current assets, (b) Long-term marketable securities, (c) property, plant, and equipment, and (d) intangibles. (d) Total current liabilities were $63,448,000 at September 27, 2014, and $43,658,000 at September 28, 2013. LO 1 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

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Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 2-2

(a)

COMPARATIVE ANALYSIS PROBLEM

($ in thousands)

Columbia Sports wear

VFC

1. Working capital

$1,266,041 – $373,120 = $892,921

$4,185,854 – $1,620,241 = $2,565,613

2. Current ratio

$1,266,041 ÷ $373,120 = 3.4:1

$4,185,854 ÷ $1,620,241 = 2.6:1

$436,975

3. Debt to assets ratio 4. Free cash flow

= 24.4%

$4,349,258 *

= 43.6%

$1,792,209

$9,980,140

$185,783 – $60,283 – $39,836 = *$85,664

$1,697,629 – $234,077 – $478,933 = $984,619

*$1,620,241 + $1,423,581 + $1,305,436

(b) Liquidity VFC Company appears much more liquid since it has about $1,673 million more working capital than Columbia. But, looking at the current ratios, we see that Columbia’s ratio is more than 1.3 times as large as VFC’s. Solvency Based on the debt to assets ratio, Columbia is more solvent. Columbia’s debt to assets ratio is significantly lower than VFC’s and, therefore, Columbia would be considered better able to pay its debts as they come due. Comparing free cash flow, VFC generates much more excess cash than Columbia―$984.6 million versus $85.7 million. LO 2 BT: AN Difficulty: Hard TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 2-3

(a)

COMPARATIVE ANALYSIS PROBLEM

($ in millions)

Amazon

Wal-Mart

Working capital

$31,327 – $28,089 = $3,238

$63,278 – $65,272 = $(1,994)

Current ratio

$31,327 ÷ $28,089 = 1.1:1

$63,278 ÷ $65,272 = .97:1

Debt to assets ratio

$43,764 * = 80.3% $54,505

$122,312 = 6 0.0% $203 ,706

Free cash flow

$6,842 – $4,893 – $0 = $1,949

$28,564 – $12,174 – $6,785 = $9,605

*$28,089 + $8,265 + $7,410

(b) Liquidity Amazon appears more liquid since it has $5,232 million more working capital than Wal-Mart. Also, Amazon’s current ratio is slightly better than Wal-Mart’s. Solvency Based on the debt to assets ratio, Wal-Mart is more solvent. Wal-Mart’s debt to assets ratio is significantly lower than Amazon’s and, therefore, Wal-Mart would be considered better able to pay its debts as they come due. Comparing free cash flow, Wal-Mart generates much more excess cash than Amazon. LO 2 BT: AN Difficulty: Hard TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

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Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 2-4

INTERPRETING FINANCIAL STATEMENTS

(a) The percentage decrease in Gap’s total assets during this period is calculated as:

$7,065 – $8,544 = 17.3% $8,544 The average decrease per year can be approximated as:

17.3% = 4.3% per year 4 years (b) Gap’s working capital and current ratio decreased (2014), increased (2015 and 2016) and then decreased (2017) during this period, indicating a decline, an improvement and then another decline in liquidity. The current ratio is a better measure of liquidity because it provides a relative measure; that is, current assets compared to current liabilities. Working capital only tells us the net amount of current assets less current liabilities. It is hard to say whether a given amount of working capital is adequate or inadequate without knowing the size of the company. (c) The debt to assets ratio suggests that Gap’s solvency didn’t change much during the period. Debt to assets was .39 in 2013, rose to .45 in 2014 and then came back down to .42 in 2017. (d) The earnings per share suggests that Gap’s profitability improved significantly from 2013 to 2017, increasing from $0.94 to $1.89. However, based on the years shown, it appears that earnings varied a great deal during this period. LO 2 BT: AN Difficulty: Hard TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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2-37

REAL-WORLD FOCUS

CT 2-5 Answers will vary depending on the company chosen and the date. LO 2 BT: AN Difficulty: Hard TOT: 20 min. AACSB: Analytic and Technology AICPA FC: Reporting

CT 2-6 Answers will vary depending on the company chosen and the date. LO 1, 2 BT: E Difficulty: Hard TOT: 25 min. AACSB: Analytic, Technology, and Reflective Thinking AICPA FC: Reporting AICPA BB: Critical Thinking

2-38

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 2-7

RESEARCH CASE

(a) Many large companies, big accounting firms, and accounting standard setters tend to favor a switch to IFRS because they believe that global accounting standards would save companies money by consolidating their bookkeeping. They also believe it would make it easier to raise capital around the world. In addition, investors would have less trouble comparing companies from different countries. They also feel that having international accounting standards would lead to an improvement in the enforcement of securities laws. (b) Many small companies are opposed to switching to IFRS because (1) they say that the switch would be very costly, and (2) because they don't have operations outside of the U.S., so they see any benefit to their company of using international standards. (c) It has been suggested that IFRS lacks standards that are specific to utility companies that U.S. GAAP contains. (d) Condorsement (a word invented by the SEC) represents a combination of convergence and endorsement. Under condorsement, U.S. standard setters would continue to work with international standard setters to try to reduce differences in standards. In addition, as new international standards are issued, U.S. standard setters would review those standards and consider whether to endorse them by absorbing them into U.S. GAAP. LO 3 BT: AN Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 2-8

DECISION MAKING ACROSS THE ORGANIZATION

The current ratio increase is a favorable indication as to liquidity, but alone tells little about the prospects of the client. From this ratio change alone, it is impossible to know the amount and direction of the changes in individual accounts, total current assets, and total current liabilities. Also unknown are the reasons for the changes. The working capital increase is also a favorable indication as to liquidity, but again the amount and direction of the changes in individual current assets and current liabilities cannot be determined from this measure. The increase in free cash flow is a favorable indicator for solvency. An increase in free cash flow means the company can replace assets, pay dividends, and have “free cash” available to pay down debt or expand operations. The decrease in the debt to assets ratio is a favorable indicator for solvency and going-concern prospects. The lower the percentage of debt to assets, the lower the risk that a company may be unable to pay its debts as they come due. A decline in the debt to assets ratio is also a positive sign regarding going-concern potential. The increase in net income is a favorable indicator for both solvency and profitability prospects although much depends on the quality of receivables generated from sales and how quickly they can be converted into cash. A significant factor here may be that despite a decline in sales the client’s management has been able to reduce costs to produce this increase. Indirectly, the improved income picture may have a favorable impact on solvency and going-concern potential by enabling the client to borrow currently to meet cash requirements. The earnings per share increase is a favorable indicator for profitability. A 109% (from $1.15 to $2.40) increase indicates a significant increase in net income and provides a favorable sign regarding going-concern potential. LO 2 BT: E Difficulty: Hard TOT: 20 min. AACSB: Communication and Reflective Thinking AICPA PC: Interaction, Leadership, and Communication

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Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 2-9

COMMUNICATION ACTIVITY

To:

B. P. Palmer

From:

Accounting Major

Subject:

Financial Statement Analysis

(a) Ratios can be classified into three types, which measure three different aspects of a company’s financial health: 1.

Liquidity ratios—These measure a company’s ability to pay its current obligations.

Solvency ratios—These measure a company’s ability to pay its long-term obligations and survive over the long-term.

Profitability ratios—These measure the ability of the company to generate a profit.

(b) 1.

Examples of liquidity measures are: Working capital = Current assets – Current liabilities Current ratio =

Current assets Current liabilities

Examples of solvency measures are: Debt to assets ratio =

Total liabilities Total assets

Free cash flow = Cash provided by operating activities – Capital expenditures – Cash dividends

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2-41

CT 2-9 (Continued) 3.

Example of profitability measure: Earnings per share =

Net income − Preferred dividends Average common shares outstanding

Intracompany—This basis compares an item or financial relationship within a company in the current year with the same item or relationship in one or more prior years.

Industry averages—This basis compares an item or financial relationship of a company with industry averages (or norms).

Intercompany—This basis compares an item or financial relationship of one company with the same item or relationship in one or more competing companies.

LO 2 BT: AP Difficulty: Medium TOT: 18 min. AACSB: Communication AICPA PC: Communication

2-42

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 2-10

ETHICS CASE

(a) The stakeholders in this case are: Boeing’s management; CEO, public relations manager, Boeing’s stockholders, McDonnell Douglas stockholders, other users of the financial statements; especially potential investors of the new combined company. (b) The ethical issues center around full disclosure of financial information. Management attempted to “time” the release of bad news in order to complete a merger that would have been revoked if cost overruns had been disclosed as soon as management became aware of them. (c) The periodicity assumption requires that financial results be reported on specific, pre-determined dates. The full disclosure principle requires that all circumstances and events that make a difference to financial statement users must be disclosed. (d) It is not ethical to “time” the release of bad news. GAAP requires that all significant financial information be released to allow users to make informed decisions. (e) Answers will vary. One possibility: Release the information regarding cost overruns as it became available. Describe the causes of such overruns and explain how Boeing would address them (probably by improving production methods to eliminate the inefficiencies alluded to in the text). (f)

Investors and analysts should be aware that Boeing’s management will probably “manage” information in the future in ways that will interfere with full disclosure.

LO 3 BT: E Difficulty: Hard TOT: 20 min. AACSB: Ethics AICPA FC: Measurement AICPA PC: Personal Demeanor

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 2-11

ALL ABOUT YOU

Answers will vary. LO - BT: S Difficulty: Hard TOT: 30 min. AACSB: Communication and Reflective Thinking AICPA CC: Critical Thinking AICPA PC: Communication

2-44

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 2-12

FASB CODIFICATION ACTIVITY

(a) 1.

Current assets is used to designate cash and other assets or resources commonly identified as those that are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business.

Current liabilities is used principally to designate obligations whose liquidation is reasonably expected to require the use of existing resources properly classifiable as current assets, or the creation of other current liabilities.

(b) Access FASB Codification 210-20-45 A right of set off exists when all of the following conditions are met: 1.

Each of two parties owes the other determinable amounts.

The reporting party has the right to set off the amount owed with the amount owed by the other party.

The reporting party intends to set off.

The right of set off is enforceable at law. As a result, a company may not offset accounts payable against cash on its balance sheet.

LO 1 BT: C Difficulty: Medium TOT: 15 min. AACSB: Analytic and Technology AICPA FC: Measurement

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2-45

CT 2-13

PEOPLE, PLANET AND PROFIT

(a)

The existence of three different forms of certification would most likely create confusion for coffee purchasers. It would difficult to know what aspects of the coffee growing process each certification covered. Similarly, if there were multiple groups that certified financial statements, each with different criteria, it would be difficult for financial statement users to know what each certification promised.

(b)

The Starbucks certification appears to be the most common in that area. It has the advantage of having a direct link to the Starbucks coffee market. Although it does not guarantee that Starbucks will buy its coffee, it is a requirement that must be met before Starbucks will buy somebody’s coffee. Note that the article states that the Starbucks certification “incorporates elements of social responsibility and environmental leadership, but quality of coffee is the first criteria.” The Smithsonian Bird Friendly is considered to have the strictest requirements and, as a result, appears to be the least common.

(c)

The certifications have multiple objectives including organic farming as a means to protect bird species, biodiversity and wildlife habitat. Some included requirements are to improve workers’ living conditions, such as providing running water in worker housing, child labor regulations and education requirements. As mentioned above, the Starbucks certification has the potential financial benefit of making Starbucks a potential customer, which can stabilize farmers’ earnings. Certifications can also be financially beneficial because companies can benefit from the positive public relations effects of either producing or buying coffee produced using sustainable practices.

LO - BT: S Difficulty: Hard TOT: 30 min. AACSB: Technology and Reflective Thinking AICPA FC: Measurement and Reporting AICPA BB: Critical Thinking and Resource Management

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Kimmel, Financial Accounting, 8/e, Solutions Manual

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IFRS CONCEPTS AND APPLICATION

IFRS 2-1 The statement of financial position required under IFRS and the balance sheet prepared under GAAP usually present the same information regarding a company’s assets, liabilities, and stockholders’ equity at a point in time. IFRS does not dictate a specific order but most companies list noncurrent items before current. Differences in ordering are Statement of Financial Position presentation Noncurrent assets Current assets Equity Noncurrent liabilities Current liabilities

Balance Sheet presentation Current assets Noncurrent assets Current liabilities Noncurrent liabilities Stockholders’ equity

Under IFRS, current assets are usually listed in the reverse order of liquidity. LO 4 BT: C Difficulty: Easy TOT: 5 min. AACSB: Diversity AICPA FC: Reporting AICPA BB: International/Global

IFRS 2-2 IFRS uses statement of financial position rather than balance sheet. LO 4 BT: K Difficulty: Easy TOT: 3 min. AACSB: Diversity AICPA FC: Measurement AICPA BB: International/Global

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2-47

IFRS 2-3 SUNDELL COMPANY Partial Statement of Financial Position Current assets Prepaid insurance ................................................................... Supplies ................................................................................... Accounts receivable ............................................................... Debt investments .................................................................... Cash ......................................................................................... Total .................................................................................

£ 3,600 5,200 12,500 6,700 15,400 £43,400

LO 1 BT: K Difficulty: Easy TOT: 2 min. AACSB: Diversity AICPA FC: Reporting AICPA BB: International/Global

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Kimmel, Financial Accounting, 8/e, Solutions Manual

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IFRS 2-4 LESSILA BOWLING ALLEY Statement of Financial Position December 31, 2017 Assets Property, plant, and equipment Land ............................................... Buildings ....................................... Less: Acc. depr.—buildings......... Equipment ..................................... Less: Acc. depr.—equipment ...... Current assets Prepaid insurance......................... Accounts receivable ..................... Cash............................................... Total assets ..........................................

$64,000 $128,800 42,600 62,400 18,720

86,200 43,680 4,680 14,520 18,040

$193,880

37,240 $231,120

Equity and Liabilities Equity Share capital—ordinary ............................. Retained earnings ($15,000 + $3,440*) ...... Non-current liabilities Notes payable ............................................. Current liabilities Current portion of notes payable .............. Accounts payable ....................................... Interest payable .......................................... Total equity and liabilities .................................

$100,000 18,440

$118,440 83,880

13,900 12,300 2,600

28,800 $231,120

*Net income = $14,180 – $780 – $7,360 – $2,600 = $3,440 (Assets = Equity + Liabilities) LO 1 BT: AP Difficulty: Medium TOT: 3 min. AACSB: Diversity AICPA FC: Reporting AICPA BB: International/Global

Kimmel, Financial Accounting, 8/e, Solutions Manual

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2-49

IFRS 2-5 INTERNATIONAL COMPARATIVE ANALYSIS PROBLEM

Differences in the format of the statement of financial position (balance sheet) used by Vuitton and Apple include the following:

1. 2. 3.

4. 5. 6.

Vuitton

Apple

Non-current assets listed first Goodwill listed before property, plant and equipment Current assets are shown in reverse order of liquidity with cash being last The equity section is shown before liabilities Long-term liabilities are shown before current liabilities The equity section uses Share capital and Share premium

Current assets listed first Property, plant, and equipment listed before goodwill Current assets are shown in order of liquidity with cash being first Liabilities are shown before the equity section Current liabilities are shown before long-term liabilities The equity section uses Common stock and additional paid-in capital Reporting currency is $ (dollars)

Reporting currency is € (euros)

LO 1 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Diversity AICPA FC: Reporting AICPA BB: International/Global

2-50

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

CHAPTER 3 The Accounting Information System Learning Objectives 1. 2. 3. 4. 5.

Analyze the effect of business transactions on the basic accounting equation. Explain how accounts, debits, and credits are used to record business transactions. Indicate how a journal is used in the recording process. Explain how a ledger and posting help in the recording process. Prepare a trial balance.

Summary of Questions by Learning Objectives and Bloom’s Taxonomy Item

Item

1. 2. 3. 4. 5.

1 1 1 1 2

C C C K K

6. 7. 8. 9. 10.

2 2 2 2 2

C C C K K

1. 2. 3.

1 1 1

C AP AP

4. 5. 6.

2 2 3

K C AP

1. 2. 3. 4. 5.

1 1 1 1 2

C AP AP AP AP

6. 7. 8. 9. 10.

2 2, 3 2 3 3

AP AP C AP AP

1. 2. 3.

1 1, 2 1, 2

AP AP AP

4. 3 AP 5. 3, 4, 5 AP 6. 3, 4, 5 AP

Item

Questions 11. 2 K 12. 2 K 13. 2 K 14. 2 K 15. 3 K Brief Exercises 7. 3 C 8. 3 C Do It! Exercises 3. 3 AP Exercises 11. 3 AP 12. 3 AP 13. 4, 5 AP 14. 1, 3, 4 AP 15. 3, 5 AN Problems: Set A 7. 5 AN 8. 3, 4, 5 AP

Item

16. 17. 18. 19. 20.

3 3 3 4 5

K K AP C C

21. 22.

1 5

K AN

9. 10.

3 4

AP AP

11. 12.

5 5

AP AN

16. 4, 5 AP 17. 3, 5 AN 18. 3, 4, 5 AP 19. 5 AN 20. 5 AP

21. 22.

5 5

AP AP

9. 3, 4, 5 AP 10. 3, 4, 5 AP

11.

Kimmel, Financial Accounting, 8/e, Solutions Manual

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3-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Analyze transactions and compute net income.

Moderate

40–50

Analyze transactions and prepare financial statements.

Moderate

40–50

Analyze transactions and prepare an income statement, retained earnings statement, and balance sheet.

Moderate

50–60

Journalize a series of transactions.

Simple

20–30

Journalize transactions, post, and prepare a trial balance.

Simple

30–40

Journalize transactions, post, and prepare a trial balance.

Moderate

40–50

Prepare a correct trial balance.

Moderate

30–40

Journalize transactions, post, and prepare a trial balance.

Moderate

40–50

Journalize transactions, post, and prepare a trial balance.

Moderate

40–50

10A

Journalize transactions, post, and prepare trial balance.

Moderate

40–50

11A

Analyze errors and their effects on the trial balance.

Moderate

30–40

3-2

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

ANSWERS TO QUESTIONS 1.

The system of collecting and processing transaction data and communicating financial information to decision makers is known as the accounting information system.

LO 1 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting

Yes, a business can enter into a transaction in which only the left side of the accounting equation is affected. An example would be a transaction where an increase in one asset is offset by a decrease in another asset. An increase in the equipment account which is offset by a decrease in the cash account is a specific example.

LO 1 BT: K Diff: M TOT: 2 min. AACSB: None AICPA FC: Reporting

Accounting transactions are the economic events of the company recorded by accountants because they affect the basic accounting equation. (a) The death of a major stockholder of the company is not an accounting transaction as it does not affect the basic accounting equation. (b) Supplies purchased on account is an accounting transaction because it affects the basic accounting equation. (c) An employee being fired is not an accounting transaction as it does not affect the basic accounting equation. (d) Paying a cash dividend to stockholders is an accounting transaction as it does affect the basic accounting equation.

LO 1 BT: C Diff: M TOT: 3 min. AACSB: None AICPA FC: Reporting

(a) (b) (c) (d)

Decrease assets and decrease stockholders’ equity. Increase assets and decrease assets. Increase assets and increase stockholders’ equity. Decrease assets and decrease liabilities.

LO 1 BT: AP Diff: M TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

An account consists of three parts: (a) the title, (b) the left or debit side, and (c) the right or credit side. Because the alignment of these parts resembles the letter T, it is referred to as a T account.

LO 2 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting

Disagree. The terms debit and credit are synonymous with left and right, respectively.

LO 2 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting

Barry is incorrect. The double-entry system merely records the dual (two-sided) effect of a transaction on the accounting equation. A transaction is not recorded twice; it is recorded once, and must affect two or more accounts to keep the basic accounting equation in balance. In other words, for each transaction, debits must equal credits.

LO 2 BT: C Diff: E TOT: 2 min. AACSB: None AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

3-3

Misty is incorrect. A debit balance only means that debit amounts exceed credit amounts in an account. Conversely, a credit balance only means that credit amounts are greater than debit amounts in an account. Thus, a debit or credit balance is neither favorable or unfavorable.

LO 2 BT: C Diff: E TOT: 2 min. AACSB: None AICPA FC: Reporting

(a) Asset accounts are increased by debits and decreased by credits. (b) Liability accounts are decreased by debits and increased by credits. (c) The common stock account is decreased by debits and increased by credits.

LO 2 BT: K Diff: E TOT: 2 min. AACSB: None AICPA FC: Reporting

10.

(a) (b) (c) (d) (e) (f) (g)

Accounts Receivable—debit balance. Cash—debit balance. Dividends—debit balance. Accounts Payable—credit balance. Service Revenue—credit balance. Salaries and Wages Expense—debit balance. Common Stock—credit balance.

LO 2 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting

11.

(a) (b) (c) (d) (e)

Accounts Receivable—asset—debit balance. Accounts Payable—liability—credit balance. Equipment—asset—debit balance. Dividends—stockholders’ equity—debit balance. Supplies—asset—debit balance.

LO 2 BT: K Diff: E TOT: 2 min. AACSB: None AICPA FC: Reporting

12.

(a) Debit Supplies and credit Accounts Payable. (b) Debit Cash and credit Notes Payable. (c) Debit Salaries and Wages Expense and credit Cash.

LO 2 BT: AP Diff: M TOT: 2 min. AACSB: Analytic AICPA FC: Reporting

13.

(a) (b) (c) (d) (e) (f)

Cash—both debit and credit entries. Accounts Receivable—both debit and credit entries. Dividends—debit entries only. Accounts Payable—both debit and credit entries. Salaries and Wages Expense—debit entries only. Service Revenue—credit entries only.

LO 2 BT: K Diff: M TOT: 2 min. AACSB: None AICPA FC: Reporting

14.

Normal balances for accounts in Apple’s financial statements: Accounts Receivable—debit; Accounts Payable—credit; Sales—credit; Selling, General, and Administrative Expenses—debit.

LO 2 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting

3-4

Kimmel, Financial Accounting, 8/e, Solutions Manual

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15.

The basic steps in the recording process are: (1) Analyze each transaction in terms of its effect on the accounts. (2) Enter the transaction information in a journal. (3) Transfer the journal information to the appropriate accounts in the ledger.

LO 3 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting

16.

(a) The debit should be entered first. (b) The credit should be indented.

LO 3 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting

17.

(a) No, debits and credits should not be recorded directly in the ledger. (b) The advantages of using the journal are: (1) It discloses in one place the complete effect of a transaction. (2) It provides a chronological record of all transactions. (3) It helps to prevent or locate errors because the debit and credit amounts for each entry can be readily compared.

LO 3 BT: C Diff: E TOT: 2 min. AACSB: None AICPA FC: Reporting

18.

(a) Cash ........................................................................................................ 12,000 Common Stock................................................................................. (Issued stock for cash) (b) Prepaid Insurance .................................................................................... Cash ................................................................................................ (Paid one-year insurance policy) (c)

12,000

800 800

Supplies................................................................................................... Accounts Payable ............................................................................ (Purchased supplies on account)

1,800

(d) Cash ........................................................................................................ Service Revenue .............................................................................. (Received cash for services rendered)

7,500

1,800

7,500

LO 3 BT: AP Diff: M TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

19.

(a) The entire group of accounts maintained by a company, including all the asset, liability, and stockholders’ equity accounts, is referred to collectively as the ledger. (b) The chart of accounts is important, particularly for a company that has a large number of accounts, because it helps organize the accounts and identify their location in the ledger.

LO 4 BT: C Diff: E TOT: 2 min. AACSB: None AICPA FC: Reporting

20.

A trial balance is a list of accounts and their balances at a given time. The primary purpose of a trial balance is to prove the mathematical equality of debits and credits after all journalized transactions have been posted. A trial balance also facilitates the discovery of errors in journalizing and posting. In addition, it is useful in preparing financial statements.

LO 5 BT: K Diff: E TOT: 2 min. AACSB: None AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

3-5

21.

The proper sequence is as follows: (b) Accounting transaction occurs. (c) Information is entered in the journal. (a) Debits and credits are posted to the ledger. (e) Trial balance is prepared. (d) Financial statements are prepared.

LO 5 BT: K Diff: M TOT: 2 min. AACSB: None AICPA FC: Reporting

22.

(a) The trial balance would balance. (b) The trial balance would not balance since the debits would be $720 higher than the credits.

LO 5 BT: AN Diff: M TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

3-6

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 3-1

(a) (b) (c)

Assets + + –

Liabilities + NE NE

Stockholders’ Equity NE + –

LO 1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

BRIEF EXERCISE 3-2

Cash (1)

+$60,000

(2)

–9,000

(3)

+13,000

Assets = Liabilities + Stockholders’ Equity Accounts Accounts Bonds Common Retained + Receivable + Supplies = Payable + Payable + Stock + Earnings +$60,000 –$9,000

Paid div.

–$13,000

(4)

+$3,100

LO 1 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 3-3 Assets Cash (1)

–$286,176

(2)

+137,590

(3)

+ Inventory +

Equipment

Liabilities

Accounts Payable

Stockholders’ Equity

Common Stock

Retained Earnings

+$286,176 +$137,590 +$68,480

Issued stock

+$68,480

LO 1 BT: AP Difficulty: Medium TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 3-4

(a) (b) (c) (d) (e) (f)

Accounts Payable Advertising Expense Service Revenue Accounts Receivable Retained Earnings Dividends

Debit Effect Decrease Increase Decrease Increase Decrease Increase

Credit Effect Increase Decrease Increase Decrease Increase Decrease

Kimmel, Financial Accounting, 8/e, Solutions Manual

Normal Balance Credit Debit Credit Debit Credit Debit

(For Instructor Use Only)

3-7

LO 2 BT: K Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting

BRIEF EXERCISE 3-5

June 1 2 3 12

Account Debited Cash Equipment Rent Expense Accounts Receivable

Account Credited Common Stock Accounts Payable Cash Service Revenue

LO 2 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting

BRIEF EXERCISE 3-6 June 1 2 3 12

Cash ..................................................................... Common Stock ............................................

5,000

Equipment............................................................ Accounts Payable ........................................

1,100

Rent Expense ...................................................... Cash..............................................................

740

Accounts Receivable .......................................... Service Revenue ..........................................

700

5,000 1,100 740 700

LO 3 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 3-7 The basic steps in the recording process are: 1.

Analyze each transaction. In this step, source documents are examined to determine the effects of the transaction on the accounts.

Enter each transaction in a journal. This step is called journalizing and it results in making a chronological record of the transactions.

Transfer journal information to ledger accounts. This step is called posting. Posting makes it possible to accumulate the effects of journalized transactions on individual accounts.

LO 3 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting 3-8

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 3-8 (a) Basic Analysis

(b)

Debit-Credit Analysis

Aug. 1

The asset Cash is increased; the stockholders’ equity account Common Stock is increased.

Debits increase assets: debit Cash $10,000. Credits increase stockholders’ equity: credit Common Stock $10,000.

The asset Prepaid Insurance is increased; the asset Cash is decreased.

Debits increase assets: debit Prepaid Insurance $1,500. Credits decrease assets: credit Cash $1,500.

The asset Cash is increased; the revenue Service Revenue is increased.

Debits increase assets: debit Cash $900. Credits increase revenues: credit Service Revenue $900.

The expense Salaries and Wages Expense is increased; the asset Cash is decreased.

Debits increase expenses: debit Salaries and Wages Expense $620. Credits decrease assets: credit Cash $620.

LO 3 BT: C Difficulty: Medium TOT: 8 min. AACSB: None AICPA FC: Reporting

BRIEF EXERCISE 3-9 Aug. 1 4 16 27

Cash...................................................................... Common Stock .............................................

10,000

Prepaid Insurance................................................ Cash ..............................................................

1,500

Cash...................................................................... Service Revenue ..........................................

900

Salaries and Wages Expense.............................. Cash ..............................................................

620

10,000 1,500 900 620

LO 3 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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3-9

BRIEF EXERCISE 3-10

5/12 5/15

5/5

Cash 1,600 2,000

Service Revenue 5/5 5/15

3,800 2,000

Accounts Receivable 3,800 5/12 1,600

LO 4 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 3-11 PEETE COMPANY Trial Balance June 30, 2017 Cash ............................................................................ Accounts Receivable ................................................. Equipment................................................................... Accounts Payable ...................................................... Common Stock ........................................................... Dividends .................................................................... Service Revenue......................................................... Salaries and Wages Expense .................................... Rent Expense .............................................................

Debit $ 5,400 3,000 13,000

Credit

$ 1,000 18,000 1,200 8,600 4,000 1,000 $27,600

$27,600

(Total of debit account balances = Total of credit account balances) LO 5 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

3-10

Kimmel, Financial Accounting, 8/e, Solutions Manual

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BRIEF EXERCISE 3-12 BIRELLIE COMPANY Trial Balance December 31, 2017 Cash ............................................................................ Prepaid Insurance ...................................................... Accounts Payable ...................................................... Unearned Service Revenue ....................................... Common Stock ........................................................... Retained Earnings ...................................................... Dividends .................................................................... Service Revenue ........................................................ Salaries and Wages Expense .................................... Rent Expense .............................................................

Debit $20,800 3,500

Credit

$ 2,500 1,800 10,000 6,600 5,000 25,600 14,600 2,600 $46,500

$46,500

(Assets, expenses, and dividends have debit balances) LO 5 BT: AN Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

3-11

SOLUTIONS TO DO IT! REVIEW EXERCISES DO IT! 3-1 Assets = Accounts Cash + Receivable = (1) (2)

+$20,000 +$20,000

(3) (4)

Liabilities Accounts Payable

+ +

Common Stock

Stockholders’ Equity Retained Earnings + Revenues – Expenses – Dividends +$20,000

–20,000 –$1,800

+$1,800 –3,000

–$3,000

LO 1 BT: AP Difficulty: Medium TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

DO IT! 3-2 Boyd would likely need the following accounts in which to record the transactions necessary to ready his photography studio for opening day: Cash (debit balance) Supplies (debit balance) Notes Payable (credit balance)

Equipment (debit balance) Accounts Payable (credit balance) Common Stock (credit balance)

LO 2 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

DO IT! 3-3 Each transaction that is recorded is entered in the general journal. The three activities would be recorded as follows: 1. 2.

Cash .......................................................................... Common Stock .................................................

8,000

Supplies ................................................................... Accounts Payable ............................................ Cash ..................................................................

950

8,000 550 400

No entry because no transaction has occurred.

LO 3 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

3-12

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

DO IT! 3-4

4/1 4/3 4/30

Cash 1,900 4/16 3,400 4/20 4,500

500 300

LO 4 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

DO IT! 3-5 CHILLIN’ COMPANY Trial Balance December 31, 2017 Debit Cash ............................................................................ $ 6,000 Accounts Receivable ................................................. 8,000 Supplies ...................................................................... 5,000 Equipment................................................................... 76,000 Notes Payable............................................................. Accounts Payable ...................................................... Salaries and Wages Payable ..................................... Common Stock ........................................................... Dividends .................................................................... 8,000 Service Revenue ........................................................ Rent Expense ............................................................. 2,000 Salaries and Wages Expense .................................... 38,000 $143,000

Credit

$ 20,000 9,000 3,000 25,000 86,000 $143,000

(Liabilities, Common stock, and Revenues have credit balances) LO 5 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

3-13

SOLUTIONS TO EXERCISES EXERCISE 3-1 1. 2. 3. 4. 5. 6. 7. 8. 9.

Increase in assets and increase in stockholders’ equity. Decrease in assets and decrease in stockholders’ equity. Increase in assets and increase in stockholders’ equity. Increase in assets and increase in stockholders’ equity. Decrease in assets and decrease in stockholders’ equity. Increase in liabilities and decrease in stockholders’ equity. Increase in assets and decrease in assets. Increase in assets and decrease in assets. Increase in assets and increase in liabilities.

LO 1 BT: C Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Reporting

EXERCISE 3-2 Assets Cash (1)

Liabilities

Accounts Payable

Common Retained Earnings + Stock + Revenues – Expenses

+$40,000

(2) (3)

+$30,000

Issued Stock

+$30,000

–4,000

(4)

–$4,000 +$19,000

(5)

+5,000

(6)

–8,000

(7)

–30,000

Rent Expense

+$19,000

Service Revenue

+5,000

Service Revenue –8,000

Utilities Expense

–1,300

Advertising Expense

–30,000

(8) (9)

Stockholders’ Equity

Accounts Receivable + Equipment =

+1,300 +12,000

–12,000

$15,000 +

$7,000

$30,000

$52,000

$ 1,300

$40,000 +

$24,000 –

$13,300

$52,000

LO 1 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

3-14

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

3-14 Only)

John Wiley & Sons, Inc.

–60,000

+16,000

(3)

(4)

–11,000

(9) +

$4,700

$131,500

$10,000

+$10,000

+$4,700

$60,000

+$60,000

Equipment

$4,700

+$4,700

$131,500

+$26,000 –

+10,000

+$16,000

$33,200

–28,000

–$5,200

–

$11,000

–$11,000

Stockholders’ Equity Retained Earnings + Revenues – Expenses – Dividends

$100,000 +

+$100,000

Common + Stock

$45,000 +

+$45,000

Liabilities Accounts Bonds = Payable + Payable

LO 1 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

$ 56,800 +

–28,000

(8)

(7)

(6)

–5,200

+45,000

(2)

(5)

+$100,000

(1)

Cash

Assets Accounts + Receivable + Supplies +

Dividends

Salaries and Wages Expense

Service Revenue

Rent Expense

Service Revenue

Issued Stock

EXERCISE 3-3

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use

EXERCISE 3-4 (a)

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

Stockholders invested $20,000 cash in the business. Purchased equipment for $5,000, paying $1,000 in cash and the balance of $4,000 on account. Paid $750 cash for supplies. Earned $9,500 in revenue, receiving $4,100 cash and $5,400 on account. Paid $1,500 cash on accounts payable. Paid $2,000 cash dividends to stockholders. Paid $800 cash for rent. Collected $450 cash from customers on account. Paid salaries of $3,000. Incurred $300 of utilities expense on account.

(b) Issued common stock ............................................................ Service revenue ...................................................................... Dividends ................................................................................ Rent expense .......................................................................... Salaries and wages expense .................................................. Utilities expense ..................................................................... Increase in stockholders’ equity............................................

$20,000 9,500 (2,000) (800) (3,000) (300) $23,400

[Revenues – Expenses = Net income or (loss)] (Changes in stockholders’ equity = Additional investment – dividends ± Net income or Loss)

(c) Service revenue ...................................................................... Rent expense .......................................................................... Salaries and wages expense .................................................. Utilities expense ..................................................................... Net income ..............................................................................

$ 9,500 (800) (3,000) (300) $ 5,400

LO 1 BT: AP Difficulty: Medium TOT. 12 min. AACSB: Analytic AICPA FC: Reporting

3-16

Kimmel, Financial Accounting, 8/e, Solutions Manual

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EXERCISE 3-5 WOLFE COMPANY Income Statement For the Month Ended August 31, 2017 Revenues Service revenue ....................................................... Expenses Salaries and wages expense .................................. Rent expense ........................................................... Utilities expense ...................................................... Total expenses ................................................. Net income .......................................................................

$9,500 $3,000 800 300 4,100 $5,400

WOLFE COMPANY Retained Earnings Statement For the Month Ended August 31, 2017 Retained earnings, August 1 ............................................................ Add: Net income .............................................................................

$ 0 5,400 5,400 2,000 $3,400

Less: Dividends ................................................................................ Retained earnings, August 31 .......................................................... WOLFE COMPANY Balance Sheet August 31, 2017 Assets Current assets Cash .......................................................................... Accounts receivable ................................................ Supplies .................................................................... Total current assets .............................................. Equipment..................................................................... Total assets ...........................................................

$15,500 4,950 750 $21,200 5,000 $26,200

Liabilities and Stockholders’ Equity Current liabilities Accounts payable..................................................... Stockholders’ equity Common stock ......................................................... Retained earnings .................................................... Total liabilities and stockholders’ equity ....

$ 2,800 $20,000 3,400

23,400 $26,200

(Ending retained earnings = Beginning retained earnings + Net income – Dividends) LO 2 BT: AP Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Reporting Copyright © 2016 John Wiley & Sons, Inc.

Kimmel, Financial Accounting, 8/e, Solutions Manual

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3-17

EXERCISE 3-6 Account Accounts payable Accounts receivable Common stock Depreciation expense Interest expense Interest income Inventories Prepaid expenses Property and equipment Revenues

(a) Normal Balance Debit or Credit Credit Debit Credit Debit Debit Credit Debit Debit Debit Credit

(b) Balance Sheet or Income Statement Balance sheet Balance sheet Balance sheet Income statement Income statement Income statement Balance sheet Balance sheet Balance sheet Income statement

LO 2 BT: K Difficulty: Easy TOT: 5 min. AACSB: None AICPA FC: Reporting

3-18

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

3-18

Kimmel, Financial Accounting, 8/e, Solutions Manual

Stockholders’ Equity

Liability

Asset

Increase

Decrease

Accounts Payable Dividends

Increase

Cash

Increase

Advertising Expense

Stockholders’ Equity

Increase

Equipment

Increase

Accounts Receivable

Asset

Cash

Asset

Increase

Asset

Transaction

Account Debited (b) (c) Specific Account Effect

Supplies

(a) Basic Type

(a)

Debit

Credit

Debit

(d) Normal Balance

Asset

Service Revenue

Stockholders’ Equity

Cash

Decrease

Accounts Receivable Cash

Decrease

Cash

Increase

Accounts Payable

Liability

Increase

Decrease

Common Stock Cash

Asset

Stockholders’ Equity

(a) Basic Type

Account Credited (b) (c) Specific Account Effect

Debit

Credit

Debit

Credit

(d) Normal Balance

EXERCISE 3-7

(For Instructor Use Only)

EXERCISE 3-7 (Continued) (b) General Journal Trans. 1. 2. 3. 4. 5. 6. 7. 8.

Account Titles Debit Cash ................................................................... 15,000 Common Stock ..........................................

15,000

Equipment ......................................................... 10,000 Cash ...........................................................

10,000

Supplies ............................................................. Accounts Payable .....................................

300

Accounts Receivable ........................................ Service Revenue........................................

3,700

Advertising Expense......................................... Cash ...........................................................

200

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

1,100

Accounts Payable ............................................. Cash ...........................................................

300

Dividends........................................................... Cash ...........................................................

400

Credit

300 3,700 200 1,100 300 400

LO 2,3 BT: AP Difficulty: Medium TOT: 15 AACSB: Analytic AICPA FC: Reporting

EXERCISE 3-8 Oct. 1

3-20

Debits increase assets: debit Cash $30,000. Credits increase stockholders’ equity: credit Common Stock $30,000.

No accounting transaction.

Debits increase assets: debit Equipment $3,800. Credits increase liabilities: credit Accounts Payable $3,800.

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 3-8 (Continued) Oct. 6

Debits increase assets: debit Accounts Receivable $10,800. Credits increase revenues: credit Service Revenue $10,800.

Debits increase assets: debit Cash $140. Credits increase revenues: credit Service Revenue $140.

Debits decrease liabilities: debit Accounts Payable $700. Credits decrease assets: credit Cash $700.

Debits increase expenses: debit Salaries and Wages Expense $3,000. Credits decrease assets: credit Cash $3,000.

LO 2 BT: C Difficulty: Medium TOT: 10 min. AACSB: None AICPA FC: Reporting

EXERCISE 3-9 General Journal Date Oct. 1

Account Titles Debit Cash .................................................................. 30,000 Common Stock..........................................

No entry.

Equipment ......................................................... Accounts Payable .....................................

6 10 27 30

Credit 30,000

3,800 3,800

Accounts Receivable ....................................... 10,800 Service Revenue ....................................... Cash .................................................................. Service Revenue .......................................

140

Accounts Payable............................................. Cash ...........................................................

700

Salaries and Wages Expense .......................... Cash ...........................................................

3,000

10,800 140 700 3,000

LO 3 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

3-21

EXERCISE 3-10 General Journal Date May 4 7 8 9 17 22 29

Account Titles Debit Accounts Payable ............................................. 700 Cash ........................................................... Accounts Receivable ........................................ Service Revenue .......................................

6,800

Supplies............................................................. Accounts Payable .....................................

850

Equipment ......................................................... Cash ...........................................................

1,000

Salaries and Wages Expense........................... Cash ...........................................................

530

Maintenance and Repairs Expense ................. Accounts Payable .....................................

900

Prepaid Insurance............................................. Cash ...........................................................

1,200

Credit 700 6,800 850 1,000 530 900 1,200

LO 3 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

3-22

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 3-11 General Journal Date March 1 3 5 8

12 14 22 24 27 28 30

Account Titles Rent Expense .................................................... Cash ...........................................................

Debit 1,200

Accounts Receivable........................................ Service Revenue .......................................

140

Cash .................................................................. Service Revenue .......................................

Equipment ......................................................... Cash ........................................................... Accounts Payable .....................................

600

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

140

Salaries and Wages Expense .......................... Cash ...........................................................

525

Utilities Expense ............................................... Cash ...........................................................

Cash .................................................................. Notes Payable ...........................................

1,500

Repairs Expense ............................................... Cash ...........................................................

220

Accounts Payable ............................................. Cash ...........................................................

520

Prepaid Insurance ............................................ Cash ...........................................................

1,800

Credit 1,200 140 75 80 520 140 525 72 1,500 220 520 1,800

LO 3 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

3-23

EXERCISE 3-12 Trans. 1. 2. 3. 4. 5. 6. 7.

8. 9. 10. 11. 12. 13. 14.

Account Titles Cash ................................................................... Common Stock ..........................................

Debit 24,000

Cash ................................................................... Notes Payable ............................................

7,000

Equipment ......................................................... Cash ...........................................................

11,000

Rent Expense .................................................... Cash ...........................................................

1,200

Supplies ............................................................. Cash ...........................................................

1,450

Advertising Expense......................................... Accounts Payable .....................................

600

Cash ................................................................... Accounts Receivable ........................................ Service Revenue........................................

2,000 16,000

Dividends........................................................... Cash ...........................................................

400

Utilities Expense ............................................... Cash ...........................................................

2,000

Accounts Payable ............................................. Cash ...........................................................

600

Interest Expense ............................................... Cash ...........................................................

Salaries and Wages Expense ........................... Cash ...........................................................

6,400

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

12,000

Income Tax Expense......................................... Cash ...........................................................

1,500

Credit 24,000 7,000 11,000 1,200 1,450 600

18,000 400 2,000 600 40 6,400 12,000 1,500

LO 3 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

3-24

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 3-13 (a) Oct. 1 10 Bal.

Cash 30,000 Oct. 27 140 30 26,440

700 3,000

Accounts Payable Oct. 27 700 Oct. 3 Bal.

3,800 3,100

Common Stock Oct. 1 Bal.

30,000 30,000

Accounts Receivable Oct. 6 10,800 Bal. 10,800

Oct. 3 Bal.

Equipment 3,800 3,800

Service Revenue Oct. 6 10,800 10 140 Bal. 10,940 Salaries and Wages Expense Oct. 30 3,000 Bal. 3,000

(b)

MCCALL REAL ESTATE AGENCY Trial Balance October 31, 2017 Cash .................................................................... Accounts Receivable ......................................... Equipment .......................................................... Accounts Payable .............................................. Common Stock .................................................. Service Revenue ................................................ Salaries and Wages Expense ............................

Debit $26,440 10,800 3,800

3,000 $44,040

Credit

$ 3,100 30,000 10,940 . $44,040

(Total of debit account balances = Total of credit account balances) LO 4, 5 BT: AP Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

3-25

EXERCISE 3-14 (a) Assets

Accounts Cash

Sept. 1

+$20,000

–3,000

Receivable

Liabilities Accounts

+ Equipment =

Payable

Stockholders’ Equity

+ Common +

Stock

Retained Earnings + Revenues

–1,200

–4,000

–500 $ 11,300 +

–

Exp.

Div.

+$20,000 +$9,000

Issued stock

+$ 6,000

+$18,000

–

+$18,000

Ser. Rev. –$1,200

Salar. Exp.

–4,000 –$500 $18,000 $38,300

$9,000

$ 2,000+

$20,000

$18,000

–

$1,200

–

Dividends

$500

$38,300

(b) General Journal Date Sept. 1 5

8 14 25 30

3-26

Account Titles Cash ............................................................... Common Stock ......................................

Debit 20,000

Equipment ...................................................... Accounts Payable .................................. Cash ........................................................

9,000

Accounts Receivable .................................... Service Revenue ....................................

18,000

Salaries and Wages Expense ....................... Cash ........................................................

1,200

Accounts Payable.......................................... Cash ........................................................

4,000

Dividends ....................................................... Cash ........................................................

500

J1 Credit 20,000 6,000 3,000 18,000 1,200 4,000

Kimmel, Financial Accounting, 8/e, Solutions Manual

500

(For Instructor Use Only)

EXERCISE 3-14 (Continued) (c)

Bal.

Cash 20,000 9/5 9/14 9/25 9/30 11,300

9/8 Bal.

Accounts Receivable 18,000 18,000

9/1

9/5 Bal.

9/25

Common Stock 9/1 Bal.

3,000 1,200 4,000 500

Dividends 500 500

9/30 Bal.

Service Revenue 9/8 Bal.

Equipment 9,000 9,000

20,000 20,000

18,000 18,000

Salaries and Wages Expense 9/14 1,200 Bal. 1,200

Accounts Payable 4,000 9/5 Bal.

6,000 2,000

LO 1, 3, 4 BT: AP Difficulty: Hard TOT:20 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

3-27

EXERCISE 3-15 (a) Date Apr. 1

3-28

General Journal Account Titles and Explanation Debit Cash................................................................... 15,000 Common Stock .......................................... (Issued stock for cash) Supplies............................................................. Accounts Payable ..................................... (Purchased supplies on account)

5,200

Accounts Receivable ........................................ Service Revenue ....................................... (Billed clients for services rendered)

3,400

Cash................................................................... Service Revenue ....................................... (Received cash for revenue earned)

700

Salaries and Wages Expense........................... Cash ........................................................... (Paid salaries)

800

Accounts Payable ............................................. Cash ........................................................... (Paid creditors on account)

3,500

Cash................................................................... Accounts Receivable ................................ (Received cash in payment of account)

800

Cash................................................................... Unearned Service Revenue ...................... (Received cash for future services)

900

Credit 15,000

5,200

3,400

700

800

3,500

800

Kimmel, Financial Accounting, 8/e, Solutions Manual

900

(For Instructor Use Only)

EXERCISE 3-15 (Continued) (b)

SALVADOR’s GARDENING COMPANY, INC. Trial Balance April 30, 2017 Cash .................................................................... Accounts Receivable ......................................... Supplies .............................................................. Accounts Payable .............................................. Unearned Service Revenue ............................... Common Stock .................................................. Service Revenue ................................................ Salaries and Wages Expense ............................

Debit $13,100 2,600 5,200

Credit

$ 1,700 900 15,000 4,100 800 $21,700

$21,700

(Assets and Expenses have debit balances) LO 3, 5 BT: AN Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

3-29

EXERCISE 3-16 (a) Aug. 1 10 31 Bal.

Cash 8,000 Aug. 12 1,700 600 9,100

Accounts Receivable Aug. 25 3,400 Aug. 31 Bal. 2,800

Aug. 12 Bal.

Notes Payable Aug. 12 Bal.

5,000 5,000

Common Stock Aug. 1 Bal.

8,000 8,000

Service Revenue Aug. 10 25 Bal.

1,700 3,400 5,100

1,200

600

Equipment 6,200 6,200

(b)

BAYLEE INC. Trial Balance August 31, 2017 Cash .................................................................... Accounts Receivable ......................................... Equipment .......................................................... Notes Payable .................................................... Common Stock ................................................... Service Revenue ................................................

Debit $ 9,100 2,800 6,200

$18,100

Credit

$ 5,000 8,000 5,100 $18,100

(Liabilities, Common stock, and Revenues have credit balances) LO 4, 5 BT: AP Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Reporting

3-30

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 3-17 (a) Oct. 1

Cash ............................................................... Common Stock ...................................... (Issued stock for cash)

7,000

Cash ............................................................... Service Revenue .................................... (Received cash for services provided)

980

Cash ............................................................... Notes Payable ........................................ (Issued note payable for cash)

8,000

Cash ............................................................... Accounts Receivable ............................ (Received cash in payment of account)

700

Accounts Receivable .................................... Service Revenue .................................... (Billed clients for services provided)

920

Kimmel, Financial Accounting, 8/e, Solutions Manual

7,000

980

8,000

700

(For Instructor Use Only)

920

3-31

EXERCISE 3-17 (Continued) (b)

KRISCOE CO. Trial Balance October 31, 2017 Cash .................................................................... Accounts Receivable ......................................... Supplies .............................................................. Equipment .......................................................... Notes Payable .................................................... Accounts Payable .............................................. Common Stock ................................................... Dividends ............................................................ Service Revenue ................................................ Salaries and Wages Expense ............................ Supplies Expense .............................................. Rent Expense .....................................................

Debit $15,730 1,020 220 3,000

Credit

$ 8,000 1,500 9,000 300 2,700 500 180 250 $21,200

$21,200

(Liabilities, Common stock, and Service revenues have credit balances) LO 3, 5 BT: AN Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Reporting

3-32

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 3-18 (a) Date Oct.

Account Titles Debit Cash .................................................................. 66,000 Common Stock..........................................

No entry

Rent Expense .................................................... Cash ...........................................................

8 10 12 16 21 24 27 31

2,000

Advertising Expense ........................................ Cash ...........................................................

500

Maintenance and Repairs Expense ................. Accounts Payable .....................................

390

Accounts Receivable........................................ Service Revenue .......................................

3,200

Supplies ............................................................ Accounts Payable .....................................

410

4,000 14,000 500 390 3,200 410

Accounts Payable ............................................. 14,000 Cash ........................................................... Utilities Expense ............................................... Cash ...........................................................

148

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

3,200

Salaries and Wages Expense .......................... Cash ...........................................................

5,100

Kimmel, Financial Accounting, 8/e, Solutions Manual

66,000

2,000

Equipment ......................................................... 18,000 Cash ........................................................... Accounts Payable .....................................

Credit

14,000 148 3,200

(For Instructor Use Only)

5,100

3-33

EXERCISE 3-18 (Continued) (b) 10/1 10/27

Bal.

Cash 66,000 10/4 3,200 10/7 10/8 10/21 10/24 10/31 43,452

2,000 4,000 500 14,000 148 5,100

Accounts Receivable 10/12 3,200 10/27 3,200

10/16 Bal.

Supplies 410 410

10/7 Bal.

Equipment 18,000 18,000

10/21

3-34

10/8 Bal.

3,200 3,200

Advertising Expense 500 500

Salaries and Wages Expense 10/31 5,100 Bal. 5,100 Maintenance & Repairs Expense 10/10 390 Bal. 390

Accounts Payable 14,000 10/7 14,000 10/10 390 10/16 410 Bal. 800 Common Stock 10/1 Bal.

Service Revenue 10/12 Bal.

10/4 Bal.

Rent Expense 2,000 2,000

10/24 Bal.

Utilities Expense 148 148

66,000 66,000

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 3-18 (Continued) (c)

BEYERS CORPORATION Trial Balance October 31, 2017 Cash .................................................................... Supplies .............................................................. Equipment .......................................................... Accounts Payable .............................................. Common Stock .................................................. Service Revenue ................................................ Advertising Expense ......................................... Salaries and Wages Expense ............................ Maintenance and Repairs Expense .................. Rent Expense ..................................................... Utilities Expense ................................................

Debit $43,452 410 18,000

Credit

$ 800 66,000 3,200 500 5,100 390 2,000 148 $70,000

$70,000

(Total of debit account balances = Total of credit account balances) LO 3-5 BT: AP Difficulty: Hard TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 3-19 Error 1. 2. 3. 4. 5. 6.

(a) In Balance No Yes Yes No Yes No

(b) Difference $400 — — 300 — 36

LO 5 BT: AN Difficulty: Hard TOT: 12 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

3-35

EXERCISE 3-20 (a)

RAPID DELIVERY SERVICE Trial Balance July 31, 2017 Debit

Credit

Cash ($98,370 – Debit total without Cash $85,946) ..................................................................$12,424 Accounts Receivable ................................................. 13,400 Prepaid Insurance ...................................................... 2,200 Equipment .................................................................. 59,360 Accounts Payable ...................................................... Salaries and Wages Payable ..................................... Notes Payable (due 2020) .......................................... Common Stock .......................................................... Retained Earnings ..................................................... Dividends ................................................................... 700 Service Revenue ........................................................ Salaries and Wages Expense .................................... 7,428 Maintenance and Repairs Expense .......................... 1,958 Insurance Expense .................................................... 900 $98,370

$ 8,400 820 28,450 40,000 5,200 15,500

$98,370

(Liabilities, Common stock, Retained earnings, and Service revenue have credit balances)

3-36

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 3-20 (Continued) (b)

RAPID DELIVERY SERVICE Income Statement For the Month Ended July 31, 2017 Revenues Service revenue ................................................. Expenses Salaries and wages expense ............................ Maintenance and repairs expense ................... Insurance expense ............................................ Total expenses ............................................... Net income ............................................................

$15,500 $7,428 1,958 900 10,286 $ 5,214

RAPID DELIVERY SERVICE Retained Earnings Statement For the Month Ended July 31, 2017 Retained earnings, July 1 ..................................... Add: Net income ................................................. Less: Dividends ................................................... Retained earnings, July 31 ...................................

Kimmel, Financial Accounting, 8/e, Solutions Manual

$ 5,200 5,214 10,414 700 $ 9,714

(For Instructor Use Only)

3-37

EXERCISE 3-20 (Continued) RAPID DELIVERY SERVICE Balance Sheet July 31, 2017 Assets Current assets Cash.................................................................... Accounts receivable .......................................... Prepaid insurance.............................................. Total current assets ....................................... Equipment ............................................................. Total assets ....................................................

$12,424 13,400 2,200 $28,024 59,360 $87,384

Liabilities and Stockholders’ Equity Current liabilities Accounts payable .............................................. Salaries and wages payable ............................. Total current liabilities ................................... Notes payable........................................................ Total liabilities ................................................ Stockholders’ equity Common stock .................................................. Retained earnings ............................................. Total stockholders’ equity ............................. Total liabilities and stockholders’ equity .....

$ 8,400 820 $ 9,220 28,450 37,670 40,000 9,714 49,714 $87,384

[Ending retained earnings = Beginning retained earnings ± Net income or (loss) – dividends] LO 5 BT: AP Difficulty: Hard TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

3-38

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 3-21 1. 2. 3. 4. 5. 6. 7. 8. 9.

Financing activity Operating activity Operating activity Non-cash event Financing activity Non-cash event Operating activity Investing activity Non-cash event

LO 5 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 3-22 1. 2. 3. 4. 5. 6. 7. 8. 9.

Financing activity Financing activity Investing activity Operating activity Non-cash event Operating activity Non-cash event Operating activity Financing activity

LO 5 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

3-39

Kimmel, Financial Accounting, 8/e, Solutions Manual

–400

–200

–1,800

Assets

= Liabilities +

–9,000

+$9,000

$38,700

$500

+$500

$3,400

+$3,400

–200

+$200

$30,000 +

$38,700

$12,000

+$12,000

–

$2,900

–1,800

–200

–$900

–

$400

–$400

Retained Earnings Common Stock + Revenues – Expenses – Dividends +$30,000

Stockholders’ Equity

WONDER TRAVEL AGENCY INC.

Accounts Accounts + Receivable + Supplies + Equipment = Payable +

$34,800 +

+9,000

+3,000

10.

–500

–3,400

–900

Cash +$30,000

(a)

OLUTIONS TO PROBLEMS Salaries and Wages Expense

Dividends

Service Revenue

Advertising Expense

Rent Expense

SOLUTIONS TO PROBLEM 3-3A PROBLEM 3-1A

(For Instructor Use Only)

3-39

PROBLEM 3-1A (Continued) (b) Service Revenue ...................................................... Expenses Salaries and Wages Expense .......................... Rent Expense ................................................... Advertising Expense ........................................ Net Income ................................................

$12,000 $1,800 900 200

2,900 $ 9,100

OR Revenues.................................................................. Less: Expenses....................................................... Net Income ...............................................................

$12,000 2,900 $ 9,100

[Revenues – Expenses = Net Income or (Loss)] LO 1 BT: AP Difficulty: Hard TOT: 45 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

3-41

Cash

+1,400

–200

Kimmel, Financial Accounting, 8/e, Solutions Manual

–500

+1,200

+5,000

–200

–180

Assets

Liabilities

CURRY CONSULTING INC. Stockholders’ Equity

$23,770

$3,000

–1,200

+4,200

$500

+$500

$2,000

+$2,000

$5,000 +

+$5,000

$1,800

+1,800

–500

+$500

$5,600

+4,200

+$1,400

$23,770

$15,000 +

+$15,000

–

$3,430

–180

–2,500

–150

–$600

–

$200

–$200

Accounts Notes Accounts Common Retained Earnings + Receivable + Supplies + Equipment = Payable + Payable + Stock + Revenues – Expenses – Dividends

$18,270 +

–2,500

–150

–600

May 1 +$15,000

Date

(a)

Utilities Expense

Expense

Salaries and Wages

Service Revenue

Dividends

Service Revenue

Advertising Expense

Rent Expense

PROBLEM 3-2A

(For Instructor Use Only)

3-41

PROBLEM 3-2A (Continued) (b)

CURRY CONSULTING INC. Income Statement For the Month Ended May 31, 2017 Revenues Service revenue ($1,400 + $4,200)................ Expenses Salaries and wages expense ........................ Rent expense ................................................. Utilities expense ............................................ Advertising expense ..................................... Total expenses....................................... Net income ............................................................

$5,600 $2,500 600 180 150 3,430 $2,170

[Revenues – Expenses = Net Income or (Loss)]

(c)

CURRY CONSULTING INC. Balance Sheet May 31, 2017 Assets Current assets Cash ............................................................... Accounts receivable ..................................... Supplies......................................................... Total current assets .............................. Equipment ..................................................... Total assets............................................

$18,270 3,000 500 $21,770 2,000 $23,770

Liabilities and Stockholders’ Equity Current liabilities Notes payable ............................................... $ 5,000 Accounts payable ......................................... 1,800 Total current liabilities .......................... Stockholders’ equity Common stock .............................................. 15,000 Retained earnings ($0 + $2,170 – $200) ....... 1,970 Total liabilities and stockholders’ equity..................................................

$ 6,800 16,970 $23,770

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

3-43

Kimmel, Financial Accounting, 8/e, Solutions Manual

–700

–2,450

–700

+5,000

$7,150 +

+3,600

$500

$19,850

$3,200 +

+1,800

–1,100

+1,100

$2,500 +

$4,000 +

–2,700

Assets

Liabilities

Stockholders’ Equity

BINDY CRAWFORD INC.

$9,000

+4,000

$5,000

+380 $5,000 + $5,180

+$5,000

+3,300

–2,700

$4,200

$6,200

$19,850

+ $1,600

$5,400 –

+$5,400

–380 $2,830 –

$700

Utilities Expense

Dividends

Advertising Expense

–350 –$700

Rent Expense

Salaries and Wages Expense

Service Revenue

–700

–$1,400

Accounts Notes Accounts Common Retained Cash + Receivable + Supplies + Equipment = Payable + Payable + Stock + Earnings + Revenues– Expenses – Dividends

July 31 Bal. Aug. 1

(a)

PROBLEM 3-3A

(For Instructor Use Only)

3-43

PROBLEM 3-3A (Continued) (b)

BINDY CRAWFORD INC. Income Statement For the Month Ended August 31, 2017 Revenues Service revenue................................................ Expenses Salaries and wages expense ........................... Rent expense .................................................... Utilities expense ............................................... Advertising expense ........................................ Total expenses.......................................... Net income ...............................................................

$5,400 $1,400 700 380 350 2,830 $2,570

BINDY CRAWFORD INC. Retained Earnings Statement For the Month Ended August 31, 2017 Retained earnings, August 1 .................................................... Add: Net income...................................................................... Less: Dividends ........................................................................ Retained earnings, August 31...................................................

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

$1,600 2,570 4,170 700 $3,470

3-45

PROBLEM 3-3A (Continued) BINDY CRAWFORD INC. Balance Sheet August 31, 2017 Assets Current assets Cash ................................................................ Accounts receivable ...................................... Supplies .......................................................... Total current assets ................................ Equipment....................................................... Total assets .............................................

$7,150 3,200 500 $10,850 9,000 $19,850

Liabilities and Stockholders’ Equity Current liabilities Notes payable ................................................. Accounts payable........................................... Total current liabilities............................ Stockholders’ equity Common stock ............................................... Retained earnings .......................................... Total liabilities and stockholders’ equity ...................................................

$5,000 5,180 $10,180 6,200 3,470

9,670 $19,850

[Ending retained earnings = Beginning retained earnings ± Net income or (loss) – Dividends] LO 1, 2 BT: AP Difficulty: Hard TOT: 55 min. AACSB: Analytic AICPA FC: Reporting

3-46

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 3-4A

Date Mar. 1

Account Titles and Explanation Cash ................................................................. Common Stock......................................... (Issued stock for cash)

Debit 50,000

Land.................................................................. Buildings .......................................................... Equipment ........................................................ Cash .......................................................... (Purchased Snead’s Golf Land)

23,000 9,000 6,000

Advertising Expense ....................................... Cash .......................................................... (Paid for advertising)

1,200

Prepaid Insurance ........................................... Cash .......................................................... (Paid for one-year insurance policy)

2,400

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

5,500

Cash ................................................................. Service Revenue ...................................... (Received cash for revenue earned)

1,600

Cash (100 X $25) .............................................. Unearned Service Revenue ..................... (Received cash for coupon books sold)

2,500

Dividends ......................................................... Cash .......................................................... (Payment of cash dividend)

500

Kimmel, Financial Accounting, 8/e, Solutions Manual

Credit 50,000

38,000

1,200

2,400

5,500

1,600

2,500

(For Instructor Use Only)

500

3-47

PROBLEM 3-4A (Continued) Date Mar. 30

Account Titles and Explanation Salaries and Wages Expense......................... Cash ......................................................... (Paid salaries expense)

Debit 800

Accounts Payable ........................................... Cash ......................................................... (Paid creditor on account)

5,500

Cash................................................................. Service Revenue ..................................... (Received cash for revenue earned)

900

Credit 800

5,500

900

LO 3 BT: AP Difficulty: Medium TOT: 25 min. AACSB: Analytic AICPA FC: Reporting

3-48

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 3-5A (a) Date Apr. 1

Account Titles and Explanation Cash ................................................................. Common Stock ........................................ (Issued shares of stock for cash)

Debit 118,000 0

No entry—not a transaction.

Rent Expense .................................................. Cash .......................................................... (Paid monthly office rent)

900

Supplies ........................................................... Accounts Payable .................................... (Purchased supplies on account from Burmingham Company)

1,300

Accounts Receivable ...................................... Service Revenue ...................................... (Billed clients for services rendered)

1,900

Cash ................................................................. Unearned Service Revenue ..................... (Received cash advance for future service)

700

Cash ................................................................. Service Revenue ...................................... (Received cash for service performed)

2,800

Salaries and Wages Expense ......................... Cash .......................................................... (Paid monthly salary)

1,500

Accounts Payable ........................................... Cash .......................................................... (Paid Burmingham Company on account)

300

Kimmel, Financial Accounting, 8/e, Solutions Manual

Credit 18,000

900

1,300

1,900

700

2,800

1,500

300

(For Instructor Use Only)

3-49

PROBLEM 3-5A (Continued) (b) 4/1 4/11 4/20 Bal.

Cash 18,000 4/2 700 4/30 2,800 4/30 18,800

900 1,500 300

4/10 Bal.

Accounts Receivable 1,900 1,900

4/3 Bal.

Supplies 1,300 1,300

4/30

Accounts Payable 300 4/3 Bal.

Salaries and Wages Expense 4/30 1,500 Bal. 1,500

4/2 Bal.

Rent Expense 900 900

1,300 1,000

Unearned Service Revenue 4/11 700 Bal. 700

3-50

Common Stock 4/1 Bal.

18,000 18,000

Service Revenue 4/10 4/20 Bal.

1,900 2,800 4,700

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 3-5A (Continued) (c)

AYALA ARCHITECTS INC. Trial Balance April 30, 2017 Cash .................................................................... Accounts Receivable ......................................... Supplies .............................................................. Accounts Payable .............................................. Unearned Service Revenue ............................... Common Stock .................................................. Service Revenue ................................................ Salaries and Wages Expense ............................ Rent Expense .....................................................

Debit $18,800 1,900 1,300

Credit

$ 1,000 700 18,000 4,700 1,500 900 $24,400

$24,400

(Assets and Expenses have debit balances) LO 3-5 BT: AP Difficulty: Hard TOT: 35 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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3-51

PROBLEM 3-6A

(a) & (c) Cash 10/1 Bal. 19,200 10/15 10/5 1,300 10/20 10/17 600 10/29 10/31 Bal. 17,300

1,200 1,900 300 400

Retained Earnings 10/1 Bal. 11,000 Bal. 11,000

Accounts Receivable 10/1 Bal. 2,600 10/5 1,300 10/10 5,100 Bal. 6,400

10/1 Bal. Bal.

Supplies 2,100 2,100

10/1 Bal. Bal.

Equipment 8,000 8,000

10/20

Accounts Payable 1,900 10/1 Bal. Bal.

Common Stock 10/1 Bal. 15,000 Bal. 15,000

10/29 Bal.

Dividends 300 300 Service Revenue 10/10 10/17 Bal.

5,100 600 5,700

Salaries and Wages Expense 10/15 1,200 Bal. 1,200 4,800 2,900 10/31 Bal.

Utilities Expense 400 400

Unearned Service Revenue 10/1 Bal. 1,100 Bal. 1,100

3-52

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 3-6A (Continued) (b) Date Oct. 5

Account Titles and Explanation Cash ................................................................. Accounts Receivable ............................... (Received collections from customers on account)

Debit 1,300

Accounts Receivable ...................................... Service Revenue ...................................... (Billed customers for services performed)

5,100

Salaries and Wages Expense ......................... Cash .......................................................... (Paid employee salaries)

1,200

Cash ................................................................. Service Revenue ...................................... (Performed services for customers)

600

Accounts Payable............................................ Cash .......................................................... (Paid creditors on account)

1,900

Dividends ......................................................... Cash .......................................................... (Payment of cash dividend)

300

Utilities Expense .............................................. Cash .......................................................... (Paid utilities)

400

Kimmel, Financial Accounting, 8/e, Solutions Manual

Credit 1,300

5,100

1,200

600

1,900

300

(For Instructor Use Only)

400

3-53

PROBLEM 3-6A (Continued) (d)

LACEY COMPANY Trial Balance October 31, 2017 Cash .................................................................... Accounts Receivable ......................................... Supplies .............................................................. Equipment .......................................................... Accounts Payable .............................................. Unearned Service Revenue ............................... Common Stock ................................................... Retained Earnings.............................................. Dividends ............................................................ Service Revenue ................................................ Salaries and Wages Expense ............................ Utilities Expense ................................................

Debit $ 17,300 6,400 2,100 8,000

Credit

$ 2,900 1,100 15,000 11,000 300 5,700 1,200 400 $35,700

$35,700

(Liabilities, Common stock, Retained earnings, and Service revenue have credit balances) LO 3-5 BT: AP Difficulty: Hard TOT: 45 min. AACSB: Analytic AICPA FC: Reporting

3-54

Kimmel, Financial Accounting, 8/e, Solutions Manual

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PROBLEM 3-7A

WASHBURN CO. Trial Balance June 30, 2017 Cash ($3,090 – $780 + $870) .............................. Accounts Receivable* ....................................... Supplies ($800 – $340) ....................................... Equipment ($3,000 + $340) ................................ Accounts Payable ($3,686 – $206 – $260) ........ Unearned Service Revenue ............................... Common Stock .................................................. Dividends ($800 + $600) .................................... Service Revenue ................................................ Salaries and Wages Expense ($3,600 + $700 – $600)..................................... Utilities Expense ................................................

Debit $ 3,180 3,910 460 3,340

Credit

$ 3,220 1,200 9,000 1,400 3,480 3,700 910 $16,900

$16,900

*$3,190 + $780 – $870 – $90 + $900 (Each journal entry must balance and reflect the actual amount of the transaction) LO 5 BT: AN Difficulty: Hard TOT: 35 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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3-55

PROBLEM 3-8A

(a) & (c) 3/1 Bal. 3/9 3/20 3/31 3/31 Bal.

3/31 Bal.

3/1 Bal. Bal.

3-56

2,000 10,900 500 5,000 3,800

Accounts Receivable 750 750

3/1 Bal. Bal.

3/10

Cash 16,000 3/2 9,900 3/10 8,300 3/12 750 3/20 20,000 3/31 32,750

Land 38,000 38,000 Buildings 22,000 22,000 Equipment 16,000 16,000 Accounts Payable 10,900 3/1 Bal. 12,000 3/2 8,000 Bal. 9,100

Common Stock 3/1 Bal. Bal.

80,000 80,000

Service Revenue 3/9 3/20 3/31 Bal.

9,900 8,300 20,000 38,200

Sales Revenue 3/31 Bal.

1,500 1,500

3/12 Bal.

Advertising Expense 500 500

3/2 3/20 Bal.

Rent Expense 10,000 5,000 15,000

Salaries and Wages Expense 3/31 3,800 Bal. 3,800

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 3-8A (Continued) (b) Date Mar. 2

Account Titles and Explanation Rent Expense .................................................. Accounts Payable .................................... Cash ......................................................... (Rented films for cash and on account)

Debit 10,000

8,000 2,000

No entry—not a transaction.

Cash ................................................................. Service Revenue ...................................... (Received cash for admissions)

9,900

Accounts Payable ($8,000 + $2,900) .............. Cash ......................................................... (Paid creditors on account)

10,900

9,900

10,900

No entry—not a transaction.

Advertising Expense ....................................... Cash ......................................................... (Paid advertising expenses)

500

Cash ................................................................. Service Revenue ...................................... (Received cash for admissions)

8,300

Rent Expense .................................................. Cash ......................................................... (Paid film rental)

5,000

Salaries and Wages Expense ......................... Cash ......................................................... (Paid salaries expense)

3,800

Kimmel, Financial Accounting, 8/e, Solutions Manual

Credit

500

8,300

5,000

(For Instructor Use Only)

3,800

3-57

PROBLEM 3-8A (Continued) Date Mar. 31

(d)

Account Titles and Explanation Debit Cash .................................................................. 750 Accounts Receivable ....................................... 750 Sales Revenue (15% X $10,000) ................. (Received cash and balance on account for concessions)

Credit

1,500

Cash .................................................................. 20,000 Service Revenue ....................................... (Received cash for admissions)

20,000

TRIQUEL THEATER INC. Trial Balance March 31, 2017 Cash .................................................................... Accounts Receivable ......................................... Land .................................................................... Buildings ............................................................ Equipment .......................................................... Accounts Payable .............................................. Common Stock ................................................... Service Revenue ................................................ Sales Revenue .................................................... Advertising Expense.......................................... Rent Expense ..................................................... Salaries and Wages Expense ............................

Debit $ 32,750 750 38,000 22,000 16,000

Credit

500 15,000 3,800 $128,800

9,100 80,000 38,200 1,500

$128,800

(Assets and Expenses have debit balances) LO 3-5 BT: AP Difficulty: Hard TOT: 45 min. AACSB: Analytic AICPA FC: Reporting

3-58

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 3-9A (a) & (c) 7/31 8/3 8/5 8/7 8/18 8/26 Bal. 7/31 8/7 8/24 Bal.

Cash 4,000 8/6 1,200 8/12 1,300 8/14 3,000 8/20 3,500 8/31 2,000 6,225

2,700 400 4,675 500 500

Retained Earnings 7/31 Bal. Dividends 500 500

8/20 Bal.

Accounts Receivable 1,500 8/3 1,200 3,500 8/18 3,500 1,000 1,300

3,400 3,400

Service Revenue 8/7 8/24 Bal.

6,500 1,000 7,500

7/31 Bal.

Supplies 500 500

Salaries and Wages Expense 8/14 3,500 Bal. 3,500

7/31 8/12 Bal.

Equipment 5,000 1,200 6,200

8/14 Bal.

Rent Expense 900 900

8/14 Bal.

Advertising Expense 275 275

8/28 Bal.

Utilities Expense 275 275

8/31 Bal.

Income Tax Expense 500 500

8/6

Accounts Payable 2,700 7/31 8/12 8/28 Bal. Notes Payable 8/26 Bal.

2,000 2,000

4,100 800 275 2,475

3,500 1,300 4,800

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

3-59

PROBLEM 3-9A (Continued) (b) Date Aug. 3 5 6 7

18 20 24 26

Cash ................................................................... Common Stock ..........................................

1,300

Accounts Payable ............................................. Cash ...........................................................

2,700

Cash ................................................................... Accounts Receivable ........................................ Service Revenue ........................................

3,000 3,500

Equipment ......................................................... Cash ........................................................... Accounts Payable......................................

1,200

Salaries and Wages Expense ........................... Rent Expense .................................................... Advertising Expense......................................... Cash ...........................................................

3,500 900 275

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

3,500

Dividends ........................................................... Cash ...........................................................

500

Accounts Receivable ........................................ Service Revenue ........................................

1,000

Cash ................................................................... Notes Payable ............................................

2,000

1,200

2,700

6,500 400 800

4,675 3,500 500 1,000 2,000

No entry

Utilities Expense ............................................... Accounts Payable......................................

275

Income Tax Expense......................................... Cash ...........................................................

500

Credit

1,300

3-60

Account Titles Debit Cash ................................................................... 1,200 Accounts Receivable ................................

Kimmel, Financial Accounting, 8/e, Solutions Manual

275 500 (For Instructor Use Only)

PROBLEM 3-9A (Continued) (d)

HILLS LEGAL SERVICES INC. Trial Balance August 31, 2017 Cash .................................................................... Accounts Receivable ......................................... Supplies .............................................................. Equipment .......................................................... Accounts Payable .............................................. Notes Payable .................................................... Common Stock .................................................. Retained Earnings ............................................. Dividends ........................................................... Service Revenue ................................................ Advertising Expense ......................................... Salaries and Wages Expense ............................ Rent Expense ..................................................... Utilities Expense ................................................ Income Tax Expense .........................................

Debit $ 6,225 1,300 500 6,200

Credit

$ 2,475 2,000 4,800 3,400 500 7,500 275 3,500 900 275 500 $20,175

$20,175

(Assets, Dividends, and Expenses have debit balances) LO 3-5 BT: AP Difficulty: Hard TOT: 55 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

3-61

PROBLEM 3-10A (a) & (c) Apr. 30 May 7 8 15 22 29

Bal.

Cash 5,000 1,500 May 1 1,200 4 800 14 1,000 21 1,700 25 31 31 31 5,100

Apr. 30 Bal.

Supplies 500 500

Apr. 30 Bal.

Equipment 24,000 24,000

Accounts Payable Apr. 30 May 4 1,100 May 22 May 21 1,000 25 Bal. Notes Payable Apr. 30 Bal.

Common Stock Apr. 30 1,000 1,100 1,200 1,000 400 50 1,200 150

2,100 700 500 1,200 10,000

5,000

Retained Earnings Apr. 30 11,400 Bal. Service Revenue May 8 15 15 22 29 29 Bal.

11,400

1,200 800 700 1,000 1,700 600 6,000

Salaries and Wages Expense May 14 1,200 31 1,200 Bal. 2,400

May 1 Bal.

Rent Expense 1,000 1,000

10,000

Unearned Service Revenue Apr. 30 1,000 May 15 700 May 7 1,500 29 600 Bal. 1,200

3-62

Bal.

5,000

Supplies Expense May 22 700 Bal. 700 Advertising Expense May 25 500 Bal. 500

Kimmel, Financial Accounting, 8/e, Solutions Manual

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PROBLEM 3-10A (Continued) Utilities Expense May 25 400 Bal. 400 Interest Expense May 31 50 Bal. 50

Income Tax Expense May 31 150 Bal. 150

Kimmel, Financial Accounting, 8/e, Solutions Manual

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3-63

PROBLEM 3-10A (Continued) (b) Date May 1 4 7 8 14 15 15 21 22 22

3-64

Account Titles Debit Rent Expense .................................................... 1,000 Cash ........................................................... Accounts Payable ............................................. Cash ...........................................................

1,100

Cash ................................................................... Unearned Service Revenue ......................

1,500

Cash ................................................................... Service Revenue ........................................

1,200

Salaries and Wages Expense ........................... Cash ...........................................................

1,200

Cash ................................................................... Service Revenue ........................................

800

Unearned Service Revenue .............................. Service Revenue ........................................

700

Accounts Payable ............................................. Cash ...........................................................

1,000

Cash ................................................................... Service Revenue ........................................

1,000

Supplies Expense ............................................. Accounts Payable......................................

700

Credit 1,000 1,100 1,500 1,200 1,200 800 700 1,000

Kimmel, Financial Accounting, 8/e, Solutions Manual

1,000 700

(For Instructor Use Only)

PROBLEM 3-10A (Continued) May 25 25 29 29 31 31 31

Advertising Expense ......................................... Accounts Payable ......................................

500

Utilities Expense ................................................ Cash ............................................................

400

Cash .................................................................... Service Revenue.........................................

1,700

Unearned Service Revenue ............................... Service Revenue.........................................

600

Interest Expense ................................................ Cash ............................................................

Salaries and Wages Expense ............................ Cash ............................................................

1,200

Income Tax Expense ......................................... Cash ............................................................

150

Kimmel, Financial Accounting, 8/e, Solutions Manual

500 400 1,700 600 50 1,200

(For Instructor Use Only)

150

3-65

PROBLEM 3-10A (Continued) (d)

PAMPER ME SALON INC. Trial Balance May 31, 2017 Cash .................................................................... Supplies .............................................................. Equipment .......................................................... Accounts payable .............................................. Notes payable..................................................... Unearned service revenue................................. Common stock ................................................... Retained earnings .............................................. Service revenue ................................................. Salaries and wages expense ............................. Rent expense...................................................... Supplies expense ............................................... Advertising expense .......................................... Utilities expense ................................................. Interest expense ................................................. Income tax expense ........................................... Totals ..............................................................

Debit $ 5,100 500 24,000

Credit

$ 1,200 10,000 1,200 5,000 11,400 6,000 2,400 1,000 700 500 400 50 150 $34,800

$34,800

(Assets and Expenses have debit balances) LO 3-5 BT: AP Difficulty: Hard TOT: 55 min. AACSB: Analytic AICPA FC: Reporting

3-66

Kimmel, Financial Accounting, 8/e, Solutions Manual

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PROBLEM 3-11A

Error 1.

(a) In Balance No

(b) Difference $600

Yes

None

N/A

Yes

None

N/A

$680

Credit

Yes

None

N/A

Yes

None

N/A

$900

Debit

Yes

None

N/A

LO 5 BT: AN Difficulty: Hard TOT: 35 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

3-67

CT 3-1

FINANCIAL REPORTING PROBLEM

(a) Account Common Stock Accounts Payable Accounts Receivable Selling, General, and Administrative Expenses Inventories Net Property, Plant, and Equipment Net Sales

Increase Side Right/Credit Right/Credit Left/Debit

Decrease Side Left/Debit Left/Debit Right/Credit

Normal Balance Credit Credit Debit

Left/Debit Left/Debit

Right/Credit Right/Credit

Debit Debit

Left/Debit Right/Credit

Right/Credit Left/Debit

Debit Credit

(b) 1. 2. 3.

Cash is increased. Cash is decreased. Cash is decreased.

Cash is decreased or Interest Payable is increased. Cash is decreased or Notes (or Mortgage) Payable is increased.

LO 2 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

3-68

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 3-2

(a) 1. 2. 3. 4. 5.

COMPARATIVE ANALYSIS PROBLEM

Columbia Sportswear Accounts Receivable debit Net Property, Plant, and Equipment debit Accounts Payable credit Retained Earnings credit Net Sales credit

1. 2. 3. 4. 5.

VF Corporation Inventories Income Taxes Accrued Liabilities Common Stock Interest Expense

debit debit credit credit debit

(b) The following other accounts are ordinarily involved: 1.

Increase in Accounts Receivable: Service Revenue or Sales Revenue is increased (credited).

Decrease in Notes Payable: Cash is decreased (credited).

Increase in Equipment: Notes Payable is increased (credited) or Cash is decreased (credited).

Increase in Interest Revenue: Cash or Interest Receivable is increased (debited).

LO 2 BT: AP Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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3-69

CT 3-3

(a) 1. 2. 3.

COMPARATIVE ANALYSIS PROBLEM

Amazon Interest Expense: Cash and Cash Equivalents: Accounts Payable:

debit debit

1. 2.

Wal-Mart Product Revenues: Inventories:

credit

Cost of Sales:

credit debit debit

(b) The following other accounts are ordinarily involved: 1.

Increase in Accounts Receivable: Service Revenue or Sales Revenue is increased (credited).

Increase in Interest Expense: Cash is decreased (credited).

Decrease in Salaries and Wages Payable: Cash is decreased (credited).

Increase in Service Revenue: Cash or Accounts Receivable is increased (debited).

LO 2 BT: AP Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Reporting

3-70

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 3-4

INTERPRETING FINANCIAL STATEMENTS

CHIEFTAIN INTERNATIONAL, INC. (a) One of the primary advantages to Chieftain of having no long-term debt is that there is room for growth through the use of debt and the company’s financial risk is greatly reduced. Another advantage is that profitability is enhanced when there is no interest expense. A possible disadvantage is that the company could expand more and earn a greater return if the growth had been financed with long-term debt. (b) An advantage to Chieftain from having a large cash balance is that cash is available to finance such things as the drilling of new wells and the investment in new technology. New opportunities may be seized and expansions may be undertaken at the time most advantageous for the business. A disadvantage is that cash earns little or no interest. A higher rate of return might be generated on excess cash by some other type of investment. (c) Accounts payable, as purchases on credit, represent interest-free loans. Business enterprises don’t pay cash unless the supplier requires immediate payment. Nearly all exchange transactions are conducted on 30-day or more credit. LO 2 BT: AN Difficulty: Hard TOT: 15 min. AACSB: Reflective Thinking AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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3-71

CT 3-5

REAL-WORLD FOCUS

(a) CPAs work in public accounting, business and industry, government, and education. (b) A CPA needs: strong leadership, communication skills, tech know-how, business savvy. (c) Salary ranges are: $51,500 – $74,250 during the first three years for a CPA at a large firm; $189,750 – $411,000 for Chief Financial Officer at a large corporation. LO 2 BT: AN Difficulty: Hard TOT: 20 min. AACSB: Analytic and Technology AICPA PC: Communication

3-72

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 3-6

RESEARCH CASE

(a) The reason the Green Bay Packers’ issue an annual report is because they are a publicly owned, nonprofit company. They issue the report to the more than 100,000 shareholders who hold shares. None of the other teams are publicly owned, so they have no obligation to make their financial information available except to their small group of owners. (b) At the time that the article was written the owners of the NFL teams and the players’ labor union were negotiating a new contract. Knowing how profitable the NFL teams are would be useful information for the players to know so that they would have a better sense of how much the teams could afford to pay. The Packers are obviously a “small market” team, they are not necessarily representative of teams in general. However, the Packers’ annual report does give the players some sense of the profitability of other teams. (c) Since some of the cost of the stadium that the Packers play in is covered by taxpayers, the county and state government has an interest in the team’s finances. (d) The Packers’ revenues increased during recent years. However, because the cost of players’ salaries increased at a faster rate than revenues, the Packers’ operating profit actually declined. LO 2 BT: E Difficulty: Hard TOT: 25 min. AACSB: Analytic, Technology and Reflective Thinking AICPA FC: Reporting AICPA BB: Critical Thinking

Kimmel, Financial Accounting, 8/e, Solutions Manual

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3-73

CT 3-7

DECISION MAKING ACROSS THE ORGANIZATION

(a) May 1

Cash ............................................................... Common Stock ......................................

15,000 15,000

Correct.

Cash ............................................................... Unearned Service Revenue ..................

500

Supplies ......................................................... Accounts Payable..................................

1,500

Equipment ..................................................... Cash .......................................................

800

Dividends ....................................................... Cash .......................................................

400

Cash ............................................................... Service Revenue ....................................

154

Maintenance and Repairs Expense ............. Accounts Payable..................................

9 14 15 20 31

500 1,500 800 400 154 75

(b) The error in the entries of May 14 and May 20 would prevent the trial balance from balancing. (c) Net income as reported ......................................... Add: 5/9, Supplies expense................................. $1,500 5/15, Salaries and wages expense (dividends paid) ......................................................... 400 Less: 5/7, Unearned service revenue .................. Correct net income ................................................ (d) Cash as reported.................................................... Add: 5/9, Purchase on account ........................... 5/20, Transposition error ............................

$ 4,500 1,900 6,400 500 $ 5,900 $12,475

$1,500 9

1,509 $13,984

LO 3, 5 BT: AN Difficulty: Hard TOT: 30 min. AACSB: Reflective Thinking and Communication AICPA PC: Interaction, Leadership and Communication 3-74

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 3-8

COMMUNICATION ACTIVITY

To:

Accounting Instructor

From:

Accounting Student

Re:

Steps in Recording Process

In the first transaction, bills totaling $6,000 were sent to customers for services provided. Therefore, the asset Accounts Receivable is increased $6,000 and the revenue Service Revenue is increased $6,000. Debits increase assets and credits increase revenues, so the journal entry is: Accounts Receivable ............................................................ Service Revenue ............................................................ (Billed customers for services provided)

6,000 6,000

The $6,000 amount is then posted to the debit side of the general ledger account Accounts Receivable and to the credit side of the general ledger account Service Revenue. In the second transaction, $2,000 was paid in salaries to employees. Therefore, the expense Salaries and Wages Expense is increased $2,000 and the asset Cash is decreased $2,000. Debits increase expenses and credits decrease assets, so the journal entry is: Salaries and Wages Expense ............................................... Cash................................................................................ (Salaries paid)

2,000 2,000

The $2,000 amount is then posted to the debit side of the general ledger account Salaries and Wages Expense and to the credit side of the general ledger account Cash. LO 3 BT: S Difficulty: Hard TOT: 25 min. AACSB: Communication AICPA PC: Communication

Kimmel, Financial Accounting, 8/e, Solutions Manual

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3-75

CT 3-9

ETHICS CASE

(a) The stakeholders in this situation are: • • •

Vanessa Jones, assistant chief accountant. Users of the company’s financial statements. IBT Company.

(b) By adding $1,000 to the Equipment account, that account total is intentionally misstated. By not locating the error causing the imbalance, some other account may also be misstated by $1,000. If the amount of $1,000 is determined to be immaterial, and the intent is not to commit fraud (cover up an embezzlement or other misappropriation of assets), Vanessa’s action might not be considered unethical in the preparation of interim financial statements. However, if Vanessa is violating a company accounting policy by her action, then she is acting unethically. (c) Vanessa’s alternatives are: 1.

Miss the deadline but find the error causing the imbalance.

Tell her supervisor of the imbalance and suffer the consequences.

Do as she did and locate the error later, making the adjustment in the next quarter.

LO 5 BT: E Difficulty: Hard TOT: 20 min. AACSB: Etics AICPA PC: Personal Demeanor

3-76

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 3-10

ETHICS CASE

(a) Employees in the rail unit accelerated revenue in each of the fourth quarters from 2000 to 2003. That is, revenue that should have been reported in the first quarter of a year was instead reported in the fourth quarter of the previous year. (b) One possible motivation for engaging in this activity is that bonuses are frequently based on annual results. If it appeared that the rail unit was not going to meet the performance level required for bonuses, the employees may have shifted the revenue recognition forward on these sales in order to boost annual results to meet performance targets. (c) The employees were fired. In addition, the matter was being investigated by the Securities and Exchange Commission (SEC). (d) To restate financial statements means to actually issue new financial statements to replace those that were previously issued. We are told that, for example, 2002 revenue was overstated by $158 million, and net income was overstated by $22 million. While these numbers seem large, to GE they are immaterial. $22 million was less than 0.2% of the company’s net income. As a percentage of GE’s total results the errors are not large enough to change investors’ evaluation of the company. LO 3, 4 BT: E Difficulty: Hard TOT: 20 min. AACSB: Ethics AICPA PC: Personal Demeanor

Kimmel, Financial Accounting, 8/e, Solutions Manual

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3-77

CT 3-11

ALL ABOUT YOU

We address the issue of contingent liabilities in greater detail in Chapter 10. Our primary interest in this exercise is to engage students in a discussion regarding the general nature of the financial statement elements (assets, liabilities, equity, revenues and expenses). (a)

By taking out the bank loan your friend has incurred a liability. You do not have a liability unless your friend defaults, or unless it becomes clear that he will default. The loan application may, however, require you to disclose any guarantees that you have signed, since they represent potential liabilities.

(b) Accounting standards have specific requirements regarding accounting for situations where there is uncertainty regarding whether a liability has been incurred. Those standards require an evaluation of the probability of an amount being owed. Without going into detail regarding those standards, the basic idea is that if it is probable that you will owe money, then you should accrue a liability. If it is not probable, but it is possible that you will owe money, then you should disclose facts regarding the situation. The most important point is that this event has the potential to materially impact your finances, and therefore you have a responsibility to disclose it to the bank in some form. (c)

Losing your job would not create a financial liability, although it would most certainly reduce your revenues. You are obviously concerned that you might lose your job, but you don’t have specific information that would suggest that it will happen. Therefore, you probably don’t have an obligation to disclose this information to the bank. However, unless you are relatively certain that you would be able to find suitable employment relatively quickly, you might want to wait until your job situation has stabilized before pursuing a loan of this size.

LO N/A BT: S Difficulty: Hard TOT: 30 min. AACSB: Communication and Reflective Thinking AICPA CC: Critical Thinking AICPA PC: Communication

3-78

Kimmel, Financial Accounting, 8/e, Solutions Manual

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IFRS 3-1

Account Other operating income and expense Cash and cash equivalents Trade accounts payable Cost of net financial debt

CONCEPTS AND APPLICATION

Financial Statement Position in Financial Statement Consolidated Income After gross profit and before Statement operating profit Consolidated Current assets Balance Sheet Consolidated Current liabilities Balance Sheet Consolidated Income After operating profit and before Statement profit from continuing operations before taxes.

LO 2 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Diversity and Communication AICPA FC: Reporting AICPA PC: Communication

Kimmel, Financial Accounting, 8/e, Solutions Manual

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3-79

CHAPTER 4 Accrual Accounting Concepts Learning Objectives 1. 2. 3. 4. *5.

Explain the accrual basis of accounting and the reasons for adjusting entries. Prepare adjusting entries for deferrals. Prepare adjusting entries for accruals. Prepare an adjusted trial balance and closing entries. Describe the purpose and the basic form of a worksheet.

Summary of Questions by Learning Objectives and Bloom’s Taxonomy Item LO

Item

LO BT Questions

16.

Item

23.

30.

10.

17.

24.

31.

11.

18.

25.

32.

12.

19.

2, 3

26.

33.

13.

20.

2, 3

27.

34.

14.

21.

28.

35.

15.

22.

29.

36.

10.

13.

Brief Exercises 1.

2. 3.

11.

14.

12.

15.

4a.

4b.

Do It! Exercises 1.

Exercises 1.

1, 2, 3

11.

2,3

16.

2, 3

21.

2 ,3 , 4

1, 2, 3

12.

2,3

17.

2, 3

22.

23.

1, 2, 3

13.

1, 2, 3

18.

2, 3

1, 2, 3

2,3

14.

2,3

19.

10.

2,3

15.

1, 2, 3

20.

2, 3, 4

Problems: Set A 1.

1, 2, 3

2, 3, 4

2, 3

2, 3, 4

2, 3

Kimmel, Financial Accounting, 8/e, Solutions Manual

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4-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

4-2

Description

Difficulty Level

Time Allotted (min.)

Record transactions on accrual basis; convert revenue to cash receipts.

Simple

20–30

Prepare adjusting entries, post to ledger accounts, and prepare adjusted trial balance.

Simple

40–50

Prepare adjusting entries, adjusted trial balance, and financial statements.

Simple

50–60

Prepare adjusting entries and financial statements; identify accounts to be closed.

Moderate

40–50

Prepare adjusting entries.

Moderate

30–40

Prepare adjusting entries and a corrected income statement.

Moderate

30–40

Journalize transactions and follow through accounting cycle to preparation of financial statements.

Moderate

60–70

Kimmel, Financial Accounting, 8/e, Solutions Manual

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ANSWERS TO QUESTIONS 1.

(a) Under the periodicity assumption, an accountant is required to determine the effect of each accounting transaction on a specific accounting period. (b) An accounting time period that is one year in length is referred to as a fiscal year.

LO 1 BT: C Diff: E TOT: 2 min. AACSB: None AICPA FC: Measurement and Reporting

The two generally accepted accounting principles that pertain to adjusting the accounts are: The revenue recognition principle, which states that revenue should be recognized in the time period in which the performance obligation is satisfied. The expense recognition principle, which states that expenses be matched with revenues in the period when the company makes efforts to generate those revenues.

LO 1 BT: K Diff: E TOT: 2 min. AACSB: None AICPA FC: Measurement

The law firm should recognize the revenue in April. The revenue recognition principle states that revenue should be recognized in the accounting period in which the performance obligation is satisfied.

LO 1 BT: C Diff: M TOT: 2 min. AACSB: None AICPA FC: Measurement

Expenses of $4,700 should be deducted from the revenues in April. Under the expense recognition principle efforts (expenses) should be matched with results (revenues).

LO 1 BT: AP Diff: M TOT: 2 min. AACSB: Analytic AICPA FC: Measurement

No, adjusting entries are required by the revenue and expense recognition principles.

LO 1 BT: C Diff: E TOT: 1 min. AACSB: None AICPA FC: Measurement

The financial information in a trial balance may not be up-to-date because: (1) Some events are not journalized daily because it is not useful or efficient to do so. (2) The expiration of some costs occurs with the passage of time rather than as a result of recurring daily transactions. (3) Some items may be unrecorded because the transaction data are not known.

LO 1 BT: C Diff: M TOT: 3 min. AACSB: None AICPA FC: Measurement and Reporting

The two categories of adjusting entries are deferrals and accruals. Deferrals consist of revenues collected before services are provided and expenses paid before they are incurred. Accruals consist of revenues for services performed prior to collection and expenses incurred prior to payment.

LO 1 BT: C Diff: M TOT: 3 min. AACSB: None AICPA FC: Measurement and Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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4-3

In a prepaid expense adjusting entry, expenses are debited and assets are credited.

LO 2 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting

No. Depreciation is the process of allocating the cost of an asset to expense over its useful life. Depreciation results in the presentation of the book value of the asset, not its fair value.

LO 2 BT: C Diff: M TOT: 2 min. AACSB: None AICPA FC: Measurement and Reporting

10.

Depreciation expense is an expense account whose normal balance is a debit. This account shows the cost that has expired during the current accounting period. Accumulated depreciation is a contra asset account whose normal balance is a credit. The balance in this account is the depreciation that has been recognized from the date of acquisition to the balance sheet date.

LO 2 BT: C Diff: M TOT: 3 min. AACSB: None AICPA FC: Reporting

11.

Equipment ............................................................................... Less: Accumulated depreciation—equipment .........................

$15,000 7,000

$8,000

LO 2 BT: AP Diff: E TOT: 2 min. AACSB: Analytic AICPA FC: Reporting

12.

In an unearned revenue adjusting entry, liabilities are debited and revenues are credited.

LO 2 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting

13.

The sale of a three-year maintenance contract on December 29, 2016 will have no effect on the 2016 income statement but receipt of $100,000 on December 29, 2016, 2017, and 2018 will increase an asset, Cash, and a liability, Unearned Service Revenue. As Abe Technologies provides service to its customer during 2017, 2018, and 2019, the liability will decrease and revenue will be recognized. Accrual accounting rules require that revenue be recognized as the performance obligation is satisfied rather than when cash is received.

LO 2 BT: AN Diff: H TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

4-4

Kimmel, Financial Accounting, 8/e, Solutions Manual

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Questions Chapter 4 (Continued) 14.

This promotion plan sounds like a bad idea for two reasons: (1) GAAP requires that the sale of a gift card be recorded as Unearned Sales Revenue (a liability) rather than Sales Revenue. Revenue recognition is delayed until the gift card is used or expires. Ed’s plan will not help the company meet its target revenue unless customers use the cards by year-end. (2) Selling a $50 card for $45 will probably not help the company meet its target net income. Although this promotion may result in additional sales revenue as the cards are used, the income resulting from the cards will be much less than usual since they eliminate $5 of normal gross profit.

LO 2 BT: AN Diff: H TOT: 5 min. AACSB: None AICPA FC: Reporting

15.

An asset is debited and a revenue is credited.

LO 3 BT: C Diff: M TOT: 1 min. AACSB: None AICPA FC: Reporting

16.

An expense is debited and a liability is credited.

LO 3 BT: C Diff: M TOT: 1 min. AACSB: None AICPA FC: Reporting

17.

Net income was understated $270 because prior to adjustment revenues are understated by $780 and expenses are understated by $510. The difference in this case is $270 ($780 – $510).

LO 3 BT: AN Diff: H TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

18.

The entry is: Jan. 9 Salaries and Wages Expense ....................................... Salaries and Wages Payable ........................................ Cash ....................................................................

5,100 1,100 6,200

LO 3 BT: AP Diff: M TOT: 2 min. AACSB: Analytic AICPA FC: Reporting

19.

(a) Accrued revenues. (b) Unearned revenues. (c) Accrued expenses.

(d) Accrued expenses or prepaid expenses. (e) Prepaid expenses. (f) Accrued revenues or unearned revenues.

LO 2 & 3 BT: AN Diff: M TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

20.

(a) Salaries and Wages Payable. (b) Accumulated Depreciation. (c) Interest Expense.

(d) Supplies Expense. (e) Service Revenue. (f) Service Revenue.

LO 2 & 3 BT: AP Diff: M TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

21.

Disagree. An adjusting entry affects only one balance sheet account and one income statement account.

Kimmel, Financial Accounting, 8/e, Solutions Manual

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4-5

LO 1 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting

22.

Apple reports Accounts Receivable. This suggests that it records revenue when it has delivered goods, even though it hasn’t received payment. If it used a cash basis it wouldn’t record revenue until cash was received, and it would therefore not establish receivables.

LO 1 & 3 BT: C Diff: E TOT: 2 min. AACSB: None AICPA FC: Reporting

23.

Financial statements can be prepared from an adjusted trial balance because the balances of all accounts have been adjusted to show the effects of all financial events that have occurred during the accounting period.

LO 4 BT: C Diff: E TOT: 2 min. AACSB: None AICPA FC: Reporting

24.

(a) Information presented on an accrual basis is useful because it reveals important information about the relationship between efforts and results. This information is useful in predicting future results. Trends in revenues and expenses are thus more meaningful. (b) Information presented on a cash basis is useful for predicting the future availability of cash. Cash basis financial statements provide useful information about a company’s sources and uses of cash.

LO 1 & 4 BT: C Diff: M TOT: 3 min. AACSB: None AICPA FC: Reporting

25.

The amount shown in the adjusted trial balance column for an account equals the account balance in the ledger after adjusting entries have been journalized and posted.

LO 4 BT: C Diff: E TOT: 2 min. AACSB: None AICPA FC: Reporting

4-6

Kimmel, Financial Accounting, 8/e, Solutions Manual

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Questions Chapter 4 (Continued) 26. (1) (2) (3) (4)

(Dr) Individual revenue accounts and (Cr) Income Summary. (Dr) Income Summary and (Cr) Individual expense accounts. (Dr) Income Summary and (Cr) Retained Earnings (for net income). (Dr) Retained Earnings and (Cr) Dividends.

LO 4 BT: C Diff: M TOT: 3 min. AACSB: None AICPA FC: Reporting

27. Financial information is used by managers to direct and evaluate a company’s performance. The sooner such information is made available; the sooner changes can be made to get a company “back on track”. A “virtual close” speeds up the reporting process and allows managers to react much faster to changing economic conditions. LO 4 BT: C Diff: M TOT: 3 min. AACSB: None AICPA FC: Reporting

28. Income Summary is a temporary account that is used in the closing process. The account is debited for expenses and credited for revenues. The difference, either net income or net loss, is then closed to Retained Earnings. LO 4 BT: C Diff: M TOT: 2 min. AACSB: None AICPA FC: Reporting

29. The post-closing trial balance contains only balance sheet accounts. Its purpose is to prove the equality of the permanent account balances that the company carries forward into the next accounting period. LO 4 BT: C Diff: M TOT: 2 min. AACSB: None AICPA FC: Reporting

30. The accounts that will not appear in the post-closing trial balance are: Depreciation Expense; Dividends; and Service Revenue. LO 4 BT: C Diff: E TOT: 2 min. AACSB: None AICPA FC: Reporting

31. The steps that involve journalizing are (1) journalize the transactions, (2) journalize the adjusting entries, and (3) journalize the closing entries. LO 4 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting

32. The three trial balances are the (1) trial balance, (2) adjusted trial balance, and (3) post-closing trial balance. LO 4 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting

33. Earnings management is the planned timing of revenues, expenses, gains, and losses to smooth out bumps in net income. Such action is undertaken to help a company meet target financial numbers. Quality of earnings indicates the level of full and transparent information that a company provides to users of financial statements. LO 4 BT: K Diff: E TOT: 2 min. AACSB: None AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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4-7

Use of “one-time” items to prop up earnings numbers. A company may decide to sell property that has appreciated in value in order to record a gain on the sale. Such a gain will increase the current year’s net income but future income will probably not include a similar increase. Inflating revenue in the short-run to the detriment of the long-run. A company may implement changes in its promotion activities near the end of an accounting period to boost year-end revenues. Offering a special rebate or a two–for–one package is likely to increase sales for the time the promotion runs but usually results in lower sales in subsequent periods. Savvy customers may even postpone purchases until special deals are available. Recording improper adjusting entries. Some adjusting entries require estimates and judgment to properly recognize revenue and match expenses. By recognizing revenue “sooner” and delaying the recognition of expenses, earnings can be overstated in early periods and understated in subsequent periods. This type of management is most prevalent with multi-year contracts and prepaid expenses. LO 4 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting

*35. The worksheet is a working paper designed to make it easier to prepare adjusting entries and financial statements. LO 5 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting

*36. The columns of the worksheet from left to right are two columns each for the trial balance, adjustments, adjusted trial balance, income statement, and balance sheet. LO 5 BT: K Diff: E TOT: 2 min. AACSB: None AICPA FC: Reporting

4-8

Kimmel, Financial Accounting, 8/e, Solutions Manual

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SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 4-1

(a) (b) (c) (d) (e) (f)

Cash $–100 0 0 +800 –2,500 0

Net Income $0 –20 +1,300 0 0 –600

LO 1 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting

BRIEF EXERCISE 4-2 (a) Prepaid Insurance—to recognize insurance expired during the period. (b) Depreciation Expense—to allocate the cost of an asset to expense during the current period. (c) Unearned Service Revenue—to account for unearned revenue for which services were provided during the period. (d) Interest Payable—to recognize interest accrued but unpaid on notes payable during the current period. LO 1 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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4-9

BRIEF EXERCISE 4-3 Item

(1) Type of Adjustment

(2) Accounts Before Adjustment

(a)

Prepaid Expenses

Assets Overstated Expenses Understated

(b)

Accrued Revenues

Assets Understated Revenues Understated

(c)

Accrued Expenses

Expenses Understated Liabilities Understated

(d)

Unearned Revenues

Liabilities Overstated Revenues Understated

LO 1 BT: AN Difficulty: Hard TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 4-4 Dec. 31

Supplies Expense ........................................... Supplies ...................................................

Supplies 8,800 12/31 12/31 Bal. 1,100

7,700

12/31

7,700 7,700

Supplies Expense 7,700

LO 2 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

4-10

Kimmel, Financial Accounting, 8/e, Solutions Manual

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BRIEF EXERCISE 4-5 Dec. 31

Depreciation Expense ..................................... Accumulated Depreciation— Equipment.............................................

2,750 2,750

Accumulated Depreciation— Equipment 12/31 2,750

Depreciation Expense 12/31 2,750

Balance Sheet: Equipment ................................................................. Less: Accumulated depreciation—equipment ......

$22,000 2,750

$19,250

LO 2 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 4-6 July 1 Dec. 31

Prepaid Insurance ............................................ Cash ..........................................................

12,400

Insurance Expense ($12,400 X 6/24) ............... Prepaid Insurance ....................................

3,100

Prepaid Insurance 7/1 12,400 12/31 12/31 Bal. 9,300

3,100

12/31

12,400 3,100

Insurance Expense 3,100

LO 2 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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4-11

BRIEF EXERCISE 4-7 July 1 Dec. 31

Cash ................................................................. Unearned Service Revenue ....................

12,400

Unearned Service Revenue ............................ Service Revenue ($12,400 X 6/24) ..........

3,100

Unearned Service Revenue 12/31 3,100 7/1 12,400 12/31 Bal. 9,300

12,400 3,100

Service Revenue 12/31

3,100

LO 2 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 4-8 (a) Dec. 31 (b) (c)

31 31

Interest Expense ...................................... Interest Payable ...............................

300

Accounts Receivable .............................. Service Revenue ..............................

1,700

Salaries and Wages Expense ................. Salaries and Wages Payable ...........

780

300 1,700 780

LO 3 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

4-12

Kimmel, Financial Accounting, 8/e, Solutions Manual

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BRIEF EXERCISE 4-9 Account

(1) Type of Adjustment

(2) Related Account

(a)

Accounts Receivable

Accrued Revenues

Service Revenue

(b)

Prepaid Insurance

Prepaid Expenses

Insurance Expense

(c)

Equipment

Not required

(d)

Accum. Depreciation— Equipment

Prepaid Expenses

(e)

Notes Payable

Not required

(f)

Interest Payable

Accrued Expenses

Interest Expense

(g)

Unearned Service Revenue

Unearned Revenues

Service Revenue

Depreciation Expense

LO 4 BT: AN Difficulty: Hard TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 4-10 LEVIN CORPORATION Income Statement For the Year Ended December 31, 2017 Revenues Service revenue .................................................... Expenses Salaries and wages expense ............................... Rent expense ........................................................ Insurance expense ............................................... Supplies expense ................................................. Depreciation expense ........................................... Total expenses .............................................. Net income ....................................................................

$32,000 $14,000 3,900 1,800 1,500 1,000 22,200 $ 9,800

[Revenues – Expenses = Net income or (loss)] LO 4 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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4-13

BRIEF EXERCISE 4-11 LEVIN CORPORATION Retained Earnings Statement For the Year Ended December 31, 2017 Retained earnings, January 1 ......................................................... Add: Net income ............................................................................ Less: Dividends .............................................................................. Retained earnings, December 31 ...................................................

$17,200 10,400 27,600 6,000 $21,600

(Beginning retained earnings ± Changes to retained earnings = Ending retained earnings) LO 4 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 4-12 Account (a) (b) (c) (d) (e) (f) (g)

Accumulated Depreciation Depreciation Expense Retained Earnings (beginning) Dividends Service Revenue Supplies Accounts Payable

Balance Sheet Income Statement Retained Earnings Statement Retained Earnings Statement Income Statement Balance Sheet Balance Sheet

LO 4 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

BRIEF EXERCISE 4-13 The accounts that will appear in the post-closing trial balance are: Accumulated Depreciation Retained Earnings (ending) Supplies Accounts Payable LO 4 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

4-14

Kimmel, Financial Accounting, 8/e, Solutions Manual

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BRIEF EXERCISE 4-14 (a) July 31

Closing Entries Service Revenue ..................................... Income Summary ............................. (To close revenue account)

16,000 16,000

Income Summary .................................... Salaries and Wages Expense .......... Maintenance and Repairs Expense ......................................... Income Tax Expense ........................ (To close expense accounts)

11,900

Income Summary .................................... Retained Earnings ............................ (To close net income to retained earnings)

4,100

Retained Earnings ................................... Dividends .......................................... (To close dividends to retained earnings)

1,300

8,400 2,500 1,000

4,100

1,300

(Income statement accounts are closed to the Income Summary account)

(b) Retained Earnings 1,300 7/1 Bal. 20,000 4,100 7/31 Bal. 22,800 LO 4 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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4-15

BRIEF EXERCISE 4-15 The proper sequencing of the required steps in the accounting cycle is as follows: 1. 2. 3. 4. 5. 6. 7. 8. 9.

Analyze business transactions. Journalize the transactions. Post to ledger accounts. Prepare a trial balance. Journalize and post adjusting entries. Prepare an adjusted trial balance. Prepare financial statements. Journalize and post closing entries. Prepare a post-closing trial balance.

LO 4 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

4-16

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO DO IT! EXERCISES DO IT! 4-1 1. (d)

2. (e)

3. (h)

4. (c)

LO 1 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

DO IT! 4-2 1.

Insurance Expense ....................................................... Prepaid Insurance .................................................. (To record insurance expired)

300

Supplies Expense ......................................................... Supplies .................................................................. (To record supplies used)

1,600

Depreciation Expense .................................................. Accumulated Depreciation—Equipment .............. (To record monthly depreciation)

200

Unearned Service Revenue .......................................... Service Revenue ..................................................... (To record revenue for services provided)

4,000

300

1,600

200

4,000

LO 2 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

DO IT! 4-3 1.

Salaries and Wages Expense ....................................... Salaries and Wages Payable ................................. (To record accrued salaries)

1,100

Interest Expense ($20,000 X .09 X 1/12) ...................... Interest Payable ...................................................... (To record accrued interest)

150

Accounts Receivable ................................................... Service Revenue ..................................................... (To record revenue for service provided)

1,600

1,100

150

1,600

LO 3 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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4-17

DO IT! 4-4a Income statement: Service Revenue, Utilities Expense Balance sheet: Accounts Receivable, Accumulated Depreciation, Notes Payable, Common Stock. LO 4 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

DO IT! 4-4b Dec. 31 Service Revenue ...................................................... 108,000 Income Summary .............................................. 108,000 (To close revenue to income summary) Dec. 31 Income Summary ..................................................... 72,000 Salaries and Wages Expense ........................... Rent Expense .................................................... Utilities Expense ............................................... Supplies Expense ............................................. (To close expenses to income summary)

40,000 18,000 8,000 6,000

Dec. 31 Income Summary ..................................................... 36,000 Retained Earnings ............................................ (To close net income to retained earnings)

36,000

Dec. 31 Retained Earnings ................................................... 22,000 Dividends .......................................................... (To close dividends to retained earnings)

22,000

LO 4 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

4-18

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO EXERCISES EXERCISE 4-1 The revenue recognition principle requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied. (a) Since the sales effort is not complete until the flight actually occurs, revenue should not be recognized until December. Southwest Airlines should recognize the revenue in December when the customer has been provided with the flight. (b) Sales revenue should be recognized at the time of delivery. (c) Revenue should be recognized on a per game basis over the season from April through October. (d) Interest revenue should be accrued and recognized by RBC evenly over the term of the loan. (e) Revenue should be recognized when the sweater is shipped to the customer in September. LO 1 BT: C Difficulty: Medium TOT: 10 min. AACSB: None AICPA FC: Measurement

EXERCISE 4-2 (a) (b) (c) (d) (e) (f) (g) (h)

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

Going concern assumption. Economic entity assumption. Full disclosure principle. Monetary unit assumption. Materiality. Periodicity assumption. Expense recognition principle. Historical cost principle.

LO 1 BT: K Difficulty: Easy TOT: 5 min. AACSB: None AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

4-19

EXERCISE 4-3 (a) (b) (c) (d) (e) (f)

Revenue recognition principle. Periodicity assumption. No violation. Going concern assumption. Historical cost principle. Economic entity assumption.

LO 1 BT: C Difficulty: Medium TOT: 10 min. AACSB: None AICPA FC: Reporting

EXERCISE 4-4 $ 33,640 + 3,400 – 2,800 + 1,300 – 1,460 – 2,000 + 2,400 – 1,400 + 1,100 $ 34,180

Cash basis earnings. Accounts receivable arise from sales that have been made, thus revenue must be recognized for balance outstanding at the end of the current year. Accounts receivable collected in current year, for sales made in previous year must be deducted from earnings. Supplies on hand at year end should be set up as an asset rather than expensed, this increases earnings. Supplies on hand at the end of the previous year should be expensed this year, this decreases earnings. Wages owing at the end of the current year should be accrued, thus reducing earnings. Wages owed at the end of the previous year should not be deducted from the current year’s earnings, thus increasing earnings. Other unpaid amounts owed at the end of the current year should be accrued, thus reducing earnings. Other unpaid amounts owed at the end of the previous year should not be deducted from the current year’s earnings, thus increasing earnings. Accrual basis earnings.

LO 1-3 BT: AP Difficulty: Hard TOT: 12 min. AACSB: Analytic AICPA FC: Reporting

4-20

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 4-5 (a) Service Revenue – Operating Expenses – Insurance Expense Net Income

Cash Basis $22,000 12,000 2,400 $ 7,600

Accrual Basis $28,000 15,800 — $12,200

(b) The accrual basis of accounting provides more useful information for decision makers because it recognizes revenues when the performance obligation is satisfied and expenses when incurred. LO 1 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 4-6 (a)

FRANKEN COMPANY Income Statement For the Six Months Ended April 30, 2017 Revenues Service revenue ($32,150 + $540) ................... Expenses Income tax expense ......................................... Salaries and wages expense ($2,600 + $420). Depreciation expense [($9,200 ÷ 4) X 6/12] .... Rent expense ($1,225 – $175) ......................... Utilities expense .............................................. Advertising expense ........................................ Total expenses .......................................... Net income ...............................................................

$32,690 $10,000 3,020 1,150 1,050 970 375 16,565 $16,125

[Revenues – Expenses = Net income or (loss)]

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

4-21

EXERCISE 4-6 (Continued) (b)

FRANKEN COMPANY Balance Sheet April 30, 2017 Assets Current Assets Cash ............................................................... Accounts receivable ..................................... Prepaid rent ................................................... Total current assets ............................... Property, plant, and equipment Equipment...................................................... Less: Accumulated depreciation—equipment .......................... Total assets ............................................

$27,780 540 175 $28,495 9,200 1,150

Liabilities and Stockholders’ Equity Current Liabilities Salaries and wages payable ........................ Stockholders’ equity Common stock ............................................. $20,000 Retained earnings ........................................ 16,125 Total stockholders’ equity.............. Total liabilities and stockholders’ equity...................................................

8,050 $36,545

420

36,125 $36,545

(Assets = Liabilities + Stockholders’ equity) LO 1-3 BT: AP Difficulty: Hard TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

4-22

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 4-7 (a) Event 180-day financing for customers

Cash Accounting Revenue is recorded as cash is received.

Accrual Accounting Revenue is recorded when the performance obligation is satisfied. BizCon records revenue (and a receivable) as soon as services are provided but may wait up to 180 days to receive cash.

Payment to Equipment expense is equipment recorded as an suppliers upon expense as soon as delivery of goods equipment is received and paid for.

Equipment is recorded as an asset and depreciated.

Prepayment for 2 years of insurance coverage

Insurance expense is recorded as soon as payment is made.

Prepayment is recorded as an asset and recognized as an expense as time passes.

One month’s salaries owed at year-end

No salary expense is recorded until salaries are paid.

Salary expense is recorded as employees perform work. Amounts owed at year-end would be recorded as a liability.

Proper accrual accounting would require adjusting entries for depreciation, prepaid insurance, and accrued salaries.

Kimmel, Financial Accounting, 8/e, Solutions Manual

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4-23

EXERCISE 4-7 (Continued) (b) Accrual accounting rules require that revenue be recognized as a company performs services and expenses be matched with the revenue they help produce. Receipt or payment of cash does not influence the calculation of net income. BizCon has provided many services during the year and thus has positive net income. Since BizCon allowed its largest customers to take up to 180 days to pay, but was forced to pay cash for all purchases, it is likely that the company has very little cash at year-end. New companies frequently experience cash shortages because they extend credit to attract customers but are unable to receive credit from their suppliers. As time passes, the cash supply should increase as payments on accounts receivable come in and offset current purchases. LO 1-3 BT: C Difficulty: Hard TOT: 20 min. AACSB: Analytic AICPA FC: Measurement AICPA FC: Reporting

EXERCISE 4-8 Item

(1) Type of Adjustment

(2) Accounts Before Adjustment

(a)

Accrued Revenues

Assets Understated Revenues Understated

(b)

Prepaid Expenses

Assets Overstated Expenses Understated

(c)

Accrued Expenses

Expenses Understated Liabilities Understated

(d)

Unearned Revenues

Liabilities Overstated Revenues Understated

(e)

Accrued Expenses

Expenses Understated Liabilities Understated

(f)

Prepaid Expenses

Assets Overstated Expenses Understated

LO 1-3 BT: AN Difficulty: Hard TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

4-24

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 4-9 1.

2. 3. 4. 5.

Mar. 31

31 31 31 31

Depreciation Expense ($280 X 3) ................. Accumulated Depreciation— Equipment .........................................

840

Unearned Rent Revenue .............................. Rent Revenue ($12,400 X 1/2)...............

6,200

Interest Expense ........................................... Interest Payable ....................................

400

Supplies Expense ......................................... Supplies ($3,000 – $850) .......................

2,150

Insurance Expense ($400 X 3) ..................... Prepaid Insurance .................................

1,200

840 6,200 400 2,150 1,200

LO 2, 3 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 4-10 1. 2. 3.

Jan. 31 31 31

31 4. 5.

31 31

Accounts Receivable ................................... Service Revenue ...................................

760

Utilities Expense ........................................... Accounts Payable .................................

450

Depreciation Expense .................................. Accumulated Depreciation— Equipment .........................................

400

Interest Expense ........................................... Interest Payable ....................................

500

Insurance Expense ($24,000 ÷ 12) ............... Prepaid Insurance .................................

2,000

Supplies Expense ($1,750 – $550) ............... Supplies .................................................

1,200

760 450

400 500 2,000 1,200

LO 2, 3 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

4-25

EXERCISE 4-11 1.

2. 3.

4. 5. 6. 7.

Oct. 31

31 31

31 31 31 31

Supplies Expense ......................................... Supplies ($2,500 – $500) ...................................

2,000

Insurance Expense ....................................... Prepaid Insurance .................................

100

Depreciation Expense .................................. Accumulated Depreciation— Equipment .........................................

Unearned Service Revenue .......................... Service Revenue ...................................

800

Accounts Receivable .................................... Service Revenue ...................................

280

Interest Expense ........................................... Interest Payable.....................................

Salaries and Wages Expense ...................... Salaries and Wages Payable ................

1,400

2,000 100

75 800 280 70 1,400

LO 2, 3 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

4-26

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 4-12

Date July 31 31 31 31 31 31 31

Account Titles Debit Interest Receivable ($20,000  .06  1/12) ....... 100 Interest Revenue .......................................

Credit 100

Supplies Expense ($24,000 – $18,600) ............ 5,400 Supplies.....................................................

5,400

Rent Expense ($3,600  4) ............................... Prepaid Rent .............................................

900

Salaries and Wages Expense .......................... 3,100 Salaries and Wages Payable .................... Depreciation Expense ($6,000  12) ................ Accumulated Depreciation—Buildings ...

3,100

500 500

Unearned Service Revenue ............................. 4,700 Service Revenue .......................................

4,700

Maintenance and Repairs Expense ................. 2,300 Accounts Payable .....................................

2,300

LO 2, 3 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

4-27

EXERCISE 4-13 NORSKI CO. Income Statement For the Month Ended July 31, 2017 Revenues Service revenue ($5,500 + $700) ............................. Expenses Salaries and wages expense ($2,100 + $360)......... Supplies expense ($900 – $200).............................. Utilities expense ...................................................... Insurance expense................................................... Depreciation expense .............................................. Total expenses ................................................. Net income .......................................................................

$6,200 $2,460 700 500 350 150 4,160 $2,040

[Revenues – Expenses = Net income or (loss)] LO 1-3 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 4-14 (a) July 10 14 15 20

4-28

Supplies ........................................................ Cash .......................................................

200

Cash............................................................... Service Revenue ...................................

3,800

Salaries and Wages Expense ...................... Cash .......................................................

1,000

Cash............................................................... Unearned Service Revenue ..................

600

Kimmel, Financial Accounting, 8/e, Solutions Manual

200 3,800 1,000 600

(For Instructor Use Only)

EXERCISE 4-14 (Continued) (b) July 31

31 31 31

Supplies Expense ......................................... Supplies .................................................

750

Accounts Receivable ................................... Service Revenue ...................................

500

Salaries and Wages Expense ...................... Salaries and Wages Payable ................

1,000

Unearned Service Revenue ......................... Service Revenue ...................................

900

750 500 1,000 900

LO 2, 3 BT: AN Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 4-15 Answer

Computation

(a) Supplies balance = $1,350

Supplies expense Add: Supplies (1/31) Less: Supplies purchased Supplies (1/1)

(b) Total premium = $6,240

Total premium = Monthly premium X 12; $520 X 12 = $6,240

Purchase date = May 1, 2016

$ 950) 700) (300) $1,350)

Purchase date: On Jan. 31, there are 3 months coverage remaining ($520 X 3). Thus, the purchase date was 9 months earlier on May 1, 2016.

Kimmel, Financial Accounting, 8/e, Solutions Manual

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4-29

EXERCISE 4-15 (Continued) (c) Salaries and wages payable = $1,760

Cash paid Salaries and wages payable (1/31/17)

$2,500 1,060 3,560

Less: Salaries and wages expense Salaries and wages payable (12/31/16) (d) Unearned service revenue = $2,950

1,800 $1,760

Service revenue Unearned revenue (1/31/17) Cash received in Jan. Unearned revenue (12/31/16)

$4,000 750 4,750 1,800 $2,950

LO 1-3 BT: AN Difficulty: Hard TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

4-30

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 4-16

Item Incorrect balances Effects of: Salaries and Wages

Net Income $70,000

Rent Revenue Depreciation Correct balances

4,000 (9,000) $55,000

Total Total Stockholders’ Assets Liabilities Equity $150,000 $70,000 $80,000

(10,000)

10,000 (4,000) (9,000) $141,000

$76,000

(10,000) 4,000 (9,000) $65,000

(Revenues increase Net income and Stockholders’ equity and expenses do the opposite) LO 2, 3 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 4-17 (a) 2017 June

Aug. 31 Sept.

Nov. 30 Dec.

Prepaid Insurance ...................................... Cash .....................................................

1,800

Prepaid Rent ............................................... Cash .....................................................

6,500

Cash ............................................................ Unearned Service Revenue ................

3,600

Prepaid Cleaning ........................................ Cash .....................................................

2,000

Cash ............................................................ Unearned Service Revenue ................

1,500

Kimmel, Financial Accounting, 8/e, Solutions Manual

1,800 6,500 3,600 2,000

(For Instructor Use Only)

1,500

4-31

EXERCISE 4-17 (Continued) (b) 2017 Dec.

31 31

4-32

Insurance Expense .................................... Prepaid Insurance ............................. ($1,800 × 7/12 months = $1,050)

1,050

Rent Expense ............................................. Prepaid Rent ...................................... ($6,500 × 4/5 months = $5,200)

5,200

Unearned Service Revenue ....................... Service Revenue ............................... ($3,600 × 4/9 months = $1,600)

1,600

Maintenance and Repairs Expense........... Prepaid Cleaning ...............................

1,000

Unearned Service Revenue ....................... Service Revenue ............................... ($1,500 – $475 not played = $1,025 played)

1,025

Kimmel, Financial Accounting, 8/e, Solutions Manual

1,050

5,200

1,600

1,000 1,025

(For Instructor Use Only)

EXERCISE 4-17 (Continued) (c)

June 1

Prepaid Insurance 1,800 Dec. 31 Adj. 1,050

Dec. 31 Bal.

750

Dec. 31 Adj. 1,050

Rent Expense Dec. 31 Adj. 5,200

Prepaid Rent Aug. 31

Insurance Expense

6,500 Dec. 31 Adj. 5,200

Service Revenue

Dec. 31 Bal. 1,300

Dec. 31 Adj. 1,600 Dec. 31 Adj. 1,025

Unearned Service Revenue Dec. 31 Adj. 1,600 Sept. 4 Dec. 31 Adj. 1,025 Dec. 5

Dec. 31 Bal. 2,625

3,600 1,500

Maintenance and Repairs Expense Dec. 31 Bal. 2,475

Dec. 31 Adj. 1,000

Prepaid Cleaning Nov. 30

2,000 Dec. 31 Adj. 1,000

Dec. 31 Bal. 1,000 Note: The Cash account has not been included in this solution, as per the instructions. LO 2, 3 BT: AP Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

4-33

EXERCISE 4-18 (a) 2017 Dec.

31 31 (b) 2018 Jan. 11 4

1 4 2

Utilities Expense ........................................ Accounts Payable .............................

425

Salaries and Wages Expense .................... Salaries and Wages Payable ............ ($3,500 × 4/7 days = $2,000)

2,000

425 2,000

Interest Expense ........................................ 375 Interest Payable ................................ ($45,000 × 5% × 2/12 months = $375 (rounded)) Accounts Receivable ................................. Service Revenue ...............................

300

Accounts Receivable ................................. Rent Revenue ....................................

6,000

Accounts Payable ...................................... Cash .....................................................

425

Salaries and Wages Payable ..................... Salaries and Wages Expense .................... Cash .....................................................

2,000 1,500

Interest Payable.......................................... Cash .....................................................

375

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

300

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

6,000

375

300 6,000

425

3,500 375 300 6,000

LO 2, 3 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

4-34

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 4-19 Jan. 31 31

Service Revenue .................................................. Income Summary .........................................

4,000

Income Summary ................................................. Salaries and Wages Expense ...................... Supplies Expense ........................................ Insurance Expense ......................................

3,270

Income Summary ................................................. Retained Earnings........................................

730

4,000 1,800 950 520 730

LO 4 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 4-20 (a) Date Dec. 31

31 31

Account Titles Debit Service Revenue............................................183,800 Rent Revenue ................................................ 6,200 Income Summary ...................................

190,000

Income Summary ..........................................109,300 Salaries and Wages Expense................ Depreciation Expense ........................... Rent Expense ......................................... Supplies Expense ..................................

91,100 13,200 3,600 1,400

Income Summary .......................................... 80,700 Retained Earnings .................................

80,700

Retained Earnings ......................................... 26,300 Dividends ...............................................

26,300

Kimmel, Financial Accounting, 8/e, Solutions Manual

Credit

(For Instructor Use Only)

4-35

EXERCISE 4-20 (Continued) (b) Retained Earnings Jan. 1 61,800 Dec. 31 26,300 Dec. 31 80,700 Bal. 116,200 LO 4 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 4-21 Aug. 31 31 31 31 31 31

Accounts Receivable ........................................... Service Revenue ..........................................

600

Supplies Expense ................................................ Supplies ........................................................

2,000

Insurance Expense .............................................. Prepaid Insurance ........................................

1,500

Depreciation Expense ......................................... Accumulated Depreciation—Equipment ....

1,200

Salaries and Wages Expense.............................. Salaries and Wages Payable .......................

1,100

Unearned Rent Revenue ..................................... Rent Revenue ...............................................

1,000

600 2,000 1,500 1,200 1,100 1,000

LO 2-4 BT: AN Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

4-36

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 4-22 RYAN COMPANY Income Statement For the Year Ended August 31, 2017 Revenues Service revenue .................................................... Rent revenue ......................................................... Total revenues ............................................... Expenses Salaries and wages expense ............................... Rent expense ........................................................ Supplies expense ................................................. Insurance expense ............................................... Depreciation expense ........................................... Total expenses .............................................. Net income ....................................................................

Kimmel, Financial Accounting, 8/e, Solutions Manual

$34,600 13,100 $47,700 18,100 10,800 2,000 1,500 1,200 33,600 $14,100

(For Instructor Use Only)

4-37

EXERCISE 4-22 (Continued) RYAN COMPANY Retained Earnings Statement For the Year Ended August 31, 2017 Retained earnings, September 1, 2016 .......................................... Add: Net income ............................................................................ Less: Dividends .............................................................................. Retained earnings, August 31, 2017 ..............................................

$ 5,500 14,100 19,600 2,800 $16,800

RYAN COMPANY Balance Sheet August 31, 2017 Assets Current Assets Cash ........................................................................ Accounts receivable .............................................. Supplies .................................................................. Prepaid insurance .................................................. Total current assets ....................................... Equipment .............................................................. Less: Accum. depreciation—equipment ............... Total assets ....................................................

$10,900 9,400 500 2,500 $23,300 16,000 4,800

11,200 $34,500

Liabilities and Stockholders’ Equity Current Liabilities Accounts payable .................................................. Salaries and wages payable.................................. Unearned rent revenue .......................................... Total current liabilities ................................... Stockholders’ equity Common stock ....................................................... Retained earnings .................................................. Total stockholders’ equity ......................... Total liabilities and stockholders’ equity ......

$ 5,800 1,100 800 $ 7,700 10,000 16,800 26,800 $34,500

(Ending retained earnings = Beginning retained earnings ± Changes to retained earnings) LO 4 BT: AP Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

4-38

Kimmel, Financial Accounting, 8/e, Solutions Manual

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EXERCISE 4-23 Aug. 31

31 31

Service Revenue .............................................. Rent Revenue................................................... Income Summary .....................................

34,600 13,100

Income Summary ............................................. Salaries and Wages Expense .................. Rent Expense ........................................... Supplies Expense .................................... Insurance Expense .................................. Depreciation Expense..............................

33,600

Income Summary ............................................. Retained Earnings....................................

14,100

Retained Earnings ........................................... Dividends ..................................................

2,800

47,700 18,100 10,800 2,000 1,500 1,200 14,100 2,800

LO 4 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

4-39

SOLUTIONS TO PROBLEMS PROBLEM 4-1A (a)

(b)

1. Cash ..................................................................... 19,000 Accounts Receivable .................................... 19,000 2. Unearned Sales Revenue.................................... 23,000 Sales Revenue ............................................... 23,000 3. Cash ..................................................................... 44,000 Unearned Sales Revenue .............................. 44,000 Unearned Sales Revenue ($44,000 – $20,000) ........................................... 24,000 Sales Revenue ............................................... 24,000 4. Accounts Receivable .......................................... 151,000 Service Revenue ............................................ 151,000 5. Cash ..................................................................... 136,000 Accounts Receivable ($151,000 – $15,000) .... 136,000 Cash received with respect to fees and dues 1. Collection of 2016 dues $ 19,000 3. Sale of tickets 44,000 5. Collection of 2017 dues 136,000 $199,000

Cash 1. 19,000 3. 44,000 5. 136,000 2017 Bal. 199,000 Accounts Receivable 2016 Bal. 19,000 4. 151,000 1. 19,000 5. 136,000 2017 Bal. 15,000

2. 3.

Service Revenue 4. 151,000 2017 Bal. 151,000 Sales Revenue 2. 23,000 3. 24,000 2017 Bal. 47,000

Unearned Sales Revenue 2016 Bal. 23,000 23,000 3. 44,000 24,000 2017 Bal. 20,000

LO 1-3 BT: AP Difficulty: Medium TOT: 30 min. AACSB Analytic AICPA FC: Reporting 4-40

Kimmel, Financial Accounting, 8/e, Solutions Manual

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PROBLEM 4-2A (a)

Date 2017

Account Titles

Debit

June 30

Supplies Expense ...................................... Supplies ($2,000 – $720) ....................

1,280

Utilities Expense ........................................ Accounts Payable ..............................

180

Insurance Expense .................................... Prepaid Insurance ($2,880 ÷ 12 months) ......................

240

Unearned Service Revenue ....................... Service Revenue ................................

4,100

Salaries and Wages Expense ................... Salaries and Wages Payable .............

1,250

Depreciation Expense ............................... Accumulated Depreciation— Equipment ......................................

250

Accounts Receivable ................................. Service Revenue ................................

3,900

2. 3.

4. 5. 6.

30 30

30 30 30

Credit

1,280 180

240 4,100 1,250

250 3,900

(b)

6/30 Bal.

Cash 6,850

6/30 Bal. 6/30 Bal.

Accounts Receivable 6/30 Bal. 7,000 6/30 3,900 6/30 Bal. 10,900

Supplies 2,000 6/30 720

Prepaid Insurance 6/30 Bal. 2,880 6/30 6/30 Bal. 2,640

Kimmel, Financial Accounting, 8/e, Solutions Manual

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1,280

240

4-41

PROBLEM 4-2A (Continued) Equipment 6/30 Bal. 15,000

Salaries and Wages Expense 6/30 Bal. 4,000 6/30 1,250 6/30 Bal. 5,250

Accumulated Depreciation— Equipment 6/30 250 6/30 Bal. 250 Accounts Payable 6/30 Bal. 6/30 6/30

4,230 180 4,410

Salaries and Wages Payable 6/30 1,250 6/30 Bal. 1,250 Unearned Service Revenue 6/30 4,100 6/30 Bal. 5,200 6/30 Bal. 1,100 Common Stock 6/30 Bal. 22,000

Rent Expense 6/30 Bal. 2,000 Depreciation Expense 6/30 250 6/30 Bal. 250 Insurance Expense 6/30 240 6/30 Bal. 240 Utilities Expense 6/30 180 6/30 Bal. 180 Supplies Expense 6/30 1,280 6/30 Bal. 1,280

Service Revenue 6/30 Bal. 8,300 6/30 4,100 6/30 3,900 6/30 Bal. 16,300

4-42

Kimmel, Financial Accounting, 8/e, Solutions Manual

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PROBLEM 4-2A (Continued) (c)

KUMAR CONSULTING Adjusted Trial Balance June 30, 2017 Cash .................................................................... Accounts Receivable ......................................... Supplies .............................................................. Prepaid Insurance .............................................. Equipment .......................................................... Accumulated Depreciation—Equipment .......... Accounts Payable .............................................. Salaries and Wages Payable ............................. Unearned Service Revenue ............................... Common Stock .................................................. Service Revenue ................................................ Salaries and Wages Expense ............................ Rent Expense ..................................................... Depreciation Expense ....................................... Insurance Expense ............................................ Utilities Expense ................................................ Supplies Expense ..............................................

Debit $ 6,850 10,900 720 2,640 15,000

Credit

250 4,410 1,250 1,100 22,000 16,300

5,250 2,000 250 240 180 1,280 $45,310

$45,310

(Total debits = Total credits) LO 2-4 BT: AP Difficulty: Medium TOT: 50 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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4-43

PROBLEM 4-3A

(a) 1. May 31 2.

Insurance Expense ................................. Prepaid Insurance ...........................

450

Supplies Expense ................................... Supplies ($2,600 – $1,050) ..............

1,550

Depreciation Expense ($3,600 X 1/12) ..................................... Accumulated Depreciation— Building ........................................ Depreciation Expense ($3,000 X 1/12) ..................................... Accumulated Depreciation— Equipment ....................................

450 1,550 300 300 250 250

Interest Expense ..................................... Interest Payable [($36,000 X 6%) X 1/12] ................

180

Unearned Rent Revenue......................... Rent Revenue ..................................

2,500

Salaries and Wages Expense ................. Salaries and Wages Payable ..........

900

180 2,500 900

(b)

5/31 Bal.

Cash 2,500

Prepaid Insurance 5/31 Bal. 1,800 5/31 5/31 Bal. 1,350

5/31 Bal. 5/31 Bal.

Supplies 2,600 5/31 1,050

Land 5/31 Bal. 15,000

4-44

1,550

Kimmel, Financial Accounting, 8/e, Solutions Manual

450

(For Instructor Use Only)

PROBLEM 4-3A (Continued) Building 5/31 Bal. 70,000

Mortgage Payable 5/31 Bal. 36,000

Accumulated Depreciation— Building 5/31 300 5/31 Bal. 300

Rent Revenue 5/31 Bal. 9,000 5/31 2,500 5/31 Bal. 11,500

Equipment 5/31 Bal. 16,800 Accumulated Depreciation— Equipment 5/31 250 5/31 Bal. 250 Accounts Payable 5/31 Bal.

4,700

Unearned Rent Revenue 5/31 2,500 5/31 Bal. 3,300 5/31 Bal. 800 Salaries and Wages Payable 5/31 900 5/31 Bal. 900 Interest Payable 5/31 5/31 Bal.

Common Stock 5/31 Bal. 60,000

180 180

Salaries and Wages Expense 5/31 Bal. 3,000 5/31 900 5/31 Bal. 3,900 Utilities Expense 5/31 Bal. 800 Advertising Expense 5/31 Bal. 500 Interest Expense 5/31 180 5/31 Bal. 180 Insurance Expense 5/31 450 5/31 Bal. 450

Kimmel, Financial Accounting, 8/e, Solutions Manual

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4-45

PROBLEM 4-3A (Continued) Supplies Expense 5/31 1,550 5/31 Bal. 1,550 Depreciation Expense 5/31 300 5/31 250 5/31 Bal. 550 (c)

MOTO HOTEL Adjusted Trial Balance May 31, 2017 Cash .................................................................... Supplies .............................................................. Prepaid Insurance .............................................. Land .................................................................... Building .............................................................. Accumulated Depreciation—Building .............. Equipment .......................................................... Accumulated Depreciation—Equipment .......... Accounts Payable .............................................. Unearned Rent Revenue .................................... Salaries and Wages Payable ............................. Interest Payable ................................................. Mortgage Payable .............................................. Common Stock ................................................... Rent Revenue ..................................................... Salaries and Wages Expense ............................ Utilities Expense ................................................ Advertising Expense.......................................... Interest Expense ................................................ Insurance Expense ............................................ Supplies Expense .............................................. Depreciation Expense ........................................

Debit $ 2,500 1,050 1,350 15,000 70,000

Credit

300

16,800 250 4,700 800 900 180 36,000 60,000 11,500 3,900 800 500 180 450 1,550 550 $114,630

$114,630

(Total debits = Total credits)

4-46

Kimmel, Financial Accounting, 8/e, Solutions Manual

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PROBLEM 4-3A (Continued) (d)

MOTO HOTEL Income Statement For the Month Ended May 31, 2017 Revenues Rent revenue ................................................... Expenses Salaries and wages expense .......................... Supplies expense ............................................ Utilities expense .............................................. Depreciation expense ..................................... Advertising expense ....................................... Insurance expense .......................................... Interest expense .............................................. Total expenses......................................... Net income ..............................................................

$11,500 $3,900 1,550 800 550 500 450 180 7,930 $ 3,570

MOTO HOTEL Retained Earnings Statement For the Month Ended May 31, 2017 Retained earnings, May 1 ...................................... Add: Net income .................................................. Retained earnings, May 31 ....................................

Kimmel, Financial Accounting, 8/e, Solutions Manual

0 3,570 $3,570

(For Instructor Use Only)

4-47

PROBLEM 4-3A (Continued) MOTO HOTEL Balance Sheet May 31, 2017 Assets Current Assets Cash ................................................... Supplies............................................. Prepaid insurance ............................. Total current assets .................. Property, plant, and equipment Land ................................................... Building ............................................. Less: Accumulated deprec.—Building .......................... Equipment ......................................... Less: Accumulated deprec.—equipment ...................... Total assets ...............................

$ 2,500 1,050 1,350 $

4,900

15,000 $70,000 300 16,800

69,700

250

16,550

Liabilities and Stockholders’ Equity Current Liabilities Accounts payable ........................................... $ 4,700 Salaries and wages payable .......................... 900 Unearned rent revenue .................................. 800 Interest payable .............................................. 180 Total current liabilities ............................ Long-term Liabilities Mortgage payable ........................................... Total liabilities ......................................... Stockholders’ equity Common stock ............................................... 60,000 Retained earnings .......................................... 3,570 Total stockholders’ equity ............... Total liabilities and stockholders’ equity ...................................................

101,250 $106,150

6,580 36,000 42,580

63,570 $106,150

(Ending retained earnings = Beginning retained earnings ± Changes to retained earnings)

4-48

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 4-3A (Continued) (e) The following accounts would be closed: Rent Revenue, Salaries and Wages Expense, Utilities Expense, Advertising Expense, Interest Expense, Insurance Expense, Supplies Expense, Depreciation Expense. LO 2-4 BT: AP Difficulty: Hard TOT: 60 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

4-49

PROBLEM 4-4A (a) Sept. 30 30 30 30 30 30 30

(b)

Accounts Receivable .................................... Service Revenue ....................................

600

Rent Expense ................................................ Prepaid Rent ..........................................

900

Supplies Expense ......................................... Supplies .................................................

1,020

Depreciation Expense ................................... Accum. Depreciation—Equipment .......

350

Interest Expense ........................................... Interest Payable .....................................

Unearned Rent Revenue ............................... Rent Revenue.........................................

200

Salaries and Wages Expense ....................... Salaries and Wages Payable.................

600

900 1,020 350 50 200 600

SALT CREEK GOLF INC. Income Statement For the Quarter Ended September 30, 2017 Revenues Service revenue .............................................. Rent revenue .................................................. Total revenues ........................................ Expenses Salaries and wages expense ......................... Rent expense .................................................. Supplies expense ........................................... Utilities expense ............................................. Depreciation expense .................................... Interest expense ............................................. Total expenses ........................................ Net income .............................................................

4-50

600

$14,700 900 $15,600 9,400 1,800 1,020 470 350 50

Kimmel, Financial Accounting, 8/e, Solutions Manual

13,090 $ 2,510

(For Instructor Use Only)

PROBLEM 4-4A (Continued) SALT CREEK GOLF INC. Retained Earnings Statement For the Quarter Ended September 30, 2017 Retained earnings, July 1, 2017 ................................................ Add: Net income ......................................................................

0 2,510 2,510 600 $1,910

Less: Dividends ........................................................................ Retained earnings, September 30, 2017................................... SALT CREEK GOLF INC. Balance Sheet September 30, 2017 Assets Current Assets Cash ............................................................... Accounts receivable ..................................... Supplies ......................................................... Prepaid rent ................................................... Total current assets .............................. Property, Plant and Equipment Equipment ..................................................... Less: Accumulated depreciation— equipment .......................................... Total assets ............................................

$ 6,700 1,000 180 900 $ 8,780 15,000 350

Liabilities and Stockholders’ Equity Current Liabilities Notes payable ................................................ $ 5,000 Accounts payable ......................................... 1,070 Unearned rent revenue ................................. 800 Salaries and wages payable ......................... 600 Interest payable ............................................. 50 Total current liabilities .......................... Stockholders’ equity Common stock .............................................. 14,000 Retained earnings ......................................... 1,910 Total stockholders’ equity ................. Total liabilities and stockholders’ equity ..................................................

14,650 $23,430

$ 7,520

15,910 $23,430

(Ending retained earnings = Beginning retained earnings ± Changes to retained earnings)

Kimmel, Financial Accounting, 8/e, Solutions Manual

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4-51

PROBLEM 4-4A (Continued) (c) The following accounts would be closed: Service Revenue, Rent Revenue, Salaries and Wages Expense, Rent Expense, Utilities Expense, Depreciation Expense, Supplies Expense, Interest Expense, Dividends. (d) Interest of 12% per year equals a monthly rate of 1%; monthly interest is $50 ($5,000 X 1%). Since total interest payable is $50, the note has been outstanding one month. LO 2-4 BT: AP Diffciulty: Hard TOT: 50 min. AACSB: Analytic AICPA FC: Reporting

4-52

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 4-5A

Dec. 31

Insurance Expense ....................................... Prepaid Insurance ................................. [($9,600 ÷ 3) = $3,200 [($7,200 X 12/18) = 4,800 $8,000]

8,000

Unearned Rent Revenue .............................. Rent Revenue ........................................ [[Nov. 5 X $5,000 X 2 = 50,000 [Dec. 4 X $8,500 X 1 = 34,000 $84,000]

84,000

Interest Expense ........................................... Interest Payable ($40,000 X 7% X 3/12) .........................

700

Salaries and Wages Expense ...................... Salaries and Wages Payable ................ [5 X $600 X 3/5 = $1,800 [3 X $700 X 3/5 = 1,260 $3,060]

3,060

8,000

84,000

700 3,060

LO 2, 3 BT: AP Difficulty: Medium TOT: 40 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

4-53

PROBLEM 4-6A

(a) 1. June 2. 3.

4-54

30 30 30

Rent Revenue .................................. Unearned Rent Revenue........

57,000

Supplies Expense ............................ Supplies ($8,200 – $1,800) .....

6,400

57,000 6,400

Insurance Expense ($14,400 X 3/12) ............................. Prepaid Insurance ..................

3,600

Maintenance and Repairs Expense........................... Utilities Expense .............................. Advertising Expense ....................... Accounts Payable ..................

4,450 215 110

Salaries and Wages Expense ($300 X 4)....................................... Salaries and Wages Payable ................................

3,600

4,775 1,200 1,200

Interest Expense ($14,000 X 6% X 2/12) ................... Interest Payable .................... Income Tax Expense ....................... Income Taxes Payable...........

140 140 13,400

Kimmel, Financial Accounting, 8/e, Solutions Manual

13,400

(For Instructor Use Only)

PROBLEM 4-6A (Continued) (b)

ROADSIDE TRAVEL COURT Income Statement For the Quarter Ended June 30, 2017 Revenues Rent revenue ($212,000 – $57,000) ....................... $155,000 Expenses Salaries and wages expense ($80,500 + $1,200) ............................................... $ 81,700 Income tax expense ............................................... 13,400 Maintenance and repairs expense ($4,300 + $4,450) ................................................. 8,750 Supplies expense................................................... 6,400 Advertising expense ($3,800 + $110) .................... 3,910 Insurance expense................................................. 3,600 Depreciation expense ............................................ 2,700 Utilities expense ($900 + $215) ............................. 1,115 Interest expense..................................................... 140 Total expenses ....................................................... 121,715 Net income ............................................................. $ 33,285

(Revenues are recognized when a service has been provided and expenses are recognized when an asset has been used up or a service incurred.)

Kimmel, Financial Accounting, 8/e, Solutions Manual

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4-55

PROBLEM 4-6A (Continued) (c)

The generally accepted accounting principles pertaining to the income statement not recognized by Betty were the revenue recognition principle and the expense recognition principle. The revenue recognition principle states that revenue is recognized when the performance obligation is satisfied. The cash payments of $57,000 for summer rentals have not been earned and, therefore, should not be reported as income for the quarter ended June 30. The expense recognition principle dictates that efforts (expenses) be matched with accomplishments (revenue) whenever it is reasonable and practicable to do so. This means that the expenses should include amounts incurred in June but not paid until July, and any other costs related to the operations of the business during the period April–June. The difference in reported expenses was $29,515 ($121,715 – $92,200). The overstatement of revenues ($57,000) plus the understatement of expenses ($29,515) equals the difference in reported income of $86,515 ($119,800 – $33,285).

LO 2, 3 BT: AN Difficulty: Hard TOT: 40 min. AACSB: Analytic AICPA FC: Measurement AICPA FC: Reporting

4-56

Kimmel, Financial Accounting, 8/e, Solutions Manual

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PROBLEM 4-7A

(a), (c) & (e) Cash 11/1 Bal. 2,790 11/8 11/10 1,800 11/20 11/12 3,700 11/22 11/29 750 11/25 11/30 Bal. 3,840

1,220 2,500 480 1,000

Accounts Receivable 11/1 Bal. 2,910 11/10 1,800 11/27 900 11/30 Bal. 2,010 Supplies 11/1 Bal. 1,120 11/30 11/17 1,300 11/30 Bal. 1,100

1,320

Equipment 11/1 Bal. 10,000 11/15 3,600 11/30 Bal. 13,600

11/30

Unearned Service Revenue 500 11/1 Bal. 11/29 11/30 Bal.

400 750 650

Salaries and Wages Payable 11/8 620 11/1 Bal. 620 11/30 480 11/30 Bal. 480 Common Stock 11/1 Bal. 10,000 11/30 Bal. 10,000

Accumulated Depreciation— Equipment 11/1 Bal. 500 11/30 250 11/30 Bal. 750

11/20

Accounts Payable 2,500 11/1 Bal. 2,300 11/15 3,600 11/17 1,300 11/30 Bal. 4,700

Retained Earnings 11/1 Bal. 3,000 11/30 Bal. 3,000

Kimmel, Financial Accounting, 8/e, Solutions Manual

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4-57

PROBLEM 4-7A (Continued) Service Revenue 11/12 3,700 11/27 900 11/30 500 11/30 Bal. 5,100 Depreciation Expense 11/30 250 11/30 Bal. 250

Salaries and Wages Expense 11/8 600 11/25 1,000 11/30 480 11/30 Bal. 2,080 Rent Expense 11/22 480 11/30 Bal. 480

Supplies Expense 11/30 1,320 11/30 Bal. 1,320

4-58

Kimmel, Financial Accounting, 8/e, Solutions Manual

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PROBLEM 4-7A (Continued) (b) General Journal Date Nov. 8

10 12 15 17 20 22 25 27 29

Account Titles Salaries and Wages Payable .......................... Salaries and Wages Expense ......................... Cash .........................................................

Debit 620 600

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

1,800

Cash ................................................................. Service Revenue ......................................

3,700

Equipment ....................................................... Accounts Payable....................................

3,600

Supplies ........................................................... Accounts Payable....................................

1,300

Accounts Payable ........................................... Cash .........................................................

2,500

Rent Expense .................................................. Cash .........................................................

480

Salaries and Wages Expense ......................... Cash .........................................................

1,000

Accounts Receivable ...................................... Service Revenue ......................................

900

Cash ................................................................. Unearned Service Revenue ....................

750

Kimmel, Financial Accounting, 8/e, Solutions Manual

Credit

1,220 1,800 3,700 3,600 1,300 2,500 480 1,000 900

(For Instructor Use Only)

750

4-59

PROBLEM 4-7A (Continued) (d) & (f)

SOHO EQUIPMENT REPAIR Trial Balances November 30, 2017

Cash ............................................ Accounts Receivable ................. Supplies ...................................... Equipment .................................. Accumulated Depreciation— Equipment Accounts Payable ...................... Unearned Service Revenue ....... Salaries and Wages Payable ..... Common Stock........................... Retained Earnings ..................... Service Revenue ........................ Depreciation Expense................ Supplies Expense ..................... Salaries and Wages Expense ... Rent Expense .............................

4-60

Before Adjustment Dr. Cr. $ 3,840 2,010 2,420 13,600 $

After Adjustment Dr. Cr. $ 3,840 2,010 1,100 13,600

500 4,700 1,150

10,000 3,000 4,600

750 4,700 650 480 10,000 3,000 5,100

250 1,320 1,600 2,080 480 480 $23,950 $23,950 $24,680 $24,680

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 4-7A (Continued) (e) Nov. 30

30 (g)

1. Supplies Expense........................................... Supplies ($2,420 – $1,100)......................

1,320

2. Salaries and Wages Expense ........................ Salaries and Wages Payable ..................

480

3. Depreciation Expense .................................... Accumulated Depreciation-Equipment .

250

4. Unearned Service Revenue ........................... Service Revenue .....................................

500

1,320

480

250

500

SOHO EQUIPMENT REPAIR Income Statement For the Month Ended November 30, 2017 Revenues Service revenue............................................... Expenses Salaries and wages expense .......................... Supplies expense ............................................ Rent expense ................................................... Depreciation expense ..................................... Total expenses......................................... Net income ..............................................................

( $5,100) $2,080 1,320 480 250 4,130) $ 970

SOHO EQUIPMENT REPAIR Retained Earnings Statement For the Month Ended November 30, 2017 Retained earnings, November 1 ........................... Add: Net income .................................................... Retained earnings, November 30 .........................

Kimmel, Financial Accounting, 8/e, Solutions Manual

$3,000 970 $3,970

(For Instructor Use Only)

4-61

PROBLEM 4-7A (Continued)

SOHO EQUIPMENT REPAIR Balance Sheet November 30, 2017 Assets Current assets Cash ................................................................... Accounts receivable ......................................... Supplies ............................................................. Total current assets ................................... Property, plant and equipment Equipment.......................................................... Less: Accumulated depreciation— equipment .............................................. Total assets ................................................

$ 3,840 2,010 1,100 $ 6,950 13,600 750

12,850 $19,800

Liabilities and Stockholders’ Equity Current liabilities Accounts payable.............................................. Unearned service revenue ................................ Salaries and wages payable ............................. Total current liabilities............................... Stockholders’ equity Common stock .................................................. Retained earnings ............................................. Total stockholders’ equity .................... Total liabilities and stockholders’ equity .......................................................

$ 4,700 650 480 $ 5,830 10,000 3,970 13,970 $19,800

(Ending retained earnings = Beginning retained earnings ± Changes to retained earnings) LO 2-4 BT: AP Difficulty: Hard TOT: 70 min. AACSB: Analytic AICPA FC: Reporting

4-62

Kimmel, Financial Accounting, 8/e, Solutions Manual

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ACCOUNTING CYCLE REVIEW 4-1

(a) General Journal Date July 1 1

3 5 12 18 20 21 25 31 31

Account Titles Debit Cash .................................................................. 12,000 Common Stock..........................................

12,000

Equipment ......................................................... Accounts Payable ..................................... Cash ...........................................................

8,000 6,000 2,000

Supplies ............................................................ Accounts Payable .....................................

900

Prepaid Insurance ............................................ Cash ...........................................................

1,800

Accounts Receivable........................................ Service Revenue .......................................

3,700

Accounts Payable ............................................. Cash ...........................................................

1,500

Salaries and Wages Expense .......................... Cash ...........................................................

2,000

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

1,600

Accounts Receivable........................................ Service Revenue .......................................

2,500

Maintenance and Repairs Expense ................. Cash ...........................................................

290

Dividends .......................................................... Cash ...........................................................

600

Kimmel, Financial Accounting, 8/e, Solutions Manual

Credit

900 1,800 3,700 1,500 2,000 1,600 2,500 290

(For Instructor Use Only)

600

4-63

ACR 4-1 (Continued) (b), (e) & (h) Cash 7/1 12,000 7/1 7/21 1,600 7/5 7/18 7/20 7/31 7/31 7/31 Bal. 5,410

2,000 1,800 1,500 2,000 290 600

7/18

Accounts Payable 1,500 7/1 7/3 7/31 Bal.

Salaries and Wages Payable 7/31 400 7/31 Bal. 400

Accounts Receivable 7/12 3,700 7/21 1,600 7/25 2,500 7/31 1,700 7/31 Bal. 6,300

7/3 7/31 Bal.

Supplies 900 7/31 320

Prepaid Insurance 7/5 1,800 7/31 7/31 Bal. 1,650

7/1 7/31 Bal.

580

150

Dividends 600 7/31 0

7/31

7/31 7/31 Bal.

7/31 7/31

Accumulated Depreciation— Equipment 7/31 180 7/31 Bal. 180

4-64

Common Stock 7/1 12,000 7/31 Bal. 12,000 Retained Earnings 600 7/31 7/31 Bal.

Equipment 8,000 8,000

6,000 900 5,400

7/31

Income Summary 3,600 7/31 4,300 7/31 Bal. Service Revenue 7,900 7/12 7/25 7/31 7/31 Bal.

Kimmel, Financial Accounting, 8/e, Solutions Manual

4,300 3,700

600

7,900 0

3,700 2,500 1,700 0

(For Instructor Use Only)

ACR 4-1 (Continued) Maintenance and Repairs Expense 7/31 290 7/31 290 7/31 Bal. 0 Supplies Expense 7/31 580 7/31 7/31 Bal. 0

580

Depreciation Expense 7/31 180 7/31 7/31 Bal. 0

180

Insurance Expense 7/31 150 7/31 7/31 Bal. 0

150

Salaries and Wages Expense 7/20 2,000 7/31 2,400 7/31 400 7/31 Bal. 0

Kimmel, Financial Accounting, 8/e, Solutions Manual

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4-65

ACR 4-1 (Continued) (c) & (f)

KLEENE WINDOW WASHING INC. Trial Balance July 31, 2017

Cash ................................................... Accounts Receivable ........................ Supplies ............................................. Prepaid Insurance ............................. Equipment.......................................... Accumulated Depreciation— Equipment ...................................... Accounts Payable ............................. Salaries and Wages Payable ............ Common Stock .................................. Dividends ........................................... Service Revenue................................ Maintenance and Repairs Expense .. Supplies Expense.............................. Depreciation Expense ....................... Insurance Expense ............................ Salaries and Wages Expense ...........

Before Adjustment Debit Credit $ 5,410 4,600 900 1,800 8,000

After Adjustment Debit Credit $ 5,410 6,300 320 1,650 8,000 $

180 5,400 400 12,000

$ 5,400 12,000 600

600 6,200

7,900

290

290 580 180 150 2,000 2,400 $23,600 $23,600 $25,880 $25,880

Total debits = Total credits

4-66

Kimmel, Financial Accounting, 8/e, Solutions Manual

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ACR 4-1 (Continued) (d) General Journal 1. 2. 3. 4. 5.

(g)

Date July 31 31 31 31 31

Account Titles Accounts Receivable ....................................... Service Revenue ........................................

Debit 1,700

Depreciation Expense ..................................... Accumulated Depreciation—Equipment ....

180

Insurance Expense ($1,800 X 1/12) ................. Prepaid Insurance ......................................

150

Supplies Expense ($900 – $320) ..................... Supplies......................................................

580

Salaries and Wages Expense.......................... Salaries and Wages Payable .....................

400

Credit 1,700 180 150 580 400

KLEENE WINDOW WASHING INC. Income Statement For the Month Ended July 31, 2017 Revenues Service revenue................................................ Expenses Salaries and wages expense ........................... Supplies expense ............................................. Maintenance and repairs expense .................. Depreciation expense ...................................... Insurance expense ........................................... Total expenses.......................................... Net income ...............................................................

Kimmel, Financial Accounting, 8/e, Solutions Manual

$7,900 $2,400 580 290 180 150 3,600 $4,300

(For Instructor Use Only)

4-67

ACR 4-1 (Continued) (g)

KLEENE WINDOW WASHING INC. Retained Earnings Statement For the Month Ended July 31, 2017 Retained earnings, July 1 ...................................... Add: Net income ..................................................

0 4,300 4,300 600 $3,700

Less: Dividends ................................................... Retained earnings, July 31 ...................................

KLEENE WINDOW WASHING INC. Balance Sheet July 31, 2017 Assets Current assets Cash ................................................................ Accounts receivable ...................................... Supplies .......................................................... Prepaid insurance .......................................... Total current assets ................................ Property, plant, and equipment Equipment....................................................... Less: Accumulated depreciation ................. Total assets .............................................

$ 5,410 6,300 320 1,650 $13,680 8,000 180

7,820 $21,500

Liabilities and Stockholders’ Equity Current liabilities Accounts payable........................................... Salaries and wages payable .......................... Total current liabilities............................ Stockholders’ equity Common stock ............................................... Retained earnings .......................................... Total stockholders’ equity................. Total liabilities and stockholders’ equity ...................................................

$ 5,400 400 $ 5,800 12,000 3,700 15,700 $21,500

(Ending retained earnings = Beginning retained earnings ± Changes to retained earnings)

4-68

Kimmel, Financial Accounting, 8/e, Solutions Manual

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ACR 4-1 (Continued) (h) Date July 31

General Journal Account Titles and Explanation Service Revenue ............................................. Income Summary ....................................

Debit 7,900

Credit 7,900

Income Summary............................................ 3,600 Salaries and Wages Expense ................. 2,400 Supplies Expense ................................... Depreciation Expense 580 Maintenance and Repairs Expense ....... 290 Depreciation Expense............................. 180 Insurance Expense ................................. 150

Income Summary............................................ Retained Earnings ..................................

4,300

Retained Earnings .......................................... Dividends.................................................

600

(i)

4,300 600

KLEENE WINDOW WASHING INC. Post-Closing Trial Balance July 31, 2017 Cash .................................................................... Accounts Receivable ......................................... Supplies .............................................................. Prepaid Insurance .............................................. Equipment .......................................................... Accumulated Depreciation—Equipment .......... Accounts Payable .............................................. Salaries and Wages Payable ............................. Common Stock .................................................. Retained Earnings .............................................

Debit $ 5,410 6,300 320 1,650 8,000

Credit

$21,680

180 5,400 400 12,000 3,700 $21,680

(Total debits for permanent accounts = Total credits for permanent accounts) LO 2-4 BT: AP Difficulty: Hard TOT: 80 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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4-69

ACCOUNTING CYCLE REVIEW 4-2 (a) General Journal Date Mar. 1 1 1 2 3 6 14 18 20 21 28 31 31

4-70

Account Titles Debit Cash ................................................................... 15,000 Common Stock ..........................................

Credit 15,000

Cash ................................................................... 6,000 Notes Payable............................................

6,000

Equipment ......................................................... 8,000 Cash ...........................................................

8,000

Prepaid Rent ..................................................... 1,500 Cash ...........................................................

1,500

Prepaid Insurance............................................. 2,400 Cash ...........................................................

2,400

Supplies............................................................. 2,000 Accounts Payable .....................................

2,000

Accounts Receivable ........................................ 3,700 Service Revenue .......................................

3,700

Accounts Payable ............................................. Cash ...........................................................

500

Salaries and Wages Expense........................... 1,750 Cash ...........................................................

1,750

Cash ................................................................... 1,600 Accounts Receivable ................................

1,600

Accounts Receivable ........................................ 4,200 Service Revenue .......................................

4,200

Maintenance and Repairs Expense ................. Cash ...........................................................

350

350 900

Kimmel, Financial Accounting, 8/e, Solutions Manual

900 (For Instructor Use Only)

ACR 4-2 (Continued) (b), (e) & (h) Cash 3/1 15,000 3/1 3/1 6,000 3/2 3/21 1,600 3/3 3/18 3/20 3/31 3/31 3/31 Bal. 7,200

8,000 1,500 2,400 500 1,750 350 900

Accounts Receivable 3/14 3,700 3/21 1,600 3/28 4,200 3/31 200 3/31 Bal. 6,500

3/6 3/31 Bal.

Supplies 2,000 3/31 280

500

Prepaid Insurance 3/3 2,400 3/31 3/31 Bal. 2,000

400

3/1 3/31 Bal.

3/18

Notes Payable 3/1 3/31 Bal.

6,000 6,000

Accounts Payable 500 3/6 3/31 Bal.

2,000 1,500

Salaries and Wages Payable 3/31 1,080 3/31 Bal. 1,080

1,720

Prepaid Rent 3/2 1,500 3/31 3/31 Bal. 1,000

Equipment 8,000 8,000

Accumulated Depreciation— Equipment 3/31 250 3/31 Bal. 250

Interest Payable 3/31 3/31 Bal.

30 30

Common Stock 3/1 15,000 3/31 Bal. 15,000

3/31

Retained Earnings 900 3/31 3/31 Bal.

3/31 3/31 Bal.

Dividends 900 3/31 0

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

2,020 1,120

900

4-71

ACR 4-2 (Continued) 3/31 3/31

3/31

Income Summary 6,080 3/31 2,020 3/31 Bal. Service Revenue 8,100 3/14 3/28 3/31 3/31 Bal.

8,100 0

3,700 4,200 200 0

Depreciation Expense 3/31 250 3/31 3/31 Bal. 0

250

Insurance Expense 3/31 400 3/31 3/31 Bal. 0

400

Salaries and Wages Expense 3/20 1,750 3/31 2,830 3/31 1,080 3/31 Bal. 0

Maintenance and Repairs Expense 3/31 350 3/31 350 3/31 Bal. 0

Rent Expense 3/31 500 3/31 3/31 Bal. 0

500

Supplies Expense 3/31 1,720 3/31 3/31 Bal. 0

Interest Expense 3/31 30 3/31 3/31 Bal. 0

4-72

1,720

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

ACR 4-2 (Continued) (c) & (f)

LARS CLEANERS Trial Balance March 31, 2017

Cash ..................................................... Accounts Receivable .......................... Supplies ............................................... Prepaid Rent ........................................ Prepaid Insurance ............................... Equipment ........................................... Accumulated Depreciation— Equipment ........................................ Notes Payable ..................................... Accounts Payable ............................... Salaries and Wages Payable .............. Interest Payable................................... Common Stock .................................... Dividends ............................................. Service Revenue ................................. Maintenance and Repairs Expense.... Salaries and Wages Expense ............. Depreciation Expense ......................... Insurance Expense ............................. Supplies Expense ............................... Rent Expense ...................................... Interest Expense .................................

Before Adjustment Debit Credit $ 7,200 6,300 2,000 1,500 2,400 8,000

After Adjustment Debit Credit $ 7,200 6,500 280 1,000 2,000 8,000 $

250 6,000 1,500 1,080 30 15,000

$ 6,000 1,500 15,000 900

900 7,900

8,100

350 1,750

350 2,830 250 400 1,720 500 30 $30,400 $30,400 $31,960 $31,960

(Total debits = Total credits)

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

4-73

ACR 4-2 (Continued) (d)

1. 2.

4. 5. 6. 7.

4-74

Date March 31 31

31 31 31 31

General Journal Account Titles Accounts Receivable ............................. Service Revenue.............................

Debit 200

200

Depreciation Expense ........................... Accumulated Depreciation— Equipment....................................

250

Insurance Expense ................................ Prepaid Insurance ($2,400 ÷ 6) ......................................

400

Supplies Expense .................................. Supplies ($2,000 – $280) ................

1,720

Salaries and Wages Expense ................ Salaries and Wages Payable .........

1,080

Rent Expense ......................................... Prepaid Rent ($1,500 ÷ 3) ...............

500

Interest Expense .................................... Interest Payable ($6,000 × .06 × 1/12) .....................

Credit

250

400 1,720 1,080 500

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

ACR 4-2 (Continued) (g)

LARS CLEANERS Income Statement For the Month Ended March 31, 2017 Revenues Service revenue................................................ Expenses Salaries and wages expense ........................... Supplies expense ............................................. Rent expense .................................................... Insurance expense ........................................... Maintenance and repairs expense .................. Depreciation expense ...................................... Interest expense ............................................... Total expenses.......................................... Net income ...............................................................

$8,100 $2,830 1,720 500 400 350 250 30 6,080 $2,020

LARS CLEANERS Retained Earnings Statement For the Month Ended March 31, 2017 Retained earnings, March 1 ................................... Add: Net income ...................................................

0 2,020 2,020 900 $1,120

Less: Dividends ..................................................... Retained earnings, March 31 .................................

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

4-75

ACR 4-2 (Continued) LARS CLEANERS Balance Sheet March 31, 2017 Assets Current assets Cash ................................................................ Accounts receivable ...................................... Supplies .......................................................... Prepaid rent .................................................... Prepaid insurance .......................................... Total current assets ................................ Property, plant, and equipment Equipment....................................................... Less: Accumulated depreciation— equipment........................................ Total assets .............................................

$7,200 6,500 280 1,000 2,000 $16,980 8,000 250

7,750 $24,730

Liabilities and Stockholders’ Equity Current liabilities Notes payable ................................................. Accounts payable........................................... Salaries and wages payable .......................... Interest payable .............................................. Total current liabilities............................ Stockholders’ equity Common stock ............................................... Retained earnings .......................................... Total stockholders’ equity .................. Total liabilities and stockholders’ equity ......................................................

$ 6,000 1,500 1,080 30 $ 8,610 15,000 1,120 16,120 $24,730

(Ending retained earnings = Beginning retained earnings ± Changes to retained earnings)

4-76

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

ACR 4-2 (Continued) (h) Date Mar. 31 31

31 31

General Journal Account Titles and Explanation Debit Service Revenue ............................................... 8,100 Income Summary ......................................

Credit 8,100

Income Summary.............................................. 6,080 Salaries and Wages Expense ................... Supplies Expense ..................................... Rent Expense ............................................ Insurance Expense ................................... Maintenance and Repairs Expense ......... Depreciation Expense............................... Interest Expense .......................................

2,830 1,720 500 400 350 250 30

Income Summary.............................................. 2,020 Retained Earnings ....................................

2,020

Retained Earnings ............................................ Dividends...................................................

Kimmel, Financial Accounting, 8/e, Solutions Manual

900

(For Instructor Use Only)

900

4-77

ACR 4-2 (Continued) (i)

LARS CLEANERS Post-Closing Trial Balance March 31, 2017 Cash ..................................................................... Accounts Receivable .......................................... Supplies............................................................... Prepaid Rent ....................................................... Prepaid Insurance............................................... Equipment ........................................................... Accumulated Depreciation—Equipment ........... Notes Payable ..................................................... Accounts Payable ............................................... Salaries and Wages Payable .............................. Interest Payable .................................................. Common Stock ................................................... Retained Earnings ..............................................

Debit $ 7,200 6,500 280 1,000 2,000 8,000

Credit

$24,980

250 6,000 1,500 1,080 30 15,000 1,120 $24,980

(Permanent accounts with debit balances = Permanent accounts with credit balances) LO 2-4 BT: AP Difficulty: Hard TOT: 90 min. AACSB: Analytic AICPA FC: Reporting

4-78

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

ACCOUNTING CYCLE REVIEW 4-3

(a), (c) & (e)

8/1 Bal. 8/5 8/12 8/29 8/31 Bal.

Cash 6,040 8/1 1,200 8/3 2,800 8/10 780 8/20 8/25 2,020

400 380 3,120 2,000 2,900

Accounts Receivable 8/1 Bal. 2,910 8/5 1,200 8/27 3,760 8/31 Bal. 5,470

Equipment 8/1 Bal. 10,000 8/15 2,000 8/31 Bal. 12,000 Accumulated Depreciation— Equipment 8/1 Bal. 600 8/31 320 8/31 Bal. 920

8/20 Notes Receivable 8/1 Bal. 4,000 8/31 Bal. 4,000 Interest Receivable 8/31 20 8/31 Bal. 20

8/1 Bal. 8/22 8/31 Bal.

Supplies 1,030 8/31 800 960

2,300 2,000 800 3,100

Unearned Service Revenue 800 8/1 Bal. 8/29 8/31 Bal.

1,260 780 1,240

870 Salaries and Wages Payable 8/10 1,420 8/1 Bal. 1,420 8/31 1,540 8/31 Bal. 1,540

Prepaid Advertising 8/1 400 8/31 8/31 Bal. 200

8/31

Accounts Payable 2,000 8/1 Bal. 8/15 8/22 8/31 Bal.

200 Common Stock 8/1 Bal. 12,000 8/31 Bal. 12,000

Kimmel, Financial Accounting, 8/e, Solutions Manual

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4-79

ACR 4-3 (Continued)

8/31

4-80

Retained Earnings 530 8/1 Bal. 8/31 Bal. Income Summary 7,910 8/31 8/31 8/31 Bal. Service Revenue 7,360 8/12 8/27 8/31 8/31 Bal.

6,400 5,870

7,380 530 0

2,800 3,760 800 0

Interest Revenue 20 8/31 8/31 Bal.

20 0

Depreciation Expense 8/31 320 8/31 8/31 Bal. 0

320

Supplies Expense 8/31 870 8/31 8/31 Bal. 0

870

Salaries and Wages Expense 8/10 1,700 8/31 6,140 8/25 2,900 8/31 1,540 8/31 Bal. 0 Rent Expense 8/3 380 8/31 8/31 Bal. 0

380

Advertising Expense 8/31 200 8/31 8/31 Bal. 0

200

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

ACR 4-3 (Continued) (b)

General Journal

Date Aug. 1 3 5 10

12 15 20 22 25 27 29

Account Titles Debit Prepaid Advertising ......................................... 400 Cash .......................................................... Rent Expense ................................................... Cash ..........................................................

Credit 400

380 380

Cash .................................................................. 1,200 Accounts Receivable ...............................

1,200

Salaries and Wages Payable ........................... 1,420 Salaries and Wages Expense .......................... 1,700 Cash ..........................................................

3,120

Cash .................................................................. 2,800 Service Revenue.......................................

2,800

Equipment ........................................................ 2,000 Accounts Payable ....................................

2,000

Accounts Payable ............................................ 2,000 Cash ..........................................................

2,000

Supplies ............................................................ Accounts Payable ....................................

800 800

Salaries and Wages Expense .......................... 2,900 Cash ..........................................................

2,900

Accounts Receivable ....................................... 3,760 Service Revenue.......................................

3,760

Cash .................................................................. Unearned Service Revenue .....................

Kimmel, Financial Accounting, 8/e, Solutions Manual

780

(For Instructor Use Only)

780

4-81

ACR 4-3 (Continued) (d) & (f)

B & B REPAIR SERVICES Trial Balances August 31, 2017

Cash ............................................ Accounts Receivable ................. Notes Receivable ....................... Interest Receivable .................... Supplies ...................................... Prepaid Advertising ................... Equipment .................................. Accumulated Depr.— Equipment ............................... Accounts Payable ...................... Unearned Service Revenue ....... Salaries and Wages Payable ..... Common Stock .......................... Retained Earnings ..................... Service Revenue ........................ Interest Revenue ........................ Salaries and Wages Expense .... Rent Expense ............................. Supplies Expense ...................... Depreciation Expense ............... Advertising Expense .................

Before Adjustment Dr. Cr. $ 2,020 5,470 4,000 1,830 400 12,000 $

After Adjustment Dr. Cr. $ 2,020 5,470 4,000 20 960 200 12,000

600 3,100 2,040

12,000 6,400 6,560

920 3,100 1,240 1,540 12,000 6,400 7,360 20

4,600 380

6,140 380 870 320 200 $30,700 $30,700 $32,580 $32,580

(Total debits = Total credits)

4-82

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

ACR 4-3 (Continued) (e) Aug. 31

1. Supplies Expense........................................... Supplies ($1,830 – $960).........................

870

2. Salaries and Wages Expense ........................ Salaries and Wages Payable ..................

1,540

3. Depreciation Expense .................................... Accumulated Depreciation-Equipment .

320

4. Unearned Service Revenue ........................... Service Revenue .....................................

800

5. Advertising Expense ...................................... Prepaid Advertising ................................

200

6. Interest Receivable......................................... Interest Revenue ($4,000 × .06 × 1/12) ...

Kimmel, Financial Accounting, 8/e, Solutions Manual

870

1,540

320

800

200

(For Instructor Use Only)

4-83

ACR 4-3 (Continued) (g)

B & B REPAIR SERVICES Income Statement For the Month Ended August 31, 2017 Revenues Service revenue .............................................. Interest revenue.............................................. Total expenses ........................................ Expenses Salaries and wages expense ......................... Supplies expense ........................................... Rent expense .................................................. Depreciation expense .................................... Advertising expense ...................................... Total expenses ........................................ Net loss...................................................................

($7,360 20 $7,380) 6,140 870 380 320 200 7,910) ($530)

B & B REPAIR SERVICES Retained Earnings Statement For the Month Ended August 31, 2017 Retained earnings, August 1 ................................. Less: Net loss ....................................................... Retained earnings, August 31 ...............................

4-84

Kimmel, Financial Accounting, 8/e, Solutions Manual

$6,400 530 $5,870

(For Instructor Use Only)

ACR 4-3 (Continued)

B & B REPAIR SERVICES Balance Sheet August 31, 2017 Assets Current assets Cash ............................................................... Accounts receivable ..................................... Notes receivable............................................ Interest receivable......................................... Supplies ......................................................... Prepaid Advertising ...................................... Total current assets .............................. Property, plant and equipment Equipment ..................................................... Less: Accumulated depreciation— equipment .......................................... Total assets ............................................

$ 2,020 5,470 4,000 20 960 200 $12,670 12,000 920

11,080 $23,750

Liabilities and Stockholders’ Equity Current liabilities Accounts payable ............................................... $ 3,100 Unearned service revenue.................................. 1,240 Salaries and wages payable ............................... 1,540 Total current liabilities ................................ Stockholders’ equity Common stock .................................................... 12,000 Retained earnings ............................................... 5,870 Total stockholders’ equity .......................... Total liabilities and stockholders’ equity .........................................................

$ 5,880

17,870 $23,750

(Ending retained earnings = Beginning retained earnings ± Changes to retained earnings)

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

4-85

ACR 4-3 (Continued) (h) Date Aug.

General Journal Account Titles and Explanation Debit 31 Service Revenue ............................................... 7,360 Interest Revenue............................................... 20 Income Summary ......................................

Credit

7,380

31 Income Summary.............................................. 7,910 Salaries and Wages Expense ................... Supplies Expense ..................................... Rent Expense ............................................ Depreciation Expense .............................. Advertising Expense ................................ 31 Retained Earnings ............................................ Income Summary ......................................

(i)

6,140 870 380 320 200

530 530

B & B REPAIR SERVICES Post-Closing Trial Balance March 31, 2017 Cash ..................................................................... Accounts Receivable .......................................... Notes Receivable ................................................ Interest Receivable ............................................. Supplies............................................................... Prepaid Advertising ............................................ Equipment ........................................................... Accumulated Depreciation—Equipment ........... Accounts Payable ............................................... Unearned Service Revenue ................................ Salaries and Wages Payable .............................. Common Stock ................................................... Retained Earnings ..............................................

Debit $ 2,020 5,470 4,000 20 960 200 12,000

Credit

$24,670

920 3,100 1,240 1,540 12,000 5,870 $24,670

(Permanent accounts with debit balances = Permanent accounts with credit balances) LO 2-4 BT: AP Difficulty: Hard TOT: 90 min. AACSB: Analytic AICPA FC: Reporting

4-86

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

ACCOUNTING CYCLE REVIEW 4-4 (b) Date July 1

Account Titles

Debit

Equipment ................................................................ Cash................................................................. Notes Payable .................................................

24,000

Cash ........................................................................ Common Stock ...............................................

50,000

Prepaid Insurance ................................................... Cash.................................................................

3,600

Prepaid Rent ............................................................ Cash.................................................................

8,000

Supplies ................................................................... Cash.................................................................

3,800

4,000 20,000

50,000

3,600

8,000

3,800

No entry required (consulting agreement)

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

1,200

Unearned Service Revenue .................................... Service Revenue .............................................

1,120

Accounts Payable ................................................... Cash.................................................................

400

Cash ......................................................................... Unearned Service Revenue ...........................

12,000

Salaries and Wages Expense ................................. Cash.................................................................

11,000

Accounts Receivable ............................................. Service Revenue .............................................

28,000

Kimmel, Financial Accounting, 8/e, Solutions Manual

Credit

1,200

1,120

400

12,000

11,000

28,000

(For Instructor Use Only)

4-87

ACR 4-4 (Continued) (b) (Continued) Date July 20 23 27

Account Titles

Debit

Advertising Expense .............................................. Accounts Payable ..........................................

2,200

Unearned Service Revenue.................................... Service Revenue ............................................

10,000

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

15,000

Credit

2,200 10,000 15,000

Adjusting Entries 31

31 31

31 31 31

4-88

Insurance Expense ................................................. Prepaid Insurance .......................................... ($3,600 × 1/12)

300

Rent Expense .......................................................... Prepaid Rent ...................................................

4,000

Supplies Expense ................................................... Supplies ..........................................................

1,250

Depreciation Expense ............................................ Accumulated Depreciation—Equipment...... ($24,000 ÷ 4 × 1/12)

500

Interest Expense ..................................................... Interest Payable ............................................. ($20,000 × 6% × 1/12)

100

Salaries and Wages Expense ................................ Salaries and Wages Payable .........................

11,000

Utilities Expense ..................................................... Accounts Payable ..........................................

800

Income Tax Expense .............................................. Income Taxes Payable...................................

1,200

300

4,000 1,250

500

100

11,000 800

Kimmel, Financial Accounting, 8/e, Solutions Manual

1,200

(For Instructor Use Only)

ACR 4-4 (Continued) (a), (c), (e), and (h) Cash July

July

1 Bal.

5,230 July

4,000

50,000

3,600

1,200

8,000

12,000

3,800

15,000

400

11,000

31 Bal.

52,630 Accounts Receivable

July July

1 Bal.

1,200 July

1,200

28,000

15,000

31 Bal.

13,000

300

1,250

4,000

Prepaid Insurance July

3,600

July

31 Bal.

3,300

July

Supplies July July

1 Bal.

690 July

3,800

31 Bal.

3,240 Prepaid Rent

July

8,000 July

July

31 Bal.

4,000

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

4-89

ACR 4-4 (Continued) (a), (c), (e), and (h) (Continued) Equipment July

24,000

July 31 Bal.

24,000 Accumulated Depreciation—Equipment July 31

500

July 31 Bal

500

Accounts Payable July 14

400 July 1 Bal.

400

2,200

800

July

31 Bal.

3,000

Interest Payable July 31

100

July 31 Bal.

100

Salaries and Wages Payable July 31

11,000

July 31 Bal.

11,000

Income Taxes Payable

4-90

July 31

1,200

July 31 Bal.

1,200

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

ACR 4-4 (Continued) (a), (c), (e), and (h) (Continued) Unearned Service Revenue July 13

1,120

July 1 Bal.

1,120

10,000

12,000

July 31 Bal.

2,000

Notes Payable July 1

20,000

July 31 Bal.

20,000

Common Stock July 1 Bal.

3,600

50,000

July 31 Bal.

53,600

Retained Earnings July 1 Bal.

2,000

July 31

6,770

July 31 Bal.

8,770

Service Revenue

July 31

July 13

1,120

28,000

10,000

39,120 July 31 Bal.

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

4-91

ACR 4-4 (Continued) (a), (c), (e), and (h) (Continued)

Salaries and Wages Expense July 18

11,000

July 31

11,000 July 31

July 31 Bal.

22,000

Rent Expense July 31

4,000 July 31

July 31 Bal.

4,000

0 Advertising Expense

July 20

2,200 July 31

July 31 Bal.

2,200

0 Supplies Expense

July 31

1,250 July 31

July 31 Bal.

4-92

1,250

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

ACR 4-4 (Continued) (a), (c), (e), and (h) (Continued)

Utilities Expense July 31

800 July 31

July 31 Bal.

800

0 Depreciation Expense

July

500 July 31

July 31 Bal.

500

0 Insurance Expense

July

300 July 31

July 31 Bal.

300

0 Interest Expense

July

100 July 31

July 31 Bal.

100

0 Income Tax Expense

July 31

1,200 July 31

July 31 Bal.

1,200

0 Income Summary

July

32,350

6,770 July 31

39,120

July 31 B al.

Kimmel, Financial Accounting, 8/e, Solutions Manual

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4-93

ACR 4-4 (Continued) (d) and (f) (Continued) GREEN RIVER COMPUTER CONSULTANTS Trial Balances July 31, 2017

Cash .............................................................. Accounts receivable .................................... Prepaid insurance ........................................ Supplies ........................................................ Prepaid rent ................................................... Equipment ..................................................... Accumulated depreciation—equipment ...... Accounts payable ......................................... Interest payable ............................................ Salaries and wages payable ........................ Income taxes payable .................................. Unearned service revenue ........................... Notes payable ................................................ Common stock ............................................. Retained earnings ........................................ Service revenue ............................................ Salaries and wages expense ....................... Rent expense ................................................ Advertising expense .................................... Supplies expense ......................................... Utilities expense ........................................... Depreciation expense .................................. Insurance expense ....................................... Interest expense ........................................... Income tax expense .....................................

Before Adjustment

After Adjustment

Debit $ 52,630 13,000 3,600 4,490 8,000 24,000

Debit $ 52,630 13,000 3,300 3,240 4,000 24,000

Credit

$ $

2,200

2,000 20,000 53,600 2,000 39,120 11,000 2,200

$118,920 $118,920

22,000 4,000 2,200 1,250 800 500 300 100 1,200 $132,520

500 3,000 100 11,000 1,200 2,000 20,000 53,600 2,000 39,120

$132,520

(Total debits = Total credits)

4-94

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

ACR 4-4 (Continued) (g) (1) GREEN RIVER COMPUTER CONSULTANTS Income Statement For the Month Ended July 31, 2017

Revenues Service revenue ............................................ Expenses Salaries and wages expense........................ Rent expense ................................................. Advertising expense ..................................... Supplies expense .......................................... Utilities expense ............................................ Depreciation expense ................................... Insurance expense ........................................ Interest expense ............................................ Income tax expense ...................................... Total expenses ..................................... Net income..............................................................

$39,120 $22,000 4,000 2,200 1,250 800 500 300 100 1,200 32,350 $ 6,770

(2) GREEN RIVER COMPUTER CONSULTANTS Retained Earnings Statement For the Month Ended July 31, 2017 Retained earnings, July 1 ............................................................ Add: Net income ........................................................................... Retained earnings, July 31 ..........................................................

Kimmel, Financial Accounting, 8/e, Solutions Manual

$2,000 6,770 $8,770

(For Instructor Use Only)

4-95

ACR 4-4 (Continued) (g) (Continued) (3) GREEN RIVER COMPUTER CONSULTANTS Balance Sheet July 31, 2017 Assets Current assets Cash........................................................... Accounts receivable................................. Prepaid rent .............................................. Prepaid insurance .................................... Supplies .................................................... Total current assets ........................ Property, plant, and equipment Equipment ................................................. Less: Accumulated depreciation ............ Total assets........................................................

$52,630 13,000 4,000 3,300 3,240 76,170 $24,000 500

Liabilities and Stockholders’ Equity Current liabilities Accounts payable ..................................... $ 3,000 Salaries and wages payable .................... 11,000 Interest payable ........................................ 100 Income tax payable .................................. 1,200 Unearned service revenue ....................... 2,000 Total current liabilities ........................ Long-term liabilities Notes payable ........................................... Total liabilities.................................. Stockholders’ equity Common stock.......................................... $53,600 Retained earnings .................................... 8,770 Total stockholders’ equity .............. Total liabilities and stockholders’ equity ........

23,500 $99,670

$17,300 20,000 37,300

62,370 $99,670

(Ending retained earnings = Beginning retained earnings ± Changes to retained earnings)

4-96

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

ACR 4-4 (Continued) (h) Date July 31 31

Debit

Account Titles Service Revenue...................................................... Income Summary ...........................................

39,120

Income Summary .................................................... Salaries and Wages Expense ........................ Rent Expense .................................................. Advertising Expense ...................................... Supplies Expense ........................................... Utilities Expense ............................................. Depreciation Expense .................................... Insurance Expense ......................................... Interest Expense ............................................. Income Tax Expense ......................................

32,350

Income Summary .................................................... Retained Earnings ..........................................

6,770

Credit

39,120 22,000 4,000 2,200 1,250 800 500 300 100 1,200 6,770

(i) GREEN RIVER COMPUTER CONSULTANTS Post-Closing Trial Balance July 31, 2017 Cash ............................................................... Accounts receivable ..................................... Prepaid insurance ......................................... Supplies ......................................................... Prepaid rent ................................................... Equipment ..................................................... Accumulated depreciation—equipment ...... Accounts payable ......................................... Interest payable ............................................ Salaries and wages payable ........................ Income taxes payable ................................... Unearned service revenue ........................... Notes payable ................................................ Common stock .............................................. Retained earnings .........................................

Debit $ 52,630 13,000 3,300 3,240 4,000 24,000

Credit

$100,170

500 3,000 100 11,000 1,200 2,000 20,000 53,600 8,770 $100,170

(Permanent accounts with debit balances = Permanent accounts with credit balances) LO 2-4 BT: AP Difficulty: Hard TOT: 180 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

4-97

CT 4-1

FINANCIAL REPORTING PROBLEM

(a) Items that may result in adjusting entries for deferrals are: 1. 2. 3. 4. (b) 1. 2.

Deferred tax assets. Other current assets (prepaid expenses). Plant and equipment accumulated depreciation. Deferred revenue. Accrued expenses (interest expense, provision for income taxes, and other expense) Accrued revenues (other income)

(c) Depreciation and amortization expense was $7,946 (millions) in 2014 and $6,757 (millions) in 2013. Accumulated depreciation was reported in Note 3 to the consolidated financial statements. (d) The statement of cash flows (at the bottom) reports income taxes paid in 2014 of $10,026 (millions). The income statement reports income tax expense of $13,973 (millions). LO 2-4 BT: AP Difficulty: Medium TOT: 20 min. AACSB: Communication and Analytic AICPA FC: Reporting AICPA PC: Communication

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CT 4-2

COMPARATIVE ANALYSIS PROBLEM

Accounts that provide evidence of the use of accrual accounting are: Balance Sheet

Income Statement

(a) Columbia Company 1. Accounts receivable, net 2. Prepaid expenses 3. Income taxes payable 4. Accrued liabilities

1. 2. 3. 4.

Sales Insurance (or supplies) expense Income tax expense Miscellaneous expense

(b) VFC 1. Other current assets 2. Accounts receivable, less allowance for doubtful accounts 3. Accrued liabilities 4. Deferred income taxes

1. Insurance (or supplies) expense 2. Sales 3. Miscellaneous expense 4. Income tax expense

LO 1 BT: AN Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

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CT 4-3

COMPARATIVE ANALYSIS PROBLEM

Accounts that provide evidence of the use of accrual accounting are: Balance Sheet

Income Statement

(a) Amazon Company 1. Accounts receivable, net and other 2. Accrued expenses and other 3. Unearned revenue

1. Product or Service Sales 2. Interest expense 3. Product or Service revenue

(b) Wal-Mart 1. Prepaid expenses 2. Accumulated depreciation 3. Accounts receivable, net 4. Accrued liabilities 5. Accrued income taxes

1. 2. 3. 4. 5.

Insurance (or supplies) expense Depreciation expense Sales Miscellaneous expense Income tax expense

LO 1 BT: AN Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

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4-101

CT 4-4

INTERPRETING FINANCIAL STATEMENTS

LASER RECORDING SYSTEMS (a)

Laser Recording is handling legal expense via an accrued expense adjustment. This is explained by the fact that accrued professional services increased during the year.

(b)

Each of the three adjustments is an accrued expense adjustment. Since this type of adjustment increases expenses, net income is decreased by each adjustment.

(c)

In recording accrued interest, Laser Recording debited Interest Expense and credited Interest Payable.

LO 3 BT: AN Difficulty: Hard TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

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CT 4-5

REAL-WORLD FOCUS

(a) The SEC was created by Congress after the stock market crash of 1929. The SEC was created to restore investor confidence in our capital markets by providing more structure and government oversight. (b) Division of Corporation Finance. The Division of Corporation Finance oversees corporate disclosure of important information to the investing public. Corporations are required to comply with regulations pertaining to disclosure that must be made when stock is initially sold and then on a continuing and periodic basis. The Division’s staff routinely reviews the disclosure documents filed by companies. The staff also provides companies with assistance interpreting the Commission’s rules and recommends to the Commission new rules for adoption. Division of Trading and Markets. The Division of Trading and Markets establishes and maintains standards for fair, orderly, and efficient markets. It does this primarily by regulating the major securities market participants: broker-dealer firms; self-regulatory organizations (SROs), which include the stock exchanges and the National Association of Securities Dealers (NASD), Municipal Securities Rulemaking Board (MSRB), and clearing agencies (SROs that help facilitate trade settlement); transfer agents (parties that maintain records of stock and bond owners); and securities information processors. (A self-regulatory organization is a member organization that creates and enforces rules for its members based on the federal securities laws. SROs, which are overseen by the SEC, are the front line in regulating broker-dealers.) Division of Investment Management. The Division of Investment Management oversees and regulates the $15 trillion investment management industry and administers the securities laws affecting investment companies (including mutual funds) and investment advisers. In applying the federal securities laws to this industry, the Division works to improve disclosure and minimize risk for investors without imposing undue costs on regulated entities.

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CT 4-5 (Continued) Division of Enforcement. The Division of Enforcement investigates possible violations of securities laws, recommends Commission action when appropriate, either in a federal court or before an administrative law judge, and negotiates settlements on behalf of the Commission. While the SEC has civil enforcement authority only, it works closely with various criminal law enforcement agencies throughout the country to develop and bring criminal cases when the misconduct warrants more severe action. Division of Economic and Risk Analysis The Division of Economic and Risk Analysis assists the Commission in executing its mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation by integrating robust economic analysis and rigorous data analytics into the work of the SEC. The Division has a broad role in Commission activities, interacting with nearly every Division and Office, providing sophisticated and data-driven economic and risk analyses to help inform the agency's policymaking, rulemaking, enforcement, and examinations. There are two main functions for the Division. First, DERA staff provide vital support in the form of economic analyses in support of Commission rulemaking and policy development. Second, the Division also provides economic analysis and research, risk assessment, and data analytics to critically support the agency's resources on matters presenting the greatest perceived risks in litigation, examinations, and registrant reviews, as well as providing economic support for enforcement matters. ( c ) Office of the Chief Accountant The Chief Accountant is appointed by the Chairman to be the principal adviser to the Commission on accounting and auditing matters. The Office of the Chief Accountant assists the Commission in executing its responsibility under the securities laws to establish accounting principles, and for overseeing the private sector standards-setting process. The Office works closely with the Financial Accounting Standards Board, whose accounting standards the Commission has recognized as generally accepted for purposes of the federal securities laws, as well as the International Accounting Standards Board and the American Institute of Certified Public Accountants.

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CT 4-5 (Continued) In addition to its responsibility for accounting standards, the Commission is responsible for the approval or disapproval of auditing rules put forward by the Public Company Accounting Oversight Board, a private-sector regulator established by the Sarbanes-Oxley Act to oversee the auditing profession. The Commission also has thorough-going oversight responsibility for all of the activities of the PCAOB, including approval of its annual budget. To assist the Commission in the execution of these responsibilities, the Office of the Chief Accountant is the principal liaison with the PCAOB. The Office also consults with registrants and auditors on a regular basis regarding the application of accounting and auditing standards and financial disclosure requirements. Because of its expertise and ongoing involvement with questions concerning the financial books and records of public companies registered with the SEC, the Office of the Chief Accountant is often called upon to assist in addressing issues that arise in the context of Commission enforcement actions. LO None BT: S Difficulty: Hard TOT: 60 min. AACSB: Communication, Technology and Reflective Thinking AICPA PC: Communication

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CT 4-6

(a)

GROUP DECISION CASE

ABBEY PARK Income Statement For the Quarter Ended March 31, 2017 Revenues Rent revenue ($83,000 – $21,000)................. Expenses Salaries and wages expense [$27,600 + ($290 X 3)]............................. Advertising expense ($4,200 + $110) ........... Supplies expense ($4,500 – $600) ................ Maintenance and repairs expense ($2,800 + $1,040) .................................... Insurance expense ($7,200 X 3/12) ............... Utilities expense ($1,500 + $240) .................. Depreciation expense ................................... Interest expense ($20,000 X 7% X 3/12) ....... Total expenses ....................................... Net income ............................................................

$62,000 $28,470 4,310 3,900 3,840 1,800 1,740 800 350 45,210 $16,790

(Revenues are recognized when a service has been provided and expenses are recognized when an asset is used up or a service is used)

(b) The generally accepted accounting principles pertaining to the income statement that were not recognized by Trudy were the revenue recognition principle and the expense recognition principle. The revenue recognition principle states that revenue is recognized when the performance obligation is satisfied. The revenue of $21,000 for summer rentals has not been recognized and, therefore, should not be reported in income for the quarter ended March 31. The expense recognition principle dictates that efforts (expenses) be matched with results (revenues) whenever it is reasonable and practicable to do so. This means that the expenses should include amounts incurred in March but not paid until April. The difference in expenses was $8,310 ($45,210 – $36,900). The overstatement of revenues ($21,000) plus the understatement of expenses ($8,310) equals the difference in reported income of $29,310 ($46,100 – $16,790). LO 2-4 BT: AN Difficulty: Hard Tot: 60 min. AACSB: Communication and Reflective Thinking AICPA PC: Interaction, Leadership and Communication 4-106

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CT 4-7

COMMUNICATION ACTIVITY

(a) Accrual-basis accounting records the events that change an entity’s financial statements in the periods in which the events occur, rather than in the periods in which the entity receives or pays cash. Information presented on an accrual-basis is useful because it reveals relationships that are likely to be important in predicting future results. Conversely, under cash-basis accounting, revenue is recorded only when cash is received, and an expense is recognized only when cash is paid. As a result, the cash-basis of accounting often results in misleading financial statements. (b) Politicians might desire a cash-basis accounting system over an accrualbasis system because if an accrual accounting system is used, it could mean that billions in government liabilities presently unrecorded would have to be reported in the federal budget immediately. Currently, the federal government is facing a huge budget deficit. The recognition of these additional liabilities would make the deficit even worse. This is not what politicians would like to see and be held responsible for. (c) Dear Senator, It is my understanding, after having taken a beginning course in accounting principles, that the federal government uses a cash-basis accounting system rather than an accrual-basis accounting system. I am shocked at such a practice! There must be billions of dollars of liabilities hidden in many contracts that have not been recorded because they haven’t been paid yet. I realize that the deficit would dramatically increase if we were to implement an accrual system, but in all fairness, we citizens should be given a more accurate picture of what our government is up to. Sincerely, CONCERNED STUDENT LO 1 BT: S Difficulty: Hard TOT: 45 min. AACSB: Communication and Reflective Thinking AICPA PC: Communication AICPA BB: Critical Thinking

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CT 4-8

ETHICS CASE

(a) The stakeholders in this situation are: • • •

Tim Allen, controller. The president of Wells Company. Company stockholders and potential stockholders.

(b) 1.

It is unethical for the president to place pressure on Tim to misstate net income by requesting him to prepare incorrect adjusting entries.

It is customary for adjusting entries to be dated as of the balance sheet date although the entries are prepared at a later date. Tim did nothing unethical by dating the adjusting entries December 31.

(c) Tim can accrue revenues and defer expenses through the preparation of adjusting entries and be ethical so long as the entries reflect economic reality. Intentionally misrepresenting the company’s financial condition and its results of operations is unethical (it is also illegal). LO 2, 3 BT: E Difficulty: Hard TOT: 30 min. AACSB: Ethics AICPA PC: Personal Demeanor

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CT 4-9

ALL ABOUT YOU ACTIVITY

The following is a personal balance sheet using the classified presentation. Note that the earnings from the part-time job as well as the tuition costs are not listed since neither of those items is an asset, liability, or equity item. Assets Current assets Cash ................................................................. Money market account ................................... Certificate of deposit ...................................... Accounts receivable from brother .................. Total current assets ................................

$1,200 1,800 3,000 300

Property, plant, and equipment Automobile ...................................................... Video and stereo equipment .......................... Home computer ............................................... Total assets ..............................................

7,000 1,250 800

$ 6,300

9,050 $15,350

Liabilities and Owner’s Equity Current liabilities Current portion of automobile loan ............... Current portion of credit card payable .......... Total current liabilities ............................ Long-term liabilities Student loan .................................................... Automobile loan .............................................. Credit card payable ......................................... Total long-term liabilities ........................ Total liabilities ...................................

$1,500 150 $ 1,650 5,000 4,000 1,650 10,650 12,300

Equity M. Y. Own, Capital ($15,350 – $12,300) ..........

3,050

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

$15,350

LO None BT: AP Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

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CT 4-10

FASB CODIFICATION ACTIVITY

(a) Revenues are “inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.” (b) Compensation is reciprocal transfers of cash or other assets in exchange for services performed. LO 1 BT: C Difficulty: Medium TOT: 20 min. AACSB: Communication and Technology AICPA FC: Reporting AICPA PC: Communication

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IFRS 4-1

INTERNATIONAL FINANCIAL REPORTING PROBLEM

(a) Note 1.25 states that revenue includes shipment and transportation costs re-billed to customers only when these costs are included in products’ selling prices as a lump sum. Revenue is presented net of all forms of discount. In particular, payments made in order to have products referenced or, in accordance with agreements, to participate in advertising campaigns with the distributors, are deducted from related revenue. (b) Note 1.25 state that revenue and the corresponding trade receivables are reduced by the estimated amount of such returns, and a corresponding entry is made to inventories. The estimated rate of returns is based on statistics of historical return. (c) Louis Vuitton could have adjustments for prepayments such as: Depreciation expense, Amortisation of intangible assets, Deferred tax assets. (d) Louis Vuitton could have adjustments for accruals such as: Finance costs (interest expense), Tax liabilities, and Trade and other payables. LO 2, 3 BT: AP Difficulty: Medium TOT: 20 min. AACSB: Communication, Technology and Diversity AICPA FC: Reporting AICPA PC: Communication AICPA BB: International/Global Perspective

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CHAPTER 5 Merchandising Operations and the Multiple-Step Income Statement Learning Objectives 1. 2. 3. 4. 5. 6. *7.

Describe merchandising operations and inventory systems. Record purchases under a perpetual inventory system. Record sales under a perpetual inventory system. Prepare a multiple-step income statement and a comprehensive income statement. Determine cost of goods sold under a periodic inventory system. Compute and analyze gross profit rate and profit margin. Record purchases and sales of inventory under a periodic inventory system.

Summary of Questions by Learning Objectives and Bloom’s Taxonomy Item 1. 2. 3. 4. 5. 6.

LO 1 1 1 1 1 3

BT C C C C AP C

Item 7. 8. 9. 10. 11.

LO 3 3 3 3 2

Item

K AP C C AP

Questions 12. 4 AP 13. 3 C 14. 4 C 15. 4 K 16. 1 K

17. 18. 19. 20. 21.

4 2 2 5 5

K K K K K

22. 23. 24. 25. 26.

6 6 6 6 7*

K C AN C AP

10. 11. 12.

5 6 6

AP AP AP

13. 14.

6 7

C AP

1. 2. 3.

1, 4 2, 3 3

AP AP AP

4. 5. 6.

2 4 4

AP AP AP

1. 2.

1 2

C AP

3. 4.

3 4

AP AP

Brief Exercises 7. 4 AP 8. 5 AP 9. 5 AP Do It! Exercises 4. 5 AP 5. 5 AP

AP AP AP

Exercises 7. 4, 6 AP 8. 4, 6 AP 9. 4, 6 AP

10. 11. 12.

4 4 5

AP AP AP

13. 14. 15.

5 6 7

AP C AP

Problems: Set A 5. 4 AP

4, 5

5, 7*

4, 5, 6

1. 2. 3. 1. 2.

2 2, 3 3 2, 3, 4, 6 2, 3

AP AP AP

4. 5. 6. 3.

AP AP

2, 3 4 4, 6 2, 3, 4 4, 6

AP AP

*Continuing Cookie Solutions for this chapter are available online.

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5-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Journalize, post, prepare partial income statement, and calculate ratios.

Simple

30–40

Journalize purchase and sale transactions under a perpetual system.

Moderate

20–30

Journalize, post, and prepare trial balance and partial income statement.

Simple

30–40

Prepare financial statements and calculate profitability ratios.

Moderate

40–50

Prepare a correct multiple-step income statement.

Complex

20–30

Journalize, post, and prepare adjusted trial balance and financial statements.

Moderate

40–50

Determine cost of goods sold and gross profit under a periodic system.

Moderate

40–50

Calculate missing amounts and assess profitability.

Moderate

20–30

*9A

Journalize, post, and prepare trial balance and partial income statement under a periodic system.

Simple

30–40

5-2

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ANSWERS TO QUESTIONS 1.

(a) Disagree. The steps in the accounting cycle are the same for both a merchandising company and a service company. (b) The measurement of income is conceptually the same. In both types of companies, net income (or loss) results from the matching of expenses with revenues.

LO 1 BT: C Diff: M TOT: 2 min. AACSB: None AICPA FC: Reporting 2.

The components of revenues and expenses differ as follows:

Revenues Expenses

Merchandising Sales revenue Cost of Goods Sold and Operating

Service Fees, Rents, etc. Operating (only)

LO 1 BT: C Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting 3.

Under a periodic inventory system the company does not keep track of how many units are on hand. Instead it takes a physical count at the end of the period to determine ending inventory and cost of goods sold. Under a perpetual system the company adjusts its inventory account each time it purchases or sells inventory. Thus it always has a record of its available inventory. Having knowledge of inventory balances helps a company avoid lost sales due to “stock-outs” as well as carrying too much inventory on hand (which results in additional storage and handling costs). The purchasing department can make better decisions with the aid of perpetual inventory records.

LO 1 BT: C Diff: M TOT: 4 min. AACSB: None AICPA FC: Reporting 4.

(a) The income measurement process is as follows: Sales Revenue

Less

Cost of Goods Sold

Equals

Gross Profit

Less

Operating Expenses

Net Income (Loss)

Equals

(b) Income measurement in a merchandising company differs from a service company as follows: (a) sales are the primary source of revenue and (b) expenses are divided into two main categories: cost of goods sold and operating expenses. LO 1 BT: C Diff: M TOT: 4 min. AACSB: None AICPA FC: Reporting 5.

Sales revenue.......................................................................................................... Cost of goods sold ................................................................................................... Gross profit ..............................................................................................................

$100,000 70,000 $ 30,000

LO 1 BT: AP Diff: E TOT: 2 min. AACSB: Analytic AICPA FC: Reporting 6.

Agree. In accordance with the revenue recognition principle, sales revenues are generally considered to be recognized when the goods are transferred from the seller to the buyer; that is, when the performance obligation is satisfied. The recognition of revenue is not dependent on the collection of credit sales.

LO 3 BT: K Diff: E TOT: 2 min. AACSB: None AICPA FC: Measurement & Reporting

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5-3

(a) The primary source documents are (1) cash sales—cash register tapes and (2) credit sales— sales invoice. (b) The entries are: Debit Cash sales—

Credit sales—

Cash ................................................................... Sales Revenue ............................................

Cost of Goods Sold ............................................. Inventory .....................................................

Accounts Receivable........................................... Sales Revenue ............................................

Cost of Goods Sold ............................................. Inventory .....................................................

Credit XX

LO 3 BT: AP Diff: M TOT: 3 min. AACSB: Analytic AICPA FC: Reporting 8.

July 19

Cash ($800 – $8) .......................................................................... Sales Discounts ($800 X 1%)........................................................ Accounts Receivable ($900 – $100) ......................................

792 8 800

LO 3 BT: AP Diff: M TOT: 3 min. AACSB: Analytic AICPA FC: Reporting 9.

Shipping unwanted goods to customers is generally considered unethical behavior. In addition, if proper accounting is applied, in most cases it won’t achieve the desired result of increasing sales. If it is expected that the unwanted goods will be shipped back to the seller, then they should not be treated as sales in the first place. (Note: The practice of shipping more goods than were ordered in order to meet sales goals and get rid of extra inventory is referred to as channel stuffing.)

LO 3 BT: E Diff: H TOT: 5 min. AACSB: Analytic & Reflective Thinking AICPA BB: Critical Thinking 10.

In most industries returns are not significant, and they are therefore accounted for as they occur. When returns are expected to be significant, the company should make an adjusting entry at the end of the period to estimate the amount of returns that will result from the period’s sales, so that revenues will not be overstated during the period.

LO 3 BT: C Diff: M TOT: 3 min. AACSB: Analytic AICPA FC: Reporting 11.

July 24

Accounts Payable ($1,900 – $300) ............................................... Cash ($1,600 – $32).............................................................. Inventory ($1,600 X 2%) ........................................................

1,600 1,568 32

LO 2 BT: AP Diff: M TOT: 2 min. AACSB: Analytic AICPA FC: Reporting 12.

Gross profit .................................................................................................... Less: Net income .......................................................................................... Operating expenses.......................................................................................

$560,000 230,000 $330,000

LO 4 BT: AP Diff: E TOT: 2 min. AACSB: Analytic AICPA FC: Reporting 5-4

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13.

Its current terms of 1/10, n/30 means that customers get a 1% discount if they pay within 10 days, otherwise they have to pay the full amount within 30 days. If they switch to 2/10, n/45 customers would get a 2% discount for paying within 10 days, otherwise they have to pay the full amount in 45 days. By offering 2%, more of Mai’s customers would likely pay within the 10 day period. Management would have to determine whether it is worth the additional cost to be paid quicker. Also, by extending the full payment period from 30 to 45 days, Mai would end up receiving its money even later from its slow payers.

LO 2 & 3 BT: E Diff: H TOT: 5 min. AACSB: Analytic & Reflective Thinking AICPA BB: Critical Thinking 14.

The gain on the sale of the plant represents a one-time gain. That is, it won’t be recurring next year. If you eliminate the effect of this one-time gain, then the company’s income actually declined by $5 million relative to the prior year. When predicting future earnings investors frequently place little weight on non-recurring events such as this.

LO 4 BT: AN Diff: H TOT: 4 min. AACSB: Analytic & Reflective Thinking AICPA BB: Critical Thinking 15.

There are three distinguishing features in the income statement of a merchandising company: (1) a sales revenues section, (2) a cost of goods sold section, and (3) gross profit.

LO 4 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting 16.

The normal operating cycle for a merchandising company is likely to be longer than for a service company because inventory must first be purchased and sold, and then the receivables must be collected.

LO 1 BT: C Diff: E TOT: 2 min. AACSB: None AICPA FC: Reporting 17. Apple uses the term gross margin. Total gross margin increased by $6,233 million. LO 4 BT: AP Diff: M TOT: 3 min. AACSB: Analytic AICPA FC: Reporting 18. Of the merchandising accounts, only Inventory will appear in the post-closing trial balance. LO 4 BT: E Diff: M TOT: 3 min. AACSB: Analytic AICPA FC: Reporting 19. Businesses most likely to use a perpetual inventory system would include automobile dealerships, equipment supply companies, and other companies selling products having a high unit-value. With automation, perpetual systems are becoming increasingly cost-effective. LO 1 BT: C Diff: E TOT: 2 min. AACSB: None AICPA FC: Reporting 20. Accounts Purchase Returns and Allowances Purchase Discounts Freight-In

(a) Added/Deducted Deducted Deducted Added

(b) Normal Balance Credit Credit Debit

LO 5 BT: K Diff: E TOT: 2 min. AACSB: None AICPA FC: Reporting

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5-5

21. (a) X = Purchase returns and allowances and Y = Purchase discounts, or vice versa. (b) X = Freight-in. (c) X = Cost of goods purchased. (d) X = Ending inventory. LO 5 BT: C Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting 22. Profitability is affected by gross profit, as measured by the gross profit rate, and by management’s ability to control operating expenses, as measured by the profit margin. LO 6 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting 23. Factors affecting a company’s gross profit rate include selling products with a higher (or lower) “markup,” increased competition that results in lower selling prices, and price increases or decreases from suppliers. LO 6 BT: C Diff: M TOT: 2 min. AACSB: None AICPA FC: Reporting 24. Gross profit represents the amount by which sales exceeds cost of goods sold. In order for the company to be profitable, gross profit must exceed the company’s operating expenses. Before the selling price is cut, the company should do a careful analysis estimating what its gross profit and operating expenses would be if more units were sold at a lower selling price. In addition, a big concern is what the likely reaction of competitors will be. If competitors also cut their price, then volume will not increase, and the company’s net income will be lower. LO 6 BT: AN Diff: M TOT: 4 min. AACSB: Analytic AICPA BB: Critical Thinking 25. Mark Coney should calculate the company’s quality of earnings ratio. This is calculated by dividing net cash provided by operating activities by net income. A measure significantly below 1 would suggest that the company might be using aggressive accounting techniques to recognize income early. LO 6 BT: AN Diff: M TOT: 3 min. AACSB: Analytic AICPA PC: Problem Solving *26. July 24

Accounts Payable ($1,900 – $400) .................................. Cash ($1,500 – $30) ............................................... Purchase Discounts ($1,500 X 2%) ........................

1,500 1,470 30

LO 7 BT: AP Diff: M TOT: 2 min. AACSB: Analytic AICPA FC: Reporting

5-6

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SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 5-1 (a) (b) (c) (d) (e) (f)

Sales = $181,500 ($71,900 + $109,600). Cost of goods sold = $41,200 ($71,200 – $30,000). Gross profit = $38,000 ($108,000 – $70,000). Operating expenses = $17,900 ($30,000 – $12,100). Operating expenses = $8,500 ($38,000 (from c) – $29,500). Net income = $63,400 ($109,600 – $46,200).

LO 1, 4 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 5-2 Rita Company Inventory .............................................................. Accounts Payable ........................................

900

Linus Company Accounts Receivable ........................................... Sales Revenue ..............................................

900

Cost of Goods Sold ............................................. Inventory .......................................................

900

900 590 590

LO 2, 3 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 5-3 (a) March 2 2 (b)

6 6

Accounts Receivable ....................... Sales Revenue ........................

800,000

Cost of Goods Sold.......................... Inventory..................................

540,000

Sales Returns and Allowances ....... Accounts Receivable ..............

140,000

Inventory........................................... Cost of Goods Sold ................

94,000

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800,000 540,000 140,000 94,000

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5-7

BRIEF EXERCISE 5-3 (Continued) (c)

Cash ($660,000 – $13,200) ............... Sales Discounts ($660,000 X 2%) .... Accounts Receivable ($800,000 – $140,000) ..........

646,800 13,200 660,000

LO 3 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 5-4 (a) (b) (c)

March 2 6 12

Inventory ........................................... Accounts Payable ...................

800,000

Accounts Payable ............................ Inventory ..................................

140,000

Accounts Payable ($800,000 – $140,000) .................... Cash ($660,000 – $13,200) ...... Inventory ($660,000 X 2%) ......

800,000 140,000 660,000 646,800 13,200

LO 2 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 5-5 BARTO COMPANY Income Statement (Partial) For the Month Ended October 31, 2017 Sales Sales revenue ($300,000 + $150,000) ..................... Less: Sales returns and allowances ..................... Sales discounts ............................................ Net sales ......................................................................

$450,000 $19,000 5,000

24,000 $426,000

LO 4 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

5-8

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 5-6 As the name suggests, numerous steps are required in determining net income in a multiple-step statement. Item

Section

Gain on disposal of plant assets Cost of goods sold Depreciation expense Sales returns and allowances

Other revenues and gains Cost of goods sold Operating expenses Sales revenues

LO 4 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 5-7 (a) Service revenue ................................................... Less: Salaries and wages expense .............................. Rent expense ....................................................... Utilities expense .................................................. Advertising expense ............................................ Total expenses............................................... Net Income ...........................................................

$ 62,500 $28,000 10,400 3,100 1,800 43,300 $19,200

(b) KAREN WEIGEL INC. Comprehensive Income Statement For the Year Ended December 31, 2017 Net income ................................................................. Other comprehensive income (net of tax) ............... Comprehensive income ............................................

$ 19,200 400 $ 19,600

LO 4 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

5-9

BRIEF EXERCISE 5-8 Beginning inventory .................................................. Add: Purchases ....................................................... Cost of goods available for sale ............................... Less: Ending inventory ............................................ Cost of goods sold ....................................................

$ 67,000 380,000 447,000 50,000 $397,000

LO 5 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 5-9 Purchases .................................................................. Less: Purchase returns and allowances ................ Purchase discounts ...................................... Net purchases............................................................

$404,000 $13,000 9,000

Net purchases............................................................ Add: Freight-in ........................................................... Cost of goods purchased .........................................

22,000 $382,000 $382,000 16,000 $398,000

LO 5 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 5-10 Net sales .................................................................... Beginning inventory .................................................. Add: Cost of goods purchased* ............................. Cost of goods available for sale ............................... Less: Ending inventory ............................................ Cost of goods sold .................................................... Gross profit ................................................................

$612,000 $ 60,000 398,000 458,000 90,000 368,000 $244,000

*Information taken from Brief Exercise 5-9. LO 5 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

5-10

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 5-11 (a) Profit margin = $32,500 ÷ $250,000 = 13.0% The profit margin measures the extent by which selling price covers all expenses. In this case 87% of sales revenues cover all expenses (cost of goods sold, operating expenses, and other expenses) leaving 13% of revenues as net income. Or, for every dollar of net sales, the company earns $0.13 in net income. (b) Gross profit rate = ($250,000 – $150,000) ÷ $250,000 = 40.0% The gross profit rate measures the margin by which selling price exceeds cost of goods sold. In this case, 40% of sales revenues remain (after deducting cost of goods sold) to cover all other expenses and produce net income. Or, for every dollar of net sales, the company generates $0.40 in gross profit. LO 6 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 5-12 (a) Profit margin = $68,000 ÷ $800,000 = 8.5% The profit margin measures the extent by which selling price covers all expenses. In this case, 91.5% of sales revenues cover all expenses (cost of goods sold and operating expenses) leaving 8.5% of revenues as net income. Or, for every dollar of net sales, the company earns $0.085 in net income. (b) Gross profit rate = ($800,000 – $520,000) ÷ $800,000 = 35.0% The gross profit rate measures the margin by which selling price exceeds cost of goods sold. In this case, 35% of sales revenues remain (after deducting cost of goods sold) to cover operating expenses and produce net income. Or, for every dollar of net sales, the company generates $0.35 in gross profit. LO 6 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

5-11

BRIEF EXERCISE 5-13 The quality of earnings ratio is calculated by dividing net cash provided by operating activities by net income. For Cabo Corporation this would be $221,200 ÷ $346,000 = .64. This is significantly less than 1, which suggests that the company may be using aggressive accounting techniques in order to recognize income early. The factors that are causing net income to differ from net cash provided by operating activities should be examined. LO 6 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Measurement

*BRIEF EXERCISE 5-14 (a) March 2 (b)

(c)

Purchases ......................................... Accounts Payable ...................

800,000

Accounts Payable ............................ Purchase Returns and Allowances ...........................

95,000

Accounts Payable ($800,000 – $95,000) ...................... Cash ($705,000 – $14,100) ...... Purchase Discounts ($705,000 X 2%) ....................

800,000

95,000 705,000 690,900 14,100

LO 7 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

5-12

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO DO IT! EXERCISES DO IT! 5-1 1. 2. 3. 4.

True False. Under a perpetual inventory system, a company determines the cost of goods sold at each time a sale occurs. False. Both service and merchandising companies are likely to use accounts receivable. True.

LO 1 BT: C Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Measurement

DO IT! 5-2 Oct. 5

Oct. 8

Inventory .................................................................... Accounts Payable ............................................. (To record goods purchased on account)

5,000

Accounts Payable ..................................................... Inventory ........................................................... (To record return of defective goods)

640

5,000

640

LO 2 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

DO IT! 5-3 Oct. 5

Oct. 8

Accounts Receivable ................................................ Sales Revenue .................................................. (To record credit sales)

5,000

Cost of Goods Sold................................................... Inventory ........................................................... (To record cost of goods sold on account)

3,000

Sales Returns and Allowances ................................ Accounts Receivable ........................................ (To record credit granted for receipt of returned goods)

640

Inventory .................................................................... Cost of Goods Sold .......................................... (To record scrap value of goods returned)

240

5,000

3,000

640

240

LO 3 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

5-13

DO IT! 5-4 BERLIN CORP. Income Statement For the Year Ended December 31, 2017 Sales Sales revenue............................................... Less: Sales returns and allowances........... Net sales ............................................................. Cost of goods sold ............................................ Gross profit ........................................................ Operating expenses........................................... Income from operations .................................... Other revenues and gains ................................. Other expenses and losses............................... Income before income taxes ............................. Income tax expense ........................................... Net income .........................................................

$592,000 40,000 $552,000 156,000 396,000 186,000 210,000 12,700 (13,300)

(600) 209,400 62,820 $146,580

(Revenues – Contra revenues – Cost of goods sold – Operating expenses = Income from operations) BERLIN CORP. Comprehensive Income Statement For the Year Ended December 31, 2017 Net income ............................................................... Other comprehensive Income (net of $1,620*) ...... Comprehensive income ..........................................

$146,580 3,780 $150,360

* $5,400 × .30 LO 4 BT: AP Difficulty: Hard TOT: 12 min. AACSB: Analytic AICPA FC: Reporting

5-14

Kimmel, Financial Accounting, 8/e, Solutions Manual

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DO IT! 5-5 (a) Cost of goods purchased $161,400: Purchases – Purchase returns and allowances – Purchase discounts + Freight-in $162,500 – $3,600 – $5,900 + $8,400 (b) Cost of goods sold $165,170: Beginning inventory + Cost of goods purchased – Ending inventory $31,720 + $161,400 – $27,950 LO 5 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

DO IT! 5-6 2017 Gross profit rate ($150,000–$90,000) = 40% $150,000

2016 ($120,000–$72,000) = 40% $120,000

Profit margin

$22,000 ÷ $120,000 = 18.3%

$10,000 ÷ $150,000 = 6.7%

The company’s gross profit rate remained constant, however, its profit margin decreased significantly due to sharp increase in its operating costs as a percentage of sales. They increased from 13.3% ($16,000 ÷ $120,000) to 21.3% ($32,000 ÷ $150,000). LO 6 BT: AN Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

5-15

SOLUTIONS TO EXERCISES EXERCISE 5-1 (a) (1) April 5 (2) April 6 (3) April 7 (4) April 8 (5) April 15

(b) May 4

Inventory .......................................... Accounts Payable....................

28,000

Inventory .......................................... Cash .........................................

700

Equipment ....................................... Accounts Payable....................

30,000

Accounts Payable ........................... Inventory ..................................

3,600

Accounts Payable ($28,000 – $3,600) ......................... Cash ($24,400 – $488) ............. Inventory [($28,000 – $3,600) X 2%] .....

Accounts Payable ($28,000 – $3,600) .... Cash..................................................

28,000 700 30,000 3,600 24,400 23,912 488 24,400 24,400

LO 2 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 5-2 Sept. 6 9 10 12

5-16

Inventory........................................................ Accounts Payable..................................

1,650

Inventory........................................................ Cash .......................................................

Accounts Payable ......................................... Inventory ................................................

Accounts Receivable .................................... Sales Revenue .......................................

690

Cost of Goods Sold....................................... Inventory ................................................

520

1,650 50 66 690

Kimmel, Financial Accounting, 8/e, Solutions Manual

520 (For Instructor Use Only)

EXERCISE 5-2 (Continued) Sept. 14 14 20

Sales Returns and Allowances ..................... Accounts Receivable .............................

Inventory ........................................................ Cost of Goods Sold ................................

Accounts Receivable ..................................... Sales Revenue ........................................

760

Cost of Goods Sold ....................................... Inventory .................................................

570

45 34 760 570

LO 2, 3 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 5-3 (a) (1) Dec. 3

Accounts Receivable ................... Sales Revenue ......................

500,000

Cost of Goods Sold ..................... Inventory ...............................

330,000

Sales Returns and Allowances ... Accounts Receivable ...........

25,000

Cash ($475,000 – $4,750) ............. Sales Discounts [($500,000 – $25,000) X 1%] ..... Accounts Receivable ($500,000 – $25,000) .........

470,250

Cash ..................................................... Accounts Receivable ($500,000 – $25,000) ................

475,000

(2) Dec. 8 (3) Dec. 13

(b) Jan. 2

500,000 330,000 25,000

4,750 475,000

475,000

LO 3 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

5-17

EXERCISE 5-4 (a) June 10 11 12 19

(b) June 10

Inventory ................................................. Accounts Payable ...........................

9,000

Inventory ................................................. Cash .................................................

400

Accounts Payable ........................................ Inventory ...............................................

600

Accounts Payable ($9,000 – $600) .............. Cash ($8,400 – $252) ............................ Inventory ($8,400 X 3%) .......................

8,400

Accounts Receivable ................................... Sales Revenue ......................................

9,000

Cost of Goods Sold ..................................... Inventory ...............................................

5,000

9,000 400 600 8,148 252 9,000 5,000

No entry

Sales Returns and Allowances ................... Accounts Receivable ...........................

600

Inventory ...................................................... Cost of Goods Sold ..............................

310

Cash ($8,400 – $252).................................... Sales Discounts ($8,400 X 3%) ................... Accounts Receivable ($9,000 – $600) ..................................

8,148 252

600 310

8,400

LO 2, 3 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

5-18

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 5-5 DOQE COMPANY Income Statement (Partial) For the Year Ended October 31, 2017 Sales Sales revenue .................................................... Less: Sales returns and allowances ............... Sales discounts ...................................... Net sales ....................................................................

$900,000 $22,000 13,500

35,500 $864,500

Note: Freight-out is a selling expense. LO 4 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 5-6 (a)

LIEU CO. Income Statement For the Month Ended January 31, 2017

Sales Sales revenue ............................................. $370,000 Less: Sales returns and allowances ........ $20,000 Sales discounts .............................. 8,000 28,000 Net sales ............................................................. 342,000 Cost of goods sold ............................................ 212,000 Gross profit ........................................................ 130,000 Operating expenses Salaries and wages expense ..................... 60,000 Rent expense .............................................. 32,000 Insurance expense ..................................... 12,000 Freight-out .................................................. 7,000 Total operating expenses .................. 111,000 Income before income taxes ............................. 19,000 Income tax expense ........................................... 5,000 Net income ......................................................... $ 14,000 (Revenues–Contra-revenues – Cost of goods sold – Operating expenses = Income before income taxes).

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

5-19

EXERCISE 5-6 (Continued) (b)

LIEU CO. Comprehensive Income Statement For the Month Ended January 31, 2017 Net income ......................................................................................... $14,000 Other comprehensive income (net of $400 tax) ............................... 2,000 Comprehensive income .................................................................... $16,000

$14,000 = 4.1% $342,000 $130, 000 Gross profit rate = = 38.0% $342, 000

LO 4, 6 BT: AP Difficulty: Hard TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 5-7 (a) Yoste Company Sales ..................................................................................... *Sales returns and allowances ($90,000 – $84,000) ............ Net sales ...............................................................................

$ 90,000) (6,000) $ 84,000)

Net sales ............................................................................... Cost of goods sold .............................................................. *Gross profit ..........................................................................

$ 84,000) (58,000) $ 26,000)

Gross profit .......................................................................... Operating expenses............................................................. *Net income ...........................................................................

$ 26,000) (14,380) $ 11,620)

Noone Company

5-20

*Sales ($100,000 + $5,000) .................................................... Sales returns and allowances ............................................. Net sales ...............................................................................

$105,000) (5,000) $100,000)

Net sales ............................................................................... *Cost of goods sold ($100,000 – $40,000) ........................... Gross profit ..........................................................................

$100,000) (60,000) $ 40,000)

Gross profit .......................................................................... *Operating expenses ($40,000 – $17,000) ............................ Net income ........................................................................... *Indicates missing amount

$ 40,000) (23,000) $ 17,000)

Kimmel, Financial Accounting, 8/e, Solutions Manual

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EXERCISE 5-7 (Continued) (b)

Yoste

Noone

Profit margin

$11,620 ÷ $84,000 = 14%

$17,000 ÷ $100,000 = 17%

Gross profit rate

$26,000 ÷ $84,000 = 31%

$40,000 ÷ $100,000 = 40%

(c) Noone has a higher profit margin than Yoste. Each dollar of net sales by Noone results in 17 cents of net income compared to only 14 cents for Yoste. Noone also has a higher gross profit rate. For each dollar of Noone’s net sales, 60 cents is required to cover cost of goods sold leaving 40 cents to cover other expenses and produce net income. Yoste’s gross profit of .31 indicates that only 31 cents of each dollar of net sales is available to cover other expenses and produce net income. LO 4, 6 BT: AP Difficulty: Hard TOT: 20 min. AACSB: Analytic Communication AICPA FC: Reporting AICPA PC: Communication

EXERCISE 5-8 (a)

DARREN COMPANY Income Statement For the Year Ended December 31, 2017 Sales Sales revenue .............................. Less: Sales discounts................. Net sales .............................................. Cost of goods sold ............................. Gross profit ......................................... Operating expenses Salaries and wages expense ...... Depreciation expense ................. Utilities expense .......................... Total operating expenses................... Income from operations .....................

$2,210,000 160,000

Kimmel, Financial Accounting, 8/e, Solutions Manual

$2,050,000 987,000 1,063,000 465,000 310,000 110,000 885,000 178,000

(For Instructor Use Only)

5-21

EXERCISE 5-8 (Continued) Other revenues and gains Interest revenue........................... Other expenses and losses Loss on disposal of plant assets .............................. Interest expense .......................... Income before income taxes .............. Income tax expense ............................ Net income ..........................................

65,000 83,500 71,000

154,500 88,500 25,000 $ 63,500

(Revenues – contra revenues – Cost of goods sold – Operating expenses = Income from operations) (b) Profit margin: $63,500 ÷ $2,050,000 = 3% Gross profit rate: $1,063,000 ÷ $2,050,000 = 52% (c) During the current year Darren had a loss on the sale of property, plant, and equipment of $83,500. This loss is not part of operating income, and it is most likely a non-recurring event, meaning that we wouldn’t expect it to happen again next year. If we ignore this loss, then Darren Company’s net income would have been $147,000 ($63,500 + $83,500) and its profit margin would have been 7.2% ($147,000 ÷ $2,050,000). Therefore, while the loss is not good news, it is less of a concern than a similar drop in income from operations. LO 4, 6 BT: AP Difficulty: Hard TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 5-9 (a)

THE CLOROX COMPANY Income Statement For the Year Ended June 30, 2017 (amounts in millions) Sales Sales revenue............................................... Less: Sales returns and allowances........... Net sales ............................................................. Cost of goods sold ............................................ Gross profit ........................................................

5-22

$5,730 280

Kimmel, Financial Accounting, 8/e, Solutions Manual

$5,450 3,104 2,346

(For Instructor Use Only)

EXERCISE 5-9 (Continued) Operating expenses Advertising expense .................................. Salaries and wages expense ..................... Research and development expense........ Rent expense .............................................. Depreciation expense ................................ Utilities expense ......................................... Total operating expenses .................. Income from operations .................................... Other expenses and losses Interest expense ......................................... Loss on disposal of plant assets .............. Income before income taxes ............................. Income tax expense ........................................... Net income .........................................................

499 460 114 105 90 60 1,328 1,018 161 46

207 811 276 $ 535

(Revenues – contra revenues – Cost of goods sold – Operating expenses = Income from operations) (b) Gross profit rate: $2,346 ÷ $5,450 = 43.0% Profit margin: $535 ÷ $5,450 = 9.8% The gross profit rate indicates that about 57 cents of each dollar of net sales is required to cover the cost of goods sold, leaving about 43 cents to cover all remaining expenses and produce net income. The profit margin indicates that each dollar of net sales results in about 10 cents of net income.

Kimmel, Financial Accounting, 8/e, Solutions Manual

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5-23

EXERCISE 5-9 (Continued) (c)

THE CLOROX COMPANY Income Statement For the Year Ended June 30, 2017 (amounts in millions) Sales Net sales* ........................................................... Cost of goods sold** .......................................... Gross profit ........................................................ Operating expenses Advertising expense*** .............................. Salaries and wages expense ..................... Research and development expense ........ Rent expense .............................................. Depreciation expense ................................ Utilities expense ......................................... Total operating expenses................... Income from operations .................................... Other expenses and losses Interest expense ......................................... Loss on disposal of plant assets .............. Income before income taxes ............................. Income tax expense ........................................... Net income ......................................................... *$5,450 + (.25 X $5,450) **$3,104 + (.25 X $3,104) ***$499 + $340

$6,813 3,880 2,933 $839 460 114 105 90 60 1,668 1,265 161 46

207 1,058 360 $ 698

Gross profit rate: $2,933 ÷ $6,813 = 43.1% Profit margin: $698 ÷ $6,813 = 10.2% The gross profit rate remained nearly unchanged at 43.1%. This result would be expected since advertising expenses are not part of cost of goods sold. The profit margin increased from 9.8% to 10.2% because net income increased over 30% ($163 ÷ $535) while net sales rose only 25%. It appears that the marketing department’s plan has merit. If the expected increases in sales materialize, net income will increase $163 million ($698 – $535). LO 4, 6 BT: AP Difficulty: Hard TOT: 30 min. AACSB: Analytic AICPA FC: Reporting

5-24

Kimmel, Financial Accounting, 8/e, Solutions Manual

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EXERCISE 5-10 (a)

LAINE INC. Income Statement For the Year Ended December 31, 2017 Net sales ............................................................... Cost of goods sold ............................................... Gross profit .......................................................... Operating expenses ............................................. Income from operations ...................................... Other revenue and gains Interest revenue ................................................... Other expenses and losses Loss on disposal of plant assets ..................... .. Interest expense ................................................... Net Income before income taxes ........................ Income tax expense ............................................. Net income ............................................................

$ 2,200,000 1,256,000 944,000 725,000 219,000 33,000 $(17,000) (70,000)

(87,000) 165,000 47,000 $118,000

(Net sales – Cost of goods sold – Operating expenses = Income from operations) (b)

LAINE INC. Comprehensive Income Statement For the Year Ended December 31, 2017 Net income ........................................................................ Other comprehensive income (Net of $1,200 tax) .......... Comprehensive income ...................................................

$ 118,000 8,300 $ 126,300

LO 4 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

5-25

EXERCISE 5-11 BLUE DOOR CORPORATION Income Statement For the Year Ended December 31, 2017

Sales ........................................................................ Less: Sales returns and allowances ...................... $41,000 Sales discounts............................................. 8,500 Net sales .................................................................. Cost of goods sold ................................................. Gross profit ............................................................. Operating expenses: Salaries and wages expense .......................... 675,000 Depreciation expense ..................................... 125,000 Advertising expense ....................................... 55,000 Freight-out ....................................................... 25,000 Insurance expense .......................................... 15,000 Total operating expenses ................................... Income from operations ......................................... Other revenues and gains Interest revenue ............................................. 30,000 Rent revenue .................................................. 24,000 Other expenses and losses Interest expense............................................. Income before income taxes ............................ Income tax expense .......................................... Net income ........................................................

$2,400,000 49,500 2,350,500 1,085,000 1,265,500

895,000 370,500

54,000 (70,000) 354,500 70,000 $284,500

(Net sales – Cost of goods sold – Operating expenses = Income from operations) LO 4 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

5-26

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 5-12 Inventory, September 1, 2016 ................................... Purchases .................................................................. Less: Purchase returns and allowances ................ Net purchases ........................................................... Add: Freight-in ....................................................... Cost of goods purchased ......................................... Cost of goods available for sale............................... Inventory, August 31, 2017 ....................................... Cost of goods sold ............................................

$ 18,700 $154,000 5,000 149,000 8,000 157,000 175,700 (21,000) $154,700

LO 5 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 5-13 (a) $1,420 ($1,500 – $80) (b) $1,550 (1,420 + $130) (c) $1,490 ($1,800 – $310) (d) $40 (e) $190 (f) $120

($1,080 – $1,040) ($1,230 – $1,040) ($1,350 – $1,230)

(g) $7,700 (h) $640 (i) $8,750 (j) (k) (I)

($290 + $7,410) ($8,050 – $7,410) ($700 + $8,050)

$5,000 ($49,530 – $44,530 from (I)) $1,300 ($43,590 – $42,290) $44,530 ($42,290 + $2,240)

LO 5 BT: AP Difficulty: Hard TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 5-14 (a) Earnings have high quality if they provide a full and transparent depiction of how a company performed. (b) One indicator of earnings quality is the quality of earnings ratio which is net cash provided by operating activities divided by net income. For Dorsett Corporation this is $23,200 ÷ $45,300 = .51. This is significantly lower than 1, which indicates that the company might be using aggressive accounting techniques in order to accelerate the recognition of net income.

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

5-27

EXERCISE 5-14 (Continued) (c) In order to identify potential aggressive accounting techniques one should examine the factors that are causing net income to differ from net cash provided by operating activities. Many of these differences would be due to adjusting entries used for accrual accounting. The fact that the company’s Accounts Receivable balance is increasing so rapidly is a possible concern because it might suggest that the company is recording credit sales that really aren’t sales. For example, it might be shipping goods to customers that the company didn’t order. This would cause sales to increase, but since the customers probably won’t ever pay, it would cause the balance in accounts receivable to build up. LO 6 BT: C Difficulty: Medium TOT: 10 min. AACSB: None AICPA FC: Measurement

*EXERCISE 5-15 (a) (1) April 5 (2) April 6 (3) April 7 (4) April 8

(5) April 15

(b)

May 4

Purchases .......................................... Accounts Payable.....................

27,000

Freight-In ............................................ Cash ..........................................

1,200

Equipment .......................................... Accounts Payable.....................

30,000

Accounts Payable .............................. Purchase Returns and Allowances .............................

3,600

Accounts Payable ($27,000 – $3,600) ........................... Cash ($23,400 – $468) .............. Purchase Discounts [($27,000 – $3,600) X 2%] ...... Accounts Payable ($27,000 – $3,600) ........................... Cash ..........................................

27,000 1,200 30,000

3,600 23,400 22,932 468 23,400 23,400

LO 7 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

5-28

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO PROBLEMS PROBLEM 5-1A

(a) General Journal Date May 1 2

5 9

11 12 15 17

Account Titles Debit Inventory ........................................................... 8,000 Accounts Payable .....................................

Credit 8,000

Accounts Receivable ........................................ 4,400 Sales Revenue ...........................................

4,400

Cost of Goods Sold .......................................... 3,300 Inventory ....................................................

3,300

Accounts Payable ............................................. Inventory ....................................................

200 200

Cash ($4,400 – $88) ........................................... 4,312 Sales Discounts ($4,400 X 2%) ........................ 88 Accounts Receivable ................................

4,400

Accounts Payable ($8,000 – $200) ................... 7,800 Cash ........................................................... Inventory ($7,800 X 1%) ............................

7,722 78

Supplies............................................................. Cash ...........................................................

900 900

Inventory ........................................................... 3,100 Cash ........................................................... Cash ................................................................... Inventory ....................................................

230

Inventory ........................................................... 2,500 Accounts Payable .....................................

Kimmel, Financial Accounting, 8/e, Solutions Manual

3,100

(For Instructor Use Only)

230 2,500

5-29

PROBLEM 5-1A (Continued) General Journal Date May 19 24

25 27

Account Titles Debit Inventory ........................................................... 250 Cash ...........................................................

250

Cash................................................................... 5,500 Sales Revenue ...........................................

5,500

Cost of Goods Sold .......................................... 4,100 Inventory ....................................................

4,100

Inventory ........................................................... Accounts Payable .....................................

800 800

Accounts Payable ............................................. 2,500 Cash ........................................................... Inventory ($2,500 X 2%) ............................ Sales Returns and Allowances ........................ Cash ...........................................................

124

Inventory ........................................................... Cost of Goods Sold ...................................

2,450 50 124 90

Accounts Receivable ........................................ 1,280 Sales Revenue ........................................... Cost of Goods Sold .......................................... Inventory ....................................................

5-30

Credit

1,280

830

Kimmel, Financial Accounting, 8/e, Solutions Manual

830

(For Instructor Use Only)

PROBLEM 5-1A (Continued) (b) Cash 5/1 Bal. 8,000 5/10 5/9 4,312 5/11 5/15 230 5/12 5/24 5,500 5/19 5/27 5/29 5/31 Bal. 3,496

7,722 900 3,100 250 2,450 124

Accounts Receivable 5/2 4,400 5/9 4,400 5/31 1,280 5/31 Bal. 1,280 Inventory 5/1 8,000 5/2 5/12 3,100 5/5 5/17 2,500 5/10 5/19 250 5/15 5/25 800 5/24 5/29 90 5/27 5/31 5/31 Bal. 5,952

5/11 5/31 Bal.

5/5 5/10 5/27

3,300 200 78 230 4,100 50 830

Common Stock 5/1 Bal. 8,000 5/31 Bal. 8,000 Sales Revenue 5/2 4,400 5/24 5,500 5/31 1,280 5/31 Bal. 11,180 Sales Returns and Allowances 5/29 124 5/31 Bal. 124 Sales Discounts 5/9 88 5/31 Bal. 88 Cost of Goods Sold 5/2 3,300 5/29 5/24 4,100 5/31 830 5/31 Bal. 8,140

Supplies 900 900

Accounts Payable 200 5/1 8,000 7,800 5/17 2,500 2,500 5/25 800 5/31 Bal. 800

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

5-31

PROBLEM 5-1A (Continued) (c)

WINTERS HARDWARE STORE Income Statement (Partial) For the Month Ended May 31, 2017 Sales Sales revenue .................................................... Less: Sales returns and allowances ............... Sales discounts...................................... Net sales .................................................................... Cost of goods sold ................................................... Gross profit ...............................................................

$11,180 $124 88

212 10,968 8,140 $ 2,828

(d) Profit margin: ($2,828 – $1,400) ÷ $10,968 = 13.0% Gross profit rate: $2,828 ÷ $10,968 = 25.8% LO 2-4, 6 BT: AP Difficulty: Medium TOT: 40 min. AACSB: Analytic AICPA FC: Reporting

5-32

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 5-2A

June 1 3

6 9

15 17

20 24

Inventory .............................................................. Accounts Payable........................................

1,040

Accounts Receivable .......................................... Sales Revenue .............................................

1,200

Cost of Goods Sold ............................................. Inventory ......................................................

720

Accounts Payable ............................................... Inventory ......................................................

Accounts Payable ($1,040 – $40) ....................... Cash ............................................................. Inventory ($1,000 X .02) ...............................

1,000

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

1,200

Accounts Receivable .......................................... Sales Revenue .............................................

1,200

Cost of Goods Sold ............................................. Inventory ......................................................

730

Inventory .............................................................. Accounts Payable........................................

720

Cash ..................................................................... Sales Discounts ($1,200 X .02) ........................... Accounts Receivable ..................................

1,176 24

Kimmel, Financial Accounting, 8/e, Solutions Manual

1,040 1,200 720 40 980 20 1,200 1,200 730 720

(For Instructor Use Only)

1,200

5-33

PROBLEM 5-2A (Continued) June 26

Accounts Payable ............................................... Cash.............................................................. Inventory (720 X .01) ....................................

720

Accounts Receivable .......................................... Sales Revenue .............................................

1,300

Cost of Goods Sold ............................................. Inventory ......................................................

780

Sales Returns and Allowances........................... Accounts Receivable ...................................

130

Inventory .............................................................. Cost of Goods Sold .....................................

713 7 1,300 780 130 80

LO 2, 3 BT: AP Difficulty: Medium TOT: 25 min. AACSB: Analytic AICPA FC: Reporting

5-34

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 5-3A

(a) General Journal Date Apr. 5 7 9 10

12 14

17 20

Account Titles Inventory ........................................................... Accounts Payable .....................................

Debit 1,500

Inventory ........................................................... Cash ...........................................................

Accounts Payable............................................. Inventory....................................................

200

Accounts Receivable ....................................... Sales Revenue...........................................

1,340

Cost of Goods Sold .......................................... Inventory....................................................

820

Inventory ........................................................... Accounts Payable .....................................

830

1,500 80 200 1,340 820 830

Accounts Payable ($1,500 – $200) ................... 1,300 Cash ............................................................... Inventory ($1,300 X 3%) ............................. Accounts Payable............................................. Inventory....................................................

Accounts Receivable ....................................... Sales Revenue...........................................

810

Cost of Goods Sold .......................................... Inventory....................................................

550

Accounts Payable ($830 – $30)........................ Cash ........................................................... Inventory ($800 X 1%) ...............................

800

Kimmel, Financial Accounting, 8/e, Solutions Manual

Credit

1,261 39 30 810 550

(For Instructor Use Only)

792 8

5-35

PROBLEM 5-3A (Continued) Date Apr. 27

Account Titles Debit Sales Returns and Allowances ........................ 80 Accounts Receivable ................................

Credit

Cash ................................................................... 1,220 Accounts Receivable ................................

80 1,220

(b) 4/1 Bal. 4/30 4/30 Bal.

Cash 2,500 4/7 1,220 4/14 4/21 1,587

80 1,261 792

Accounts Receivable 4/10 1,340 4/27 80 4/20 810 4/30 1,220 4/30 Bal. 850

4/1 Bal. 4/5 4/7 4/12

4/30 Bal.

4/9 4/14 4/17 4/21

5-36

Inventory 3,500 4/9 1,500 4/10 80 4/14 830 4/17 4/20 4/21 4,263

Accounts Payable 200 4/5 1,300 4/12 30 800 4/30 Bal.

200 820 39 30 550 8

Common Stock 4/1 Bal. 4/30 Bal.

6,000 6,000

Sales Revenue 4/10 4/20 4/30 Bal.

1,340 810 2,150

Sales Returns and Allowances 4/27 80 4/30 Bal. 80 Cost of Goods Sold 4/10 820 4/20 550 4/30 Bal. 1,370

1,500 830

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 5-3A (Continued) (c)

GRANITE HILLS PRO SHOP Trial Balance April 30, 2017 Debit $1,587 850 4,263

Cash ........................................................................ Accounts Receivable ............................................. Inventory ................................................................ Common Stock ...................................................... Sales Revenue ....................................................... Sales Returns and Allowances ............................. Cost of Goods Sold ...............................................

(d)

Credit

6,000 2,150 80 1,370 $8,150

$8,150

Sales Sales revenue ..................................................................... Less: Sales returns and allowances ................................ Net sales ..................................................................................... Cost of goods sold .................................................................... Gross profit ................................................................................

$2,150 80 2,070 1,370 $ 700

GRANITE HILLS PRO SHOP Income Statement (Partial) For the Month Ended April 30, 2017

LO 2-4 BT: AP Difficulty: Medium TOT: 40 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

5-37

PROBLEM 5-4A

(a)

WOLFORD DEPARTMENT STORE Income Statement For the Year Ended November 30, 2017 Sales Sales revenue .................................. Less: Sales returns and allowances ............................ Net sales ................................................. Cost of goods sold .................................. Gross profit .............................................. Operating expenses Salaries and wages expense .......... Rent expense ................................... Advertising expense ....................... Depreciation expense ..................... Utilities expense .............................. Insurance expense .......................... Freight-out ....................................... Total operating expenses ....... Income from operations .......................... Other revenues and gains Gain on disposal of plant assets.... Other expenses and losses Interest expense .............................. Income before income taxes .................. Income tax expense ................................ Net income ...............................................

$904,000 20,000 884,000 614,300 269,700 $117,000 34,000 33,500 13,500 10,600 9,000 6,200 223,800 45,900 2,000 5,000 42,900 10,000 $ 32,900

(Income from operations + Other revenues/gains – Other expenses/losses = Income before income taxes)

5-38

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 5-4A (Continued) WOLFLORD DEPARTMENT STORE Retained Earnings Statement For the Year Ended November 30, 2017 Retained earnings, December 1, 2016 ..................................... Add: Net income ..................................................................... Less: Dividends ....................................................................... Retained earnings, November 30, 2017 ...................................

$14,200 32,900 47,100 12,000 $35,100

WOLFORD DEPARTMENT STORE Balance Sheet November 30, 2017 Assets Current assets Cash...................................................... $ 8,000 Accounts receivable ............................ 17,200 Inventory .............................................. 26,200 Prepaid insurance................................ 6,000 Total current assets...................... $ 57,400 Property, plant, and equipment Equipment ............................................ $157,000 Less: Accumulated depreciation— equipment ................................. 68,000 89,000 Total assets ................................... $146,400

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

5-39

PROBLEM 5-4A (Continued) WOLFORD DEPARTMENT STORE Balance Sheet (Continued) November 30, 2017 Liabilities and Stockholders’ Equity Current liabilities Accounts payable ............................................ $26,800 Salaries and wages payable ............................ 6,000 Total current liabilities .............................. Long-term liabilities Note payable due 2021 .................................... Total liabilities ........................................... Stockholders’ equity Common stock ................................................. 35,000 Retained earnings ............................................ 35,100 Total stockholders’ equity ........................ Total liabilities and stockholders’ equity ......................................................

$ 32,800 43,500 76,300

70,100 $146,400

(b) Profit margin: $32,900 ÷ $884,000 = 3.7% Gross profit rate: $269,700 ÷ $884,000 = 30.5% (c) Revised net income = Current net income + increase in gross profit – increase in operating expenses $14,743 = $32,900 + $40,443 – $58,600 Revised net sales = Current net sales + .15 (current net sales) $1,016,600 = $884,000 + $132,600 Revised gross profit = Current gross profit + $40,443 $310,143 = $269,700 + $40,443 Revised profit margin: $14,743 ÷ $1,016,600 = 1.5% Revised gross profit rate: $310,143 ÷ $1,016,600 = 30.5%

5-40

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 5-4A (Continued) This plan increased net sales and gross profit but did not change the gross profit rate. This is not surprising since the proposed change affects selling expenses rather than cost of goods sold. An increase in sales would increase the dollar amount of cost of goods sold but not cost of goods sold as a percentage of sales dollars. The plan decreased net income by $18,157 ($32,900 – $14,743) or 55%. Since net sales increased 15% and net income decreased 55%, the profit margin decreased from 3.7% to 1.5%. A 55% decrease in net income combined with the smaller profit margin indicates that the proposal should not be adopted. LO 4, 6 BT: AP Difficulty: Medium TOT: 50 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

5-41

PROBLEM 5-5A

SIMON COMPANY Income Statement For the Year Ended December 31, 2017 Sales Sales revenue....................................... Less: Sales returns and allowances ................................ Sales discounts ........................ Net sales ............................................... Cost of goods sold ...................................... Gross profit .................................................. Operating expenses Salaries and wages expense* ............. Freight-out ............................................ Rent expense ($24,000 – $6,000)......... Advertising expense ............................ Utilities expense .................................. Depreciation expense .......................... Total operating expenses ............ Income from operations .............................. Other revenues and gains Rent revenue ........................................ Other expenses and losses Interest expense .................................. Income before income taxes ...................... Income tax expense .................................... Net income ...................................................

$911,000 $28,000 18,000

46,000 865,000 555,000 310,000

136,000 33,000 18,000 13,000 12,000 10,000 222,000 88,000 4,000 2,000 90,000 22,500 $ 67,500

*($80,000 + $6,000 + $3,000 + $47,000) (Sales revenue – Contra revenues – Cost of goods sold = Gross profit) LO 4 BT: AP Difficulty: Hard TOT: 30 min. AACSB: Analytic AICPA FC: Reporting

5-42

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 5-6A

(a) Dec. 31

31 31

Depreciation Expense .............................. Accumulated Depreciation— Buildings ....................................... Accumulated Depreciation— Equipment .....................................

15,000

Interest Expense ...................................... Interest Payable ................................

4,500

Income Tax Expense ................................ Income Taxes Payable .....................

24,000

8,000 7,000 4,500 24,000

(b) Accumulated Depreciation—Buildings 12/31 Bal. 60,000 12/31 8,000 12/31 Bal. 68,000 Accumulated Depreciation—Equipment 12/31 Bal. 40,500 12/31 7,000 12/31 Bal. 47,500 Depreciation Expense 12/31 15,000 12/31 Bal. 15,000

Interest Expense 12/31 4,500 12/31 Bal. 4,500 Interest Payable 12/31 4,500 12/31 Bal. 4,500 Income Tax Expense 12/31 24,000 12/31 Bal. 24,000 Income Taxes Payable 12/31 24,000 12/31 Bal. 24,000

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

5-43

PROBLEM 5-6A (Continued) (c)

PEOPLE’S CHOICE WHOLESALE COMPANY Adjusted Trial Balance December 31, 2017 Cash ............................................................... Accounts Receivable .................................... Inventory ........................................................ Land ............................................................... Buildings ....................................................... Accumulated Depreciation— Buildings.................................................... Equipment ..................................................... Accumulated Depreciation— Equipment ................................................. Notes Payable ............................................... Accounts Payable ......................................... Interest Payable ............................................ Income Taxes Payable .................................. Common Stock .............................................. Retained Earnings......................................... Dividends ....................................................... Sales Revenue............................................... Sales Discounts ............................................ Cost of Goods Sold....................................... Salaries and Wages Expense ....................... Utilities Expense ........................................... Maintenance and Repairs Expense ............. Advertising Expense..................................... Insurance Expense ....................................... Depreciation Expense ................................... Income Tax Expense..................................... Interest Expense ........................................... Totals......................................................

Debit $ 31,400 37,600 70,000 92,000 200,000

Credit

68,000

83,500 47,500 54,700 17,500 4,500 24,000 160,000 67,200 10,000 922,100 6,000 709,900 51,300 11,400 8,900 5,200 4,800 15,000 24,000 4,500 $1,365,500

$1,365,500

(Total debit account balances = Total credit account balances)

5-44

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 5-6A (Continued) (d)

PEOPLE’S CHOICE WHOLESALE COMPANY Income Statement For the Year Ended December 31, 2017 Sales Sales revenue ............................................. Less: Sales discounts............................... Net sales ............................................................. Cost of goods sold ............................................ Gross profit ........................................................ Operating expenses Salaries and wages expense ..................... Depreciation expense ................................ Utilities expense ......................................... Maintenance and repairs expense ............ Advertising expense .................................. Insurance expense ..................................... Total operating expenses .................. Income from operations .................................... Other expenses and losses Interest expense ......................................... Income before income taxes ............................. Income tax expense ........................................... Net income .........................................................

$922,100 6,000 916,100 709,900 206,200 $51,300 15,000 11,400 8,900 5,200 4,800 96,600 109,600 4,500 105,100 24,000 $ 81,100

PEOPLE’S CHOICE WHOLESALE COMPANY Retained Earnings Statement For the Year Ended December 31, 2017 Retained earnings, January 1 ............................................... Add: Net income .................................................................. Less: Dividends .................................................................... Retained earnings, December 31..........................................

Kimmel, Financial Accounting, 8/e, Solutions Manual

$ 67,200 81,100 148,300 10,000 $138,300

(For Instructor Use Only)

5-45

PROBLEM 5-6A (Continued) PEOPLE’S CHOICE WHOLESALE COMPANY Balance Sheet December 31, 2017 Assets Current assets Cash ............................................... Accounts receivable...................... Inventory ........................................ Total current assets ................ Property, plant, and equipment Land................................................ Buildings ........................................ Less: Accum. depreciation— buildings ............................. Equipment ...................................... Less: Accum. depreciation— equipment .......................... Total assets .............................

$ 31,400 37,600 70,000 $139,000 92,000 $200,000 68,000 83,500

132,000

47,500

36,000

Liabilities and Stockholders’ Equity Current liabilities Notes payable .................................................. $ 15,000 Accounts payable............................................ 17,500 Income taxes payable ..................................... 24,000 Interest payable ............................................... 4,500 Total current liabilities .............................. Long-term liabilities Notes payable ($54,700 – $15,000) ................. Total liabilities ............................................ Stockholders’ equity Common stock ................................................. 160,000 Retained earnings ............................................ 138,300 Total stockholders’ equity ......................... Total liabilities and stockholders’ equity .......................................................

260,000 $399,000

$ 61,000 39,700 100,700

298,300 $399,000

(Ending retained earnings = Beginning retained earnings ± Changes to retained earnings) LO 4 BT: AP Difficulty: Medium TOT: 60 min. AACSB: Analytic AICPA FC: Reporting

5-46

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 5-7A OATES DEPARTMENT STORE Income Statement (Partial) For the Year Ended November 30, 2017 Sales Sales revenue .......................... Less: Sales returns and allowances .................... Net sales ......................................... Cost of goods sold Inventory, Dec. 1, 2016 ............ Purchases ................................ Less: Purchase discounts ..... Purchase returns and allowances ............ Net purchases.......................... Add: Freight-in ...................... Cost of goods purchased ....... Cost of goods available for sale....................................... Less: Inventory, Nov. 30, 2017 ............... Cost of goods sold ........... Gross profit.....................................

$902,000 20,000 882,000 $ 41,300 $613,000 $7,000 6,760

13,760 599,240 5,060 604,300 645,600 36,200 609,400 $272,600

(Beginning inventory + Net purchases + Freight-in = Cost of goods purchased) LO 4, 5 BT: AP Difficulty: Medium TOT: 25 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

5-47

PROBLEM 5-8A (a) (a) Cost of goods sold = Sales revenue – Gross profit = $96,890 – $67,800 = $29,090 (b) Net income = Gross profit – Operating expenses = $67,800 – $63,640 = $4,160 (c) Merchandise inventory = 2015 Inventory + Purchases – CGS = $13,000 + $25,890 – $29,090 = $9,800 (d) Cash payments to suppliers = 2015 Accounts payable + Purchases – 2016 Accounts payable = $5,800 + $25,890 – $6,500 = $25,190 (e) Sales revenue = Cost of goods sold + Gross profit = $28,060 + $59,620 = $87,680 (f) Operating expenses = Gross profit – Net income = $59,620 – $3,510 = $56,110 (g) 2016 Inventory + Purchases – 2017 Inventory = CGS Purchases = CGS – 2016 Inventory + 2017 Inventory = $28,060 – $9,800 [from (c)] + $14,700 = $32,960 (h) Cash payments to suppliers = 2016 Accounts payable + Purchases – 2017 Accounts Payable = $6,500 + $32,960 [from (g)] – $4,600 = $34,860 (i) Gross profit = Sales revenue – CGS = $82,220 – $26,490 = $55,730 (j) Net income = Gross profit – Operating expenses = $55,730 – $52,870 = $2,860

5-48

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 5-8A (Continued) (k) 2017 Inventory + Purchases – 2018 Inventory = CGS Inventory = 2017 Inventory + Purchases – CGS = $14,700 + $24,050 – $26,490 = $12,260 (I) Accounts payable = 2017 Accounts payable + Purchases – Cash payments = $4,600 + $24,050 – $24,650 = $4,000 (Sales revenue – Cost of goods sold – Operating expenses = Net income; Beginning inventory + Purchases of inventory on account – Ending inventory = Cost of goods sold) (b)

No. A decline in sales does not necessarily mean that profitability declined. Profitability is affected by sales, cost of goods sold and operating expenses. If cost of goods sold or operating expenses decline more than sales, profitability can increase even when sales decline. However, in this particular case, sales declined with insufficient offsetting cost savings to improve profitability. Therefore, profitability declined for Zhou Inc.

Gross profit rate Profit margin

2016 2017 $67,800 ÷ $96,890 $59,620 ÷ $87,680 = 70.0% = 68.0%

2018 $55,730 ÷ $82,220 = 67.8%

$4,160 ÷ $96,890 = 4.3%

$2,860 ÷ $82,220 = 3.5%

$3,510 ÷ $87,680 = 4.0%

LO 4-6 BT: AN Difficulty: Hard TOT: 40 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

5-49

*PROBLEM 5-9A

(a) Date Apr.

5-50

General Journal Account Titles and Explanation 5 Purchases ......................................................... Accounts Payable ..................................

Debit 1,500

1,500

7 Freight-In .......................................................... Cash ........................................................

9 Accounts Payable ............................................ Purchase Returns and Allowances ....................................

200

10 Accounts Receivable ....................................... Sales Revenue........................................

1,340

12 Purchases ......................................................... Accounts Payable ..................................

830

14 Accounts Payable ($1,500 – $200) .................. Cash ($1,300 – $39) ................................ Purchase Discounts (1,300 X 3%) ...................................

1,300

17 Accounts Payable ............................................ Purchase Returns and Allowances ....................................

20 Accounts Receivable ....................................... Sales Revenue........................................

810

21 Accounts Payable ($830 – $30) ....................... Cash ($800 – $8) ..................................... Purchase Discounts............................... ($800 X 1%) ....................................

800

Credit

200 1,340 830

Kimmel, Financial Accounting, 8/e, Solutions Manual

1,261 39

30 810 792 8

(For Instructor Use Only)

*PROBLEM 5-9A (Continued) Date Apr.

Account Titles and Explanation 27 Sales Returns and Allowances ........................ Accounts Receivable ..............................

Debit 80

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

1,220

Credit 80 1,220

(b) Cash 4/1 Bal. 2,500 4/7 4/30 1,220 4/14 4/21 4/30 Bal. 1,587

80 1,261 792

Accounts Receivable 4/10 1,340 4/27 80 4/20 810 4/30 1,220 4/30 Bal. 850 Inventory 4/1 Bal. 3,500 4/30 Bal. 3,500

4/9 4/14 4/17 4/21

Accounts Payable 200 4/5 1,500 1,300 4/12 830 30 800 4/30 Bal. 0

Common Stock 4/1 Bal. 6,000 4/30 Bal. 6,000 Sales Revenue 4/10 1,340 4/20 810 4/30 Bal. 2,150 Sales Returns and Allowances 4/27 80 4/30 Bal. 80 Purchases 4/5 1,500 4/12 830 4/30 Bal. 2,330

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

5-51

*PROBLEM 5-9A (Continued) Purchase Returns and Allowances 4/9 200 4/17 30 4/30 Bal. 230

Purchase Discounts 4/14 4/21 4/30 Bal.

4/7 4/30 Bal.

39 8 47

Freight-In 80 80

(c) GRANITE HILLS PRO SHOP Trial Balance April 30, 2017 Debit Cash .................................................................. Accounts Receivable ....................................... Inventory ........................................................... Common Stock ................................................. Sales Revenue .................................................. Sales Returns and Allowances ........................ Purchases ......................................................... Purchase Returns and Allowances ................. Purchase Discounts ......................................... Freight-In ...........................................................

Credit

$1,587 850 3,500 $6,000 2,150 80 2,330 230 47 80 $8,427

$8,427

(Total of debit account balances = Total of credit account balances)

5-52

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

*PROBLEM 5-9A (Continued) (d) GRANITE HILLS PRO SHOP Income Statement (Partial) For the Month Ended April 30, 2017 ____________________________________________________________ Sales Sales revenue .......................... Less: Sales returns and allowances .................... Net sales .................................. Cost of goods sold Inventory, April 1 ..................... Purchases ................................ Less: Purchase returns and allowances ............ Purchase discounts. .... Net purchases ......................... Add: Freight-in ...................... Cost of goods purchased ....... Cost of goods available for sale ........................................ Less: Inventory, April 30 ....... Cost of goods sold .............. Gross profit .............................

$2,150 80 2,070 $3,500 $2,330 $230 47

277 2,053 80 2,133 5,633 4,263 1,370 $ 700

(Beginning inventory+ Cost of goods purchased – Ending inventory = Cost of goods sold) LO 5, 7 BT: AP Difficulty: Medium TOT: 50 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

5-53

ACCOUNTING CYCLE REVIEW

(a)

Dec. 6

8 10

13 15 18

20 23

5-54

Salaries and Wages Payable ....................... Salaries and Wages Expense ...................... Cash ......................................................

1,000 600

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

1,900

Cash .............................................................. Sales Revenue ......................................

6,300

Cost of Goods Sold ...................................... Inventory ...............................................

4,100

Inventory ....................................................... Accounts Payable .................................

9,000

Supplies ........................................................ Cash ......................................................

2,000

1,600 1,900 6,300 4,100 9,000 2,000

Accounts Receivable ................................... 12,000 Sales Revenue ......................................

12,000

Cost of Goods Sold ...................................... Inventory ...............................................

8,000 8,000

Salaries and Wages Expense ...................... Cash ......................................................

1,800

Accounts Payable ........................................ Cash ...................................................... Inventory ($9,000 X .02) ........................

9,000

1,800 8,820 180

Cash .............................................................. 11,640 Sales Discounts ($12,000 X .03) .................. 360 Accounts Receivable............................

Kimmel, Financial Accounting, 8/e, Solutions Manual

12,000

(For Instructor Use Only)

ACCOUNTING CYCLE REVIEW SOLUTION (Continued) (c)

Dec. 31

Salaries and Wages Expense ....................... Salaries and Wages Payable ................

800

Depreciation Expense................................... Accumulated Depreciation— Equipment ...........................................

200

800

200

Supplies Expense ......................................... 1,700 Supplies ($3,200 – $1,500) .................... Income Tax Expense..................................... Income Taxes Payable .......................... (b) & (c) Cash 12/1 Bal. 7,200 12/6 12/8 1,900 12/15 12/10 6,300 12/20 12/27 11,640 12/23 12/31 Bal. 12,820

Supplies 12/1 Bal. 1,200 12/31 12/15 2,000 12/31 Bal. 1,500

200 200

General Ledger

1,600 2,000 1,800 8,820

Accounts Receivable 12/1 Bal. 4,600 12/8 1,900 12/18 12,000 12/27 12,000 12/31 Bal. 2,700 Inventory 12/1 Bal. 12,000 12/10 12/13 9,000 12/18 12/23 12/31 Bal. 8,720

1,700

4,100 8,000 180

1,700

Equipment 12/1 Bal. 22,000 12/31 Bal. 22,000 Accumulated Depr.—Equipment 12/1 Bal. 2,200 12/31 200 12/31 Bal. 2,400

12/23

Accounts Payable 9,000 12/1 Bal. 4,500 12/13 9,000 12/31 Bal. 4,500

Salaries and Wages Payable 12/6 1,000 12/1 Bal. 1,000 12/31 800 12/31 Bal. 800 Income Taxes Payable 12/31 12/31 Bal.

Kimmel, Financial Accounting, 8/e, Solutions Manual

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200 200

5-55

ACCOUNTING CYCLE REVIEW SOLUTION (Continued) Common Stock 12/1 Bal. 15,000 12/31 Bal. 15,000 Retained Earnings 12/1 Bal. 24,300 12/31 Bal. 24,300 Sales Revenue 12/10 6,300 12/18 12,000 12/31 Bal. 18,300 Sales Discounts 12/27 360 12/31 Bal. 360

Depreciation Exp. 12/31 200 12/31 Bal. 200 Salaries and Wages Expense 12/6 600 12/20 1,800 12/31 800 12/31 Bal. 3,200 Supplies Expense 12/31 1,700 12/31 Bal. 1,700 Income Tax Expense 12/31 200 12/31 Bal. 200

Cost of Goods Sold 12/10 4,100 12/18 8,000 12/31 Bal. 12,100

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Kimmel, Financial Accounting, 8/e, Solutions Manual

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ACCOUNTING CYCLE REVIEW SOLUTION (Continued) (d)

DEVINE DISTRIBUTING COMPANY Adjusted Trial Balance December 31, 2017 Cash ................................................................... Accounts Receivable ........................................ Inventory ........................................................... Supplies ............................................................. Equipment ......................................................... Accumulated Depreciation—Equipment ......... Accounts Payable ............................................. Salaries and Wages Payable ............................ Income Taxes Payable ...................................... Common Stock ................................................. Retained Earnings ............................................ Sales Revenue .................................................. Sales Discounts ................................................ Cost of Goods Sold .......................................... Depreciation Expense ...................................... Salaries and Wages Expense ........................... Supplies Expense ............................................. Income Tax Expense ........................................

DR. $12,820 2,700 8,720 1,500 22,000

CR.

$ 2,400 4,500 800 200 15,000 24,300 18,300

360 12,100 200 3,200 1,700 200 $65,500 $65,500 (Total of debit account balances = Total of credit account balances) (e)

DEVINE DISTRIBUTING COMPANY Income Statement For the Month Ending December 31, 2017 Sales revenue.................................................... Less: Sales discounts ..................................... Net sales ............................................................ Cost of goods sold ........................................... Gross profit ....................................................... Operating expenses Salaries and wages expense .................... Supplies expense ...................................... Depreciation expense ............................... Income before income taxes ............................ Income tax expense .......................................... Net income ........................................................

$18,300 360 17,940 12,100 5,840 $3,200 1,700 200

Kimmel, Financial Accounting, 8/e, Solutions Manual

5,100 740 200 $ 540

(For Instructor Use Only)

5-57

ACCOUNTING CYCLE REVIEW SOLUTION (Continued) DEVINE DISTRIBUTING COMPANY Retained Earnings Statement For the Month Ended December 31, 2017 Retained earnings, Dec. 1 ............................................. Add: Net income .......................................................... Retained Earnings, Dec. 31 ..........................................

$24,300 540 $24,840

DEVINE DISTRIBUTING COMPANY Balance Sheet December 31, 2017 Assets Current assets Cash ............................................................ Accounts receivable .................................. Inventory .................................................... Supplies...................................................... Total current assets .............................

$12,820 2,700 8,720 1,500

Property, plant, and equipment Equipment .................................................. Less: Accumulated depreciation ............. Total assets .......................................................

22,000 2,400

$25,740

19,600 $45,340

Liability and Stockholders’ Equity Current liabilities Accounts payable ...................................... Salaries and wages payable...................... Income taxes payable ................................ Total current liabilities .........................

$ 4,500 800 200

Stockholders’ equity Common stock ........................................... Retained earnings ...................................... Total stockholders’ equity ................... Total liabilities and stockholders’ equity.........

15,000 24,840

$ 5,500

39,840 $45,340

(Ending retained earnings = Beginning retained earnings ± Changes to retained earnings) LO 4 BT: AP Difficulty: Medium TOT: 60 min. AACSB: Analytic AICPA FC: Reporting

5-58

Kimmel, Financial Accounting, 8/e, Solutions Manual

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ACR5-2 (b) Date Nov. 8

General Journal Account Titles Salaries and Wages Payable Salaries and Wages Expense Cash

Debit 1,700 1,850

Cash

1,900

Credit

3,550

Accounts Receivable 11 12

15 19

1,900

Inventory Accounts Payable

8,000

Accounts Receivable Sales Revenue Cost of Goods Sold Inventory

5,500

Accounts Payable Inventory

8,000 5,500 4,000 4,000 300 300

Cash ($5,500 – $110) Sales Discounts ($5,500 × 2%) Accounts Receivable

5,390 110

Accounts Payable ($8,000 – $300) Inventory ($7,700 × 2%) Cash

7,700

Cash

2,300

5,500 154 7,546

Service Revenue 25 27 28

2,300

Equipment Accounts Payable

5,000

Supplies Accounts Payable

1,700

Accounts Payable Cash

3,000

Kimmel, Financial Accounting, 8/e, Solutions Manual

5,000 1,700 3,000 (For Instructor Use Only)

5-59

ACR5-2 (Continued) 29 29 29 29

Rent Expense Cash

375 375

Salaries and Wages Expense Cash

30 30

700

Cash Unearned Service Revenue

675

700

5-60

675 960 960

Salaries and Wages Expense Salaries and Wages Payable

500

Depreciation Expense Accum. Depr.—Equipment

250

Unearned Service Revenue Service Revenue ($4,675 – $650)

CLOSING ENTRIES 30 Service Revenue Sales Revenue Income Summary 30

1,300

Accounts Receivable Service Revenue

ADJUSTING ENTRIES 30 Supplies Expense Supplies 30

1,300

500 250 4,025 4,025 7,025 5,500 12,525

Income Summary Salaries and Wages Expense Rent Expense Depreciation Expense Supplies Expense Cost of Goods Sold Sales Discounts

9,345

Income Summary Retained Earnings

3,180

3,650 375 250 960 4,000 110

Kimmel, Financial Accounting, 8/e, Solutions Manual

3,180 (For Instructor Use Only)

(a), (c) & (e) Cash 11/1 Bal. 9,000 11/8 11/10 1,900 11/20 11/19 5,390 11/28 11/22 2,300 11/29 11/29 675 11/29 11/30 Bal. 3,494

3,550 7,546 3,000 375 1,300

Accounts Receivable 11/1 Bal. 2,240 11/10 1,900 11/12 5,500 11/19 5,500 11/29 700 11/30 Bal. 1,040

11/11

11/30

Inventory 8,000 11/12 11/15 11/20 3,546

Supplies 11/1 Bal. 860 adj 11/27 1,700 11/30 Bal. 1,600

11/15 11/20 11/28

adj

Accounts Payable 300 11/1 Bal. 3,400 7,700 11/11 8,000 3,000 11/25 5,000 11/27 1,700 11/30 Bal. 7,100 Unearned Service Revenue 4,025 11/1 Bal. 4,000 11/29 675 11/30 Bal. 650

4,000 300 154

Salaries and Wages Payable 11/8 1,700 11/1 Bal. 1,700 adj 500 11/30 Bal. 500

960

Common Stock 11/1 Bal. 20,000 11/30 Bal. 20,000

Equipment 11/1 Bal. 25,000 11/25 5,000 11/30 Bal. 30,000

Retained Earnings 11/1 Bal. 7,000 Close 3,180 11/30 Bal 10,180

Accumulated Depreciation— Equipment 11/1 Bal. 1,000 adj 250 11/30 Bal. 1,250

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5-61

ACR5-2 (Continued)

Service Revenue 11/22 2,300 11/29 700 7,025 adj 4,025 11/30 Bal. 0

Depreciation Expense adj 250 Close 11/30 Bal. 0

250

Supplies Expense adj 960 Close 11/30 Bal. 0

11/30 Close

5-62

Rent Expense 11/29 375 Close 11/30 Bal. 0

Close 960

Income Summary 9,345 11/30 12,525 3,180 11/30

Salaries and Wages Expense 11/8 1,850 11/29 1,300 adj 500 Close 3,650 11/30 Bal. 0

3,180

375

Sales Revenue 5,500 11/12 5,500 11/30 Bal. 0

Cost of Goods Sold 11/12 4,000 Close 4,000 11/30 Bal. 0 Sales Discounts 11/19 110 Close 11/30 Bal. 0

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ACR 5-2 (Continued) (d)

IKONK, INC. Adjusted Trial Balance November 30, 2017 Cash ................................................................... Accounts Receivable ........................................ Inventory ........................................................... Supplies ............................................................. Equipment ......................................................... Accumulated Depreciation ............................... Accounts Payable ............................................. Unearned Service Revenue .............................. Salaries and Wages Payable ............................ Common Stock ................................................. Retained Earnings ............................................ Service Revenue ............................................... Sales Revenue .................................................. Sales Discounts ................................................ Cost of Goods Sold .......................................... Salaries and Wages Expense ........................... Rent Expense .................................................... Depreciation Expense ...................................... Supplies Expense .............................................

DR. $3,494 1,040 3,546 1,600 30,000

CR.

$ 1,250 7,100 650 500 20,000 7,000 7,025 5,500 110 4,000 3,650 375 250 960 $49,025

Kimmel, Financial Accounting, 8/e, Solutions Manual

$49,025

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5-63

ACR5-2 (Continued) (f)

IKONK, INC. Income Statement For the Month Ended November 30, 2017 Sales Sales revenue ................................................. Less Sales discounts ..................................... Net sales ............................................. Service revenue .............................................. Total revenues ....................................... Less Cost of goods sold ....................................... Gross profit ............................................................ Expenses Salaries and wages expense ......................... Supplies expense ........................................... Rent expense .................................................. Depreciation expense .................................... Total expenses ........................................ Net income .............................................................

($5,500 110 $5,390 7,025 12,415 4,000 8,415 $3,650 960 375 250 5,235 $ 3,180

IKONK, INC. Retained Earnings Statement For the Month Ended November 30, 2017 Retained earnings, November 1............................ Add: Net income ................................................... Retained earnings, November 30..........................

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Kimmel, Financial Accounting, 8/e, Solutions Manual

$7,000 3,180 $10,180

(For Instructor Use Only)

ACR5-2 (Continued) IKONK, INC. Balance Sheet November 30, 2017 Assets Current assets Cash ............................................................... Accounts receivable ..................................... Inventory ........................................................ Supplies ......................................................... Total current assets .............................. Property, plant and equipment Equipment ..................................................... Less: Accumulated depreciation— equipment .................................................. Total assets ............................................

$ 3,494 1,040 3,546 1,600 $ 9,680 30,000 1,250

28,750 $38,430

Liabilities and Stockholders’ Equity Current liabilities Accounts payable ............................................. Salaries and wages payable ............................. Unearned service revenue................................ Total current liabilities .............................. Stockholders’ equity Common stock .................................................. Retained earnings ............................................. Total stockholders’ equity ........................ Total liabilities and stockholders’ equity .

Kimmel, Financial Accounting, 8/e, Solutions Manual

$ 7,100 500 650 $ 8,250 20,000 10,180 30,180 $38,430

(For Instructor Use Only)

5-65

CT 5-1

FINANCIAL REPORTING PROBLEM

(a) Percentage change in total revenue: 2013 to 2014 ($182,795 – $170,910) ÷ $170,910 = 7.0% Percentage change in net income: 2013 to 2014 ($39,510 – $37,037) ÷ $37,037 = 6.7% (b) Profit margin: 2012 2013 2014

$41,733 ÷ $156,508 = 26.7% $37,037 ÷ $170,910 = 21.7% $39,510 ÷ $182,795 = 21.6%

The profit margin decreased by 19% in 2013 but remained roughly in the same 2014. (c) Gross profit rates: 2012 2013 2014

$68,662 ÷ $156,508 = 43.9% $64,304 ÷ $170,910 = 37.6% $70,537 ÷ $182,795 = 38.6%

The gross profit rate decreased in 2013 due to an increasing cost of goods sold, but remained roughly the same in 2014. LO 6 BT: AN Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

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Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 5-2

COMPARATIVE ANALYSIS PROBLEM

(a)

Columbia Sportswear $141, 859

(1) Profit margin

VFC $1, 047, 505

= 6.8.%

(2) Gross profit (000’s)

(3) Gross profit rate

$5,993,971 = $12,282,161 – $6,288,190

$954,951 $954,951

$5,993,971

= 45.5%

(5) Percent change in operating income

$198,844

$198,844 – $131,794

= 48.8%

$12,282,161

$2,100,590

(4) Operating income (000’s)

= 8.5%

$12, 282, 161

$2, 100, 590

$1,437,724

= 50.9%

$1,437,724 – $1,647,147

$131,794

= (12.7%)

$1,647,147

(b) VFC’s higher profit margin suggests that it was better at turning sales dollars into net income. Its gross profit rate suggests that VFC can command a higher markup on its goods or that it is better at controlling its cost of goods sold. VFC’s operating income decreased 12.7% while Columbia’s increased by 50.9%. A major reason for VFC’s decline in operating income was due to an impairment of goodwill and intangible assets. LO 6 BT: AN Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

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CT 5-3

COMPARATIVE ANALYSIS PROBLEM

(a) (1) Profit margin

Amazon.com

Wal-Mart stores

($241)

$16, 363

= (0.3%)

(2) Gross profit (millions)

$26,236 = $88,988 – $62,752 $26,236

(3) Gross profit rate

= 29.5%

(4) Operating income (000’s)

$178

(5) Percent change in operating income

$178 – $745

$482,229 – $365,086 = $117,143 $117, 143

= 24.3%

$482, 229

$88,988

$745

= 3.4%

$485, 651

$88,988

$27,147

= (76.1%)

$27, 147 – $26, 872

= 1.0%

$26, 872

(b) Wal-Mart’s higher profit margin suggests that it was better at turning sales dollars into net income. Amazon’s gross profit rate suggests that it can command a higher markup on its goods or that it is better at controlling its cost of goods sold. Amazon’s operating income decreased 76.1% while Wal-Mart’s increased by 1%. LO 6 BT: AN Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

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Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 5-4

INTERPRETING FINANCIAL STATEMENTS

(a) Carrefour (Euros) Gross profit rate

(€70, 486 – €54, 630) €70, 486

Wal-Mart (Dollars) = 22.5%

($256, 329 – $198, 747) $256, 329

= 22.5%

The ratio is the same for each company, indicating that they have similar markups on the cost of their products. (b) Profit margin

€1,738 ÷ €70,486 = 2.5%

$9,054 ÷ $256,329 = 3.5%

Wal-Mart is renowned for its efficiency—this is what has caused it to dominate its U.S. competitors. It would appear from this data that it is also more efficient in its ability to generate net income from each dollar of sales than Carrefour. (c)

Current ratio

€14,521 ÷ €13,660 = 1.06:1

$34,421 ÷ $37,418 = .92:1

Debt to assets ratio

€29,434 ÷ €39,063 = .75

$61,289 ÷ $104,912 = .58

Both companies report low current ratios. This is not surprising since in recent years most large companies have tried to reduce costs and increase profitability by limiting the amount of current assets that they hold. However, Wal-Mart’s current ratio is less than 1:1 and might be cause for further investigation. The debt to assets ratio reveals that Carrefour relies more heavily on debt financing. This reduces Carrefour’s solvency and makes Carrefour more susceptible to swings in the economy. This could reduce its ability to compete head-to-head with Wal-Mart.

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CT 5-4 (Continued) (d) Ratios improve our ability to compare these two companies that report financial information using different currencies. However, other factors can still reduce our ability to compare them. Different accounting standards in the two countries might result in dramatically different results under the same circumstances. Also, differences in laws, such as bankruptcy laws, can affect the results. For example, if French bankruptcy laws favor shareholders more than U.S. bankruptcy laws, then it would be prudent for a French company to rely more on debt financing than a U.S. company. LO 6 BT: AN Difficulty: Medium TOT: 25 min. AACSB: Analytic AICPA FC: Reporting

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CT 5-5

REAL-WORLD FOCUS

Answers will vary depending on the company and article chosen by the student. LO None BT: S Difficulty: Hard TOT: 60 min. AACSB: Technology and Communication AICPA FC: Reporting AICPA PC: Communication

Kimmel, Financial Accounting, 8/e, Solutions Manual

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5-71

CT 5-6 (a) (1)

DECISION MAKING ACROSS THE ORGANIZATION GIGASALES DEPARTMENT STORE Projected Income Statement For the Year Ended December 31, 2018 Net sales [$700,000 + ($700,000 X 4%)] ..... Cost of goods sold ($728,000 X 75%)* ...... Gross profit ($728,000 X 25%)** ................ Operating expenses Selling expenses................................. Administrative expenses.................... Total operating expenses ........... Net income ..................................................

$728,000 546,000 182,000 $100,000 20,000 120,000 $ 62,000

**Alternatively: Net sales, $728,000 – gross profit, $182,000. **25% = ($140,000 ÷ $700,000) + 5%. (2)

GIGASALES DEPARTMENT STORE Projected Income Statement For the Year Ended December 31, 2018 Net sales ..................................................... Cost of goods sold ..................................... Gross profit................................................. Operating expenses Selling expenses................................. Administrative expenses.................... Net income ..................................................

$700,000 560,000 140,000 $68,000* 20,000*

88,000 $ 52,000

*$100,000 – $30,000 – ($40,000 X 40%) + ($700,000 X 2%) = $68,000. (b) Karen’s proposed changes will increase net income by $42,000. Reece’s proposed changes will reduce operating expenses by $32,000 and result in a corresponding increase in net income. Thus, if the choice is between Karen’s plan and Reece’s plan, Karen’s plan should be adopted. While Reece’s plan will increase net income, it may also have an adverse effect on sales personnel. Under Reece’s plan, sales personnel will be taking a cut of $16,000 in compensation [$60,000 – ($30,000 + $14,000)].

5-72

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CT 5-6 (Continued) (c)

GIGASALES DEPARTMENT STORE Projected Income Statement For the Year Ended December 31, 2018 Net sales ............................................................. Cost of goods sold ............................................ Gross profit ........................................................ Operating expenses Selling expenses ........................................ Administrative expenses ........................... Total operating expenses .................. Net income .........................................................

$728,000 546,000 182,000 $68,560* 20,000* 88,560 $ 93,440

*$68,000 + [2% X ($728,000 – $700,000)] = $68,560. If both plans are implemented, net income will be $73,440 ($93,440 – $20,000) higher than the 2017 results. This is an increase of over 360%. Given the size of the increase, Reece’s plan to compensate sales personnel might be modified so that they would not have to take a pay cut. For example, if sales commissions were 3%, the compensation cut would be reduced to $8,160 [$60,000 – ($30,000 + ($728,000 X 3%))]. (d) A variety of factors might be presented by the student. For example, increasing the quantity of inventory purchased will increase warehousing and other costs of inventory. It will also increase the risk of holding obsolete or out-of-fashion inventory. Cutting salespersons’ salaries and making them more dependent on commissions might actually be viewed favorably by the sales staff if they have the potential to increase their total compensation. Reduced store deliveries may anger customers, especially if competitors provide more frequent service. LO 4, 6 BT: S Difficulty: Hard TOT: 45 min. AACSB: Communication and Reflective Thinking AICPA PC: Interaction, Leadership, and Communication

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CT 5-7

COMMUNICATION ACTIVITY

(a), (b) President Surfing Hawaii Co. Dear Sir: As you know, the financial statements for Surfing Hawaii Co. are prepared in accordance with generally accepted accounting principles. One of these principles is the revenue recognition principle, which provides that revenues should be recognized when the performance obligation is satisfied. Typically, sales revenues are recognized when the goods are transferred from the buyer to the seller. At this point, the sales transaction is completed and the sales price is established. Thus, in the typical situation, revenue on the surfboard ordered by Aikau is recognized at event No. 8, when Aikan picks up the surfboard. The circumstances pertaining to this sale may seem to you to be atypical because Aiken has ordered a specific kind of surfboard. From an accounting standpoint, this would be true only if you could not reasonably expect to sell this surfboard to another customer. In such case, it would be proper under generally accepted accounting principles to recognize sales revenue when you have completed the surfboard for Aiken. Whether Aikan makes a down payment with the purchase order is irrelevant in recognizing sales revenue because at this time, you have not done anything to earn the revenue. A down payment may be an indication of Aikan’s “good faith.” However, its effect on your financial statements is limited entirely to recognizing the down payment as unearned revenue. If you have further questions about the accounting for this sale, please let me know. Sincerely, LO 2 BT: S Difficulty: Medium TOT: 30 min. AACSB: Communication and Reflective Thinking AICPA FC: Measurement AICPA PC: Communication

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CT 5-8

ETHICS CASE

(a) Tabitha Andes, as a new employee, is placed in a position of responsibility and is pressured by her supervisor to continue an unethical practice previously performed by him. The unethical practice is taking undeserved cash discounts. Her dilemma is either follow her boss’s unethical instructions or offend her boss and maybe lose the job she just assumed. (b) The stakeholders (affected parties) are: Tabitha Andes, the assistant treasurer. Pete Wilson, the treasurer. Southside Stores, the company. Creditors of Southside Stores (suppliers). Mail room employees (those assigned the blame). (c) Tabitha’s alternatives: 1. Tell the treasurer (her boss) that she will attempt to take every allowable cash discount by preparing and mailing checks within the discount period—the ethical thing to do. This will offend her boss and may jeopardize her continued employment. 2. Join the team and continue the unethical practice of taking undeserved cash discounts. 3. Go over her boss’s head and take the chance of receiving just and reasonable treatment from an officer superior to Pete. The company may not condone this practice. Tabitha definitely has a choice, but probably not without consequence. To continue the practice is definitely unethical. If Tabitha submits to this request, she may be asked to perform other unethical tasks. If Tabitha stands her ground and refuses to participate in this unethical practice, she probably won’t be asked to do other unethical things—if she isn’t fired. Maybe nobody has ever challenged Pete’s unethical behavior and his reaction may be one of respect rather than anger and retribution. Being ethically compromised is no way to start a new job. LO 2 BT: E Difficulty: Hard TOT: 45 min. AACSB: Ethics AICPA FC: Measurement AICPA PC: Personal Demeanor

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CT 5-9

ALL ABOUT YOU ACTIVITY

In order for revenue to be recognized the performance obligation must be satisfied. In this case FarWest has an obligation to provide goods with a value equal to the gift card. That obligation is not fulfilled until one of two things happens: Either the customer redeems the card for goods, or the card expires. Until either of those events occurs FarWest cannot record revenue. LO 3 BT: C Difficulty: Medium TOT: 10 min. AACSB: None AICPA FC: Measurement

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Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 5-10

FASB CODIFICATION ACTIVITY

(a) 1. Inventory is the aggregate of those items of tangible personal property that have any of the following characteristics: a. Held for sale in the ordinary course of business b. In process of production for such sale c. To be currently consumed in the production of goods or services to be available for sale. The term inventory embraces goods awaiting sale (the merchandise of a trading concern and the finished goods of a manufacturer), goods in the course of production (work in process), and goods to be consumed directly or indirectly in production (raw materials and supplies). This definition of inventories excludes long-term assets subject to depreciation accounting, or goods which, when put into use, will be so classified. The fact that a depreciable asset is retired from regular use and held for sale does not indicate that the item should be classified as part of the inventory. Raw materials and supplies purchased for production may be used or consumed for the construction of long-term assets or other purposes not related to production, but the fact that inventory items representing a small portion of the total may not be absorbed ultimately in the production process does not require separate classification. By trade practice, operating materials and supplies of certain types of entities such as oil producers are usually treated as inventory. 2. A customer is a reseller or a consumer, either an individual or a business that purchases a vendor’s products or services for end use rather than for resale. This definition is consistent with paragraph 280-10-50-42, which states that a group of entities known to a reporting entity to be under common control shall be considered as a single customer, and the federal government, a state government, a local government (for example, a county or municipality), or a foreign government each shall be considered as a single customer. Customer includes any purchaser of the vendor’s products at any point along the distribution chain, regardless of whether the purchaser acquires the vendor’s products directly or indirectly (for example, from a distributor) from the vendor. For example, a vendor may sell its products to a distributor who in turn resells the products to a retailer. The retailer in that example is a customer of the vendor.

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5-77

CT 5-10 (Continued) (b) 330-10-35-15 Only in exceptional cases may inventories properly be stated above cost. For example, precious metals having a fixed monetary value with no substantial cost of marketing may be stated at such monetary value; any other exceptions must be justifiable by inability to determine appropriate costs, immediate marketability at quoted market price, and the characteristic of unit interchangeability. LO 2 BT: S Difficulty: Medium TOT: 25 min. AACSB: Communication and Technology AICPA FC: Measurement AICPA PC: Communication

5-78

Kimmel, Financial Accounting, 8/e, Solutions Manual

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IFRS CONCEPTS AND APPLICATION

IFRS5-1 Expenses may be classified by “nature” or by “function”. The “nature-ofexpense” classification organizes expenses by type of expense, such as salaries, depreciation, rent, or supplies. The “function-of-expense” classification presents expenses by type of business activity. Examples would include cost of goods sold, selling, administrative, operating, and non-operating. LO 4 BT: K Difficulty: Easy TOT: 5 min. AACSB: Diversity AICPA FC: Measurement

IFRS5-2 By function By nature By nature By function By nature By nature By function

Cost of goods sold Depreciation expense Salaries and wages expense Selling expenses Utilities expense Delivery expense General and administrative expenses

LO 4 BT: K Difficulty: Easy TOT: 5 min. AACSB: Diversity AICPA FC: Measurement

IFRS5-3 MATILDA COMPANY Comprehensive Income Statement For the Year Ended 2017 (in thousands of euros) Net income............................................................................... Unrealized gain related to revaluation of buildings .............. Unrealized loss non-trading securities.................................. Items not recognized on the income statement .................... Total comprehensive income ........................................

€150 € 10 (35) (25) €125

LO 4 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Diversity and Analytic AICPA FC: Reporting

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5-79

IFRS5-4

INTERNATIONAL FINANCIAL REPORTING PROBLEM

(a) Vuitton uses a multiple step format. The income statement isolates gross margin, profit from recurring operations and operating profit rather than simply showing total revenues less total expenses to arrive at net income. (b) Vuitton uses Cost of Net Financial Debt rather than Interest Expense on its income statement. (c) Inventory is composed of: Wines and eaux-de-vie in process of aging Other raw materials and work in process Goods purchased for resale Finished products Amount of inventory (gross) before impairment is €10,700M LO 4 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Diversity and Analytic AICPA FC: Reporting

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Kimmel, Financial Accounting, 8/e, Solutions Manual

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CHAPTER 6 Reporting and Analyzing Inventory Learning Objectives 1. Discuss how to classify and determine inventory. 2. Apply inventory cost flow methods and discuss their financial effects. 3. Explain the statement presentation and analysis of inventory. *4. Apply inventory cost flow methods to perpetual inventory records. *5. Indicate the effects of inventory errors on the financial statements.

Summary of Questions by Learning Objectives and Bloom’s Taxonomy Item LO

Item

17. 18. 19. 20. 21.

3 3 3 3 3

AP K K K C

22. *23. *24. *25.

3 4 4 5

C C C AN

8. 9.

3 3

AP AP

*10. *11.

4 5

AP AN

3b.

13. *14. *15. *16.

3 4 4 5

AP AP AP AN

*17.

7. *8.

3 4

AP AP

*9.

Questions 1. 2. 3. 4. 5. 6.

1 1 1 1 1 2

C K K C C AP

7. 8. 9. 10. 11.

2 2 2 2 2

K C K C K

12. 13. 14. 15. 16.

2 2 2 2 3

C C C C C

Brief Exercises 1. 2. 3.

1 2 2

C AP AP

4. 5.

2 2

C AP

6. 7.

2 3

C AP

DO IT! Exercises 1.

3a.

Exercises 1. 2. 3. 4.

1 1 1 2

AN AN K AP

5. 6. 7. 8.

2 2 2 2

AP AN AP AP

9. 10. 11. 12.

3 3 3 3

AP AP AP AP

Problems: Set A 1. 2.

1 2

AN AP

3. 4.

2 2

AP AN

5. 6.

2 2

AP AP

*Continuing Cookie Solutions for this chapter are available online.

Kimmel, Financial Accounting, 8/e, Solutions Manual

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6-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Determine items and amounts to be recorded in inventory.

Moderate

15–20

Determine cost of goods sold and ending inventory using FIFO, LIFO, and average-cost with analysis.

Moderate

30–40

Determine cost of goods sold and ending inventory using FIFO, LIFO, and average-cost in a periodic inventory system and assess financial statement effects.

Moderate

30–40

Compute ending inventory, prepare income statements, and answer questions using FIFO and LIFO.

Moderate

30–40

Calculate ending inventory, cost of goods sold, gross profit, and gross profit rate under periodic method; compare results.

Moderate

30–40

Compare specific identification, FIFO, and LIFO under periodic method; use cost flow assumption to influence earnings.

Moderate

20–30

Compute inventory turnover and days in inventory; compute current ratio based on LIFO and after adjusting for LIFO reserve.

Moderate

20–30

*8A

Calculate cost of goods sold, ending inventory, and gross profit for LIFO, FIFO, and moving-average under the perpetual system; compare results.

Difficult

30–40

*9A

Determine ending inventory under a perpetual inventory system.

Difficult

30–40

6-2

Kimmel, Financial Accounting, 8/e, Solutions Manual

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ANSWERS TO QUESTIONS 1. Agree. Effective inventory management is frequently the key to successful business operations. Management attempts to maintain sufficient quantities and types of goods to meet expected customer demand. It also seeks to avoid the cost of carrying inventories that are clearly in excess of anticipated sales. LO 1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA PC: Communication 2. Inventory items have two common characteristics: (1) they are owned by the company and (2) they are intended to be sold to customers in the ordinary course of business. LO 1 BT: K Difficulty: Easy TOT: 1 min. AACSB: None AICPA PC: Communication 3. Just-in-time inventory management is the practice of manufacturing or purchasing inventory “just-intime” to fill a sales order. Since inventory quantities are kept at very low amounts, just-in-time management reduces the costs associated with carrying inventory as well as the risk of obsolescence. LO 1 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA PC: Communication 4. Taking a physical inventory involves actually counting, weighing, or measuring each kind of inventory on hand. Retailers, such as hardware stores, generally have thousands of different items to count. This is normally done when the store is closed. Will will probably count items and mark the quantity, description, and inventory number on prenumbered inventory tags. LO 1 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA PC: Communication 5. (a) (1) The goods will be included in Bonita Company’s inventory if the terms of sale are FOB destination. (2) The goods will be included in Myan Corporation’s inventory if the terms of sale are FOB shipping point. (b) Bonita Company should include goods shipped to a consignee in its inventory. Goods held by Bonita Company on consignment should not be included in inventory. LO 1 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA PC: Communication 6. Inventoriable costs are $3,015 (invoice cost $3,000 + freight charges $75 − purchase discounts $60). LO 1 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Reporting 7. The primary basis of accounting for inventories is cost in accordance with the historical cost principle. LO 1 BT: K Difficulty: Easy TOT: 1 min. AACSB: None AICPA PC: Communication 8. Actual physical flow may be impractical because many items are indistinguishable from one another. Actual physical flow may be inappropriate because management may be able to manipulate net income through specific identification of items sold. LO 2 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement AICPA PC: Communication 9. The major advantage of the specific identification method is that it tracks the actual physical flow of the goods available for sale. The major disadvantage is that management could manipulate net income. LO 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement AICPA PC: Communication 10. No. Selection of an inventory costing method is a management decision. However, once a method has been chosen, it should be consistently applied. LO 2 BT: C Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement AICPA PC: Communication 11. (a) FIFO, (b) Average-cost, (c) LIFO. LO 2 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement AICPA PC: Communication

Kimmel, Financial Accounting, 8/e, Solutions Manual

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6-3

Questions Chapter 6 (Continued) 12. Short Company is using the FIFO method of inventory costing, and King Company is using the LIFO method. Under FIFO, the latest goods purchased remain in inventory. Thus, the inventory on the balance sheet should be close to current costs. The reverse is true of the LIFO method. Short Company will have the higher gross profit because cost of goods sold will include a higher proportion of goods purchased at earlier (lower) costs. LO 2 BT: C Difficulty: Medium TOT: 2 min. AACSB: None AICPA FC: Measurement & Reporting AICPA PC: Communication 13. Mamosa Corporation may experience severe cash shortages if this policy continues. All of its net income is being paid out as dividends, yet some of the earnings must be reinvested in inventory to maintain inventory levels. Some earnings must be reinvested because net income is computed with cost of goods sold based on older, lower costs while the inventory must be replaced at current, higher costs. Because of this factor, net income under FIFO is sometimes referred to as including “phantom profits.” In addition, Mamosa is also depleting cash more quickly under FIFO because FIFO results in higher income tax payments. LO 2 BT: AN Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting AICPA PC: Communication 14. Oscar is partially correct. In a period of inflation, FIFO produces higher net income because the lower unit costs of the first units purchased is matched against revenues. A switch from LIFO to FIFO will thus produce higher net income and a larger bonus for Oscar, which he perceives as being “better off”. It is more difficult to determine if the company would be “better off” if it used FIFO instead of LIFO. Using FIFO would mean higher reported income and higher inventory values which investors usually interpret as “better” results. On the other hand, the higher net income reported with FIFO would mean higher bonus and income tax expenses. Since both of these items require cash, switching to FIFO may leave the company with an inadequate amount of cash to meet normal operating needs. LO 2 BT: C Difficulty: Hard TOT: 4 min. AACSB: None AICPA FC: Reporting AICPA PC: Communication 15. When prices are increasing, LIFO results in higher cost of goods sold, and lower income relative to FIFO. Because LIFO income is lower the company pays lower taxes, which results in higher cash flows. The quality of earnings ratio is net cash provided by operating activities divided by income. The use of LIFO will increase the numerator (net cash provided by operating activities) and decrease the denominator (net income), both of which increase the value of the ratio. LO 2 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting AICPA PC: Communication 16. Hank should know the following: (a) A departure from the cost basis of accounting for inventories is justified when the value of the goods is no longer as great as its cost. The writedown to market should be recognized in the period in which the price decline occurs. (b) Market means current replacement cost, not selling price. For a merchandising company, market is the cost at the present time from the usual suppliers in the usual quantities. LO 3 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Measurement AICPA PC: Communication 17. Jackson Music Center should report the TVs at $350 each for a total of $1,750. $350 is the current replacement cost under the lower-of-cost-or-market (LCM) basis of accounting for inventories. A decline in replacement cost usually leads to a decline in the selling price of the item. Valuation at LCM is conservative. LO 3 BT: AP Difficulty: Medium TOT: 3 min. AACSB: Analytic AICPA FC: Measurement & Reporting AICPA PC: Communication 18. Lower-of-cost-or-market can be applied after any of the cost flow assumptions has been used, including LIFO, FIFO, average-cost, or specific identification. LO 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement AICPA PC: Communication 6-4

Kimmel, Financial Accounting, 8/e, Solutions Manual

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19. Freight-out expense is not a cost associated with purchasing goods, so it should not affect cost of goods sold. It is an expense incurred to sell goods already purchased, so it should be reported as a selling expense. LO 3 BT: C Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Reporting AICPA PC: Communication

Kimmel, Financial Accounting, 8/e, Solutions Manual

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6-5

Questions Chapter 6 (Continued) 20.

Tilton Company should disclose (1) the major inventory classifications, (2) the basis of accounting (cost or lower-of-cost-or-market), and (3) the costing method (FIFO, LIFO, or average). LO 3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting AICPA PC: Communication 21.

An inventory turnover that is too high may indicate that the company is losing sales opportunities because of inventory shortages. Inventory outages may also cause customer ill will and result in lost future sales. LO 3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA PC: Communication 22.

The LIFO reserve is a required disclosure for companies that employ LIFO. It is the difference between ending inventory using LIFO and ending inventory if FIFO were used instead. Ignoring a large LIFO reserve when analyzing a company can distort any comparisons that an analyst might try to make with a company’s competitors that used FIFO.

LO 3 BT: K Difficulty: Medium TOT: 2 min. AACSB: None AICPA PC: Communication *23. Disagree. The results under the FIFO method are the same but the results under the LIFO method may be different. The reason is that the pool of inventoriable costs (costs of goods available for sale) is not the same. Under a periodic system, the pool of costs is the goods available for sale for the entire period, whereas under a perpetual system, the pool is the goods available for sale up to the date of sale. LO 4 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Measurement AICPA PC: Communication *24. In a perpetual inventory system, the average is a moving average of goods available for sale after each purchase. In a periodic inventory system, the average is a weighted average based on total goods available for sale for the period. LO 4 BT: C Difficulty: Medium TOT: 2 min. AACSB: None AICPA FC: Measurement AICPA PC: Communication *25. (a) Albert Company’s 2016 net income will be understated $5,000; (b) 2017 net income will be overstated $5,000; and (c) the combined net income for the two years will be correct. LO 5 BT: AP Difficulty: Medium TOT: 2 min. AACSB: Analytic AICPA FC: Reporting AICPA PC: Communication

6-6

Kimmel, Financial Accounting, 8/e, Solutions Manual

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SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 6-1 (a) Ownership of the goods belongs to the owner (Peete). Thus, these goods should be included in Peete’s inventory. (b) The goods in transit should not be included in the inventory count because ownership by Peete does not occur until the goods reach the buyer. (c) The goods being held belong to the customer. They should not be included in Peete’s inventory. (d) Ownership of these goods rests with the other company (the owner). Thus, these goods should not be included in the physical inventory. LO 1 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement

BRIEF EXERCISE 6-2 (a) The ending inventory under FIFO consists of 200 units at $9 for a total allocation of $1,800. (b) The ending inventory under LIFO consists of 200 units at $6 for a total allocation of $1,200. LO 2 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement and Reporting

BRIEF EXERCISE 6-3 Average unit cost is $7.917 computed as follows: 300 400 500 1,200

X X X

$6 $8 $9

= $1,800 = 3,200 = 4,500 $9,500

$9,500 ÷ 1,200 = $7.917 The cost of the ending inventory is $1,583 (200 X $7.917). LO 2 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement and Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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6-7

BRIEF EXERCISE 6-4 (a) FIFO would result in the highest net income. (b) FIFO would result in the highest ending inventory. (c) LIFO would result in the lowest income tax expense (because it would result in the lowest taxable income). (d) Average cost would result in the most stable income over a number of years because it averages out any big changes in the cost of inventory. LO 2 BT: C Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Measurement and Reporting

BRIEF EXERCISE 6-5 Cost of goods sold under: LIFO

FIFO

Cost of goods available for sale Less: Ending inventory Cost of goods sold

$6 X 100 $7 X 200 $8 X 140 $ 3,120 $ 1,160* $ 1,960

$6 X 100 $7 X 200 $8 X 140 $ 3,120 $ 1,400** $ 1,720

*(100 X $6) + (80 X $7)

**(140 X $8) + (40 X $7)

Purchases

Since the cost of goods sold is $240 ($1,960 – $1,720) less under FIFO that is the amount of the phantom profit. It is referred to as “phantom profit” because FIFO matches current selling prices with old inventory costs. To replace the units sold the company will have to pay the current price of $8 per unit, rather than the $6 per unit which some of the units were priced at under FIFO. Therefore, profit under LIFO is more representative of what the company can expect to earn in future periods. LO 2 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Measurement and Reporting

6-8

Kimmel, Financial Accounting, 8/e, Solutions Manual

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BRIEF EXERCISE 6-6 (a) LIFO results in a higher quality of earnings ratio. (b) FIFO results in higher phantom profits. (c) FIFO results in higher net income. (d) LIFO results in lower taxes. (e) FIFO results in lower net cash provided by operating activities. LO 2 BT: C Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Measurement and Reporting

BRIEF EXERCISE 6-7 Inventory Categories Cameras Camcorders DVDs Total valuation

Cost $12,500 9,000 13,000

Market $13,400 9,500 12,200

LCM $12,500 9,000 12,200 $33,700

The lower-of-cost-of-market value is $33,700. LO 3 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Measurement and Reporting

BRIEF EXERCISE 6-8 Inventory turnover:

Days in inventory:

$349,114 $349,114 = = 2.54 times ($119,035+ $155,377) ÷ 2 $137,206

365 =144 days 2.54

LO 3 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 6-9 2017 ending inventory using LIFO ............................ 2017 LIFO reserve ...................................................... 2017 ending inventory assuming FIFO .....................

$46,850,000 30,346,000 $77,196,000

LO 3 BT: AP Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Reporting

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6-9

*BRIEF EXERCISE 6-10 (1) FIFO June 1 sale: Aug. 27 sale:

Cost of Goods Sold 25 units @ $10 = $250 25 units @ $10 = $250 5 units @ $15 = 75 325 $575 (2) LIFO

June 1 sale: Aug. 27 sale:

25 units @ $10 = 30 units @ $15 =

Cost of Goods Sold $250 $450 $700

(3) MOVING-AVERAGE June 1 sale: Aug. 27 sale:

Cost of Goods Sold 25 units @ $10 = $250 30 units @ $12.727* = 382 $632

* [(50 – 25) X $10]+ (30X $15) 55 units

(A new average cost per unit is computed each time a purchase is made under the moving–average method) LO 4 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Measurement and Reporting

*BRIEF EXERCISE 6-11 The understatement of ending inventory caused cost of goods sold to be overstated $7,000 and net income to be understated $7,000. The correct net income for 2017 is $99,000 ($92,000 + $7,000). Total assets in the balance sheet will be understated by the amount that ending inventory is understated, $7,000. LO 5 BT: AN Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

6-10

Kimmel, Financial Accounting, 8/e, Solutions Manual

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SOLUTIONS TO DO IT! EXERCISES DO IT! 6-1 Inventory per physical count .................................................. Inventory out on consignment ............................................... Inventory sold, in transit at year-end ..................................... Inventory purchases, in transit at year-end .......................... Correct December 31 inventory .............................................

$300,000 28,000 0 13,000 $341,000

LO 1 BT: AN Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Measurement and Reporting

DO IT! 6-2 Cost of goods available for sale = (3,000 X $5) + (8,000 X $7) = $71,000 Ending inventory = 3,000 + 8,000 – 9,400 = 1,600 units (a) FIFO: $71,000 – (1,600 X $7) = $59,800 (b) LIFO: $71,000 – (1,600 X $5) = $63,000 (c) Average-cost: $71,000/11,000 = $6.455 per unit 9,400 X $6.455 = $60,677 LO 2 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Measurement and Reporting

DO IT! 6-3a The lowest value for each inventory type is: Small $61,000, Medium $260,000, and Large $152,000. The total inventory value under the lower-of-cost-ormarket approach is the sum of these figures, $473,000. LO 3 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement and Reporting

DO IT! 6-3b 2016 Inventory turnover Days in inventory

2017

$1,200,000 $1,425,000 = 6.3 = 9.5 ($170,000 + $210,000)/2 ($210,000 + $90,000)/2 365 ÷ 6.3 = 57.9 days

365 ÷ 9.5 = 38.4 days

The company experienced a very significant decline in its ending inventory as a result of the just-in-time inventory. This decline improved its inventory turnover ratio and its days in inventory. Also, its sales increased by 19%. It is possible that this increase is the result of a more focused inventory policy. It appears that this change is a win-win situation for Fedor Company. LO 3 BT: AN Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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6-11

SOLUTIONS TO EXERCISES EXERCISE 6-1 Ending inventory⎯physical count ................................................ $275,000 1. No effect−title passes to purchaser upon shipment when terms are FOB shipping point............................... 0 2. No effect−title does not transfer to Pohl until goods are received .......................................................... 0 3. Add to inventory: Title passed to Pohl when goods were shipped ........................................................ 25,000 4. Add to inventory: Title remains with Pohl until purchaser receives goods .............................................. 51,000 5. Subtract from inventory: The goods did not arrive prior to year-end. The goods,therefore, cannot be included in the inventory .................................................................... (42,000) Correct inventory ........................................................................... $309,000 (Legal title determines of an item should be included in inventory) LO 1 BT: AN Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Measurement and Reporting

EXERCISE 6-2 Ending inventory-as reported .......................................................

$740,000

Subtract from inventory: The goods belong to Nader Corporation. Ryder is merely holding them as a consignee. .................................................. (228,000)

Add to inventory: The goods belong to Ryder as soon as they are shipped (December 28). .........................................................................

40,000

Subtract from inventory: Office supplies should be carried in a separate account. They are not considered inventory held for resale. ..............................

(17,000)

Add to inventory: The goods belong to Ryder until they are shipped (Jan. 1). ................................................

29,000

6-12

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EXERCISE 6-2 (Continued) 5.

Subtract from inventory: GAAP requires that inventory be valued at the lower of cost or market. Obsolete parts should be adjusted from cost to zero if they have no other use...........................

Correct inventory ..........................................................................

(50,000) $514,000

(Legal title determines if an item should be included in inventory) LO 1 BT: AN Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Measurement and Reporting

EXERCISE 6-3 (a) Do not include—Gato does not own items held on consignment. (b) Include in inventory—Gato still owns the items as they were only shipped on consignment. (c) Include in inventory—Shipping terms FOB destination means that Gato owns the items until they reach the customer. (d) Do not include in inventory—Because the shipping terms are FOB shipping point, ownership has transferred to the customer. Gato should record this amount as a sale on the income statement. (e) Do not include in inventory—Because the shipping terms are FOB destination, Gato does not own the goods until they arrive at Gato’s premises. (f) Include in inventory—Shipping terms FOB shipping point means that ownership transferred at the time of shipping and therefore, Gato owns the goods in transit. (g) Do not include in inventory. Record as Supplies on the balance sheet. LO 1 BT: K Difficulty: Medium TOT: 8 min. AACSB: None AICPA FC: Measurement and Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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6-13

EXERCISE 6-4 FIFO Beginning inventory (12 X $100) .................................. Purchases Sept. 12 (45 X $103) ................................................ Sept. 19 (50 X $104) ................................................ Sept. 26 (20 X $105) ................................................ Cost of goods available for sale ................................... Less: Ending inventory (20 X $105) + (5 X $104) ....... Cost of goods sold ........................................................ Date 9/1 9/12 9/19

$ 1,200 $4,635 5,200 2,100

PROOF Unit Cost $100 103 104

Units 12 45 45 102

LIFO Cost of goods available for sale ........................................... Less: Ending inventory (12 X $100) + (13 X $103) ............ Cost of goods sold ................................................................ Date 9/26 9/19 9/12

PROOF Unit Cost $105 104 103

Units 20 50 32 102

11,935 13,135 2,620 $10,515 Total Cost $ 1,200 4,635 4,680 $10,515 $13,135 2,539 $10,596 Total Cost $ 2,100 5,200 3,296 $10,596

AVERAGE-COST $13,135 ÷ 127 = $103.425 weighted-average unit cost Cost of goods available for sale ........................................... Less: Ending inventory (25 X $103.425) .............................. Cost of goods sold ............................................................... Units 102

PROOF Unit Cost $103.425

$13,135 2,586 $10,549 Total Cost $ 10,549

LO 2 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Measurement and Reporting

6-14

Kimmel, Financial Accounting, 8/e, Solutions Manual

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EXERCISE 6-5 (a) FIFO Beginning inventory (30 X $9) ......................................... Purchases May 15 (25 X $10) ....................................................... May 24 (38 X $11) ....................................................... Cost of goods available for sale (93 units) ..................... Less: Ending inventory [(93 – 74) X $11] ....................... Cost of goods sold ...........................................................

$270 $250 418

668 938 209 $729

PROOF Date 5/1 5/15 5/24

Units 30 25 19 74

Unit Cost $ 9 10 11

Total Cost $270 250 209 $729

(b) LIFO Cost of goods available for sale.................................................. Less: Ending inventory (19 X $9) ............................................... Cost of goods sold .......................................................................

$938 171 $767

PROOF Date 5/24 5/15 5/1

Units 38 25 11 74

Unit Cost $11 10 9

Kimmel, Financial Accounting, 8/e, Solutions Manual

Total Cost $418 250 99 $767

(For Instructor Use Only)

6-15

EXERCISE 6-5 (Continued) (c) AVERAGE-COST $938 ÷ 93 = $10.086 weighted-average unit cost Cost of goods available for sale ................................................... Less: Ending inventory (19 X $10.086)......................................... Cost of goods sold ........................................................................

$938.00 191.63 $746.37

PROOF Units 74

Unit Cost $10.086

Total Cost $746.36*

*$.01 rounding difference. LO 2 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Measurement and Reporting

EXERCISE 6-6 (a) FIFO Cost of Goods Sold (#1012) $52 + (#1045) $48 = $100 (b) It could choose to sell specific units purchased at specific costs if it wished to impact earnings selectively. If it wished to minimize earnings it would choose to sell the units purchased at higher costs–in which case the Cost of Goods Sold would be $100. If it wished to maximize earnings it would choose to sell the units purchased at lower costs–in which case the cost of goods sold would be $88 ($40 + $48). (c) The FIFO method provides a more appropriate balance sheet valuation and reduces the opportunity to manipulate earnings. (The answer may vary depending on the method the student chooses.) LO 2 BT: AN Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Measurement

6-16

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EXERCISE 6-7 (a)

(1) FIFO Beginning inventory (120 X $5) ................................. Purchases June 12 (370 X $6) ............................................... June 23 (200 X $7) ............................................... Cost of goods available for sale ............................... Less: Ending inventory (200 X $7) + (30 X $6)........ Cost of goods sold .....................................................

$ 600 $2,220 1,400

3,620 4,220 1,580 $2,640

(2) LIFO Cost of goods available for sale ............................... Less: Ending inventory (120 X $5) + (110 X $6)...... Cost of goods sold .....................................................

$4,220 1,260 $2,960

(3) AVERAGE-COST Cost of Goods Total Units Weighted-Average Available for Sale ÷ Available for Sale = Unit Cost $4,220 690 $6.116 Ending inventory (230 X $6.116) $1,407 Cost of goods sold (460 X $6.116) $2,813 or $4,220 – $1,407 = $2,813 (b) The FIFO method will produce the highest ending inventory because costs have been rising. Under this method, the earliest costs are assigned to cost of goods sold, and the latest costs remain in ending inventory. The LIFO method will produce the highest cost of goods sold for Jeters Company. Under LIFO the most recent costs are charged to cost of goods sold and the earliest costs are included in the ending inventory. (c) The average-cost ending inventory ($1,407) is higher than LIFO ($1,260) but lower than FIFO ($1,580). For cost of goods sold, average cost ($2,813) is higher than FIFO ($2,640) but lower than LIFO ($2,960). (d) The simple average would be (($5 + $6 + $7)/3) = $6. However, the average cost method uses a weighted average unit cost, not a simple average of unit costs. LO 2 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Measurement and Reporting

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6-17

EXERCISE 6-8 (a) Sales ..................................................................... Cost of goods sold .............................................. Operating expenses (including depreciation) ... Income before income taxes............................... Income tax expense............................................. Net income ........................................................... (b) Sales ..................................................................... Less: Cash paid for inventory purchases ......... Cash paid for operating expenses ($27,000 – $10,000) ................................ Cash paid for income tax ......................... Net cash provided by operating activities ......... (c) Net cash provided by operating activities ......... ÷ Net income ........................................................ Quality of earnings ratio .....................................

LIFO $86,000 38,000 27,000 21,000 6,300 $14,700

FIFO $86,000 29,000 27,000 30,000 9,000 $21,000

LIFO $86,000 32,000

FIFO $86,000 32,000

17,000 6,300 $30,700

17,000 9,000 $28,000

LIFO $30,700 $14,700 2.09

FIFO $28,000 $21,000 1.33

LIFO results in a higher quality of earnings ratio because, assuming rising prices, it results in lower taxes, and thus higher net cash provided by operating activities. This increases the numerator of the ratio relative to FIFO. Also, LIFO results in lower net income, which decreases the denominator of the ratio relative to FIFO. Both effects result in a higher quality of earnings ratio. LO 2 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Measurement and Reporting

6-18

Kimmel, Financial Accounting, 8/e, Solutions Manual

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EXERCISE 6-9 Inventory at Market Lower-of-CostLower-of-CostCost/Unit Value/Unit or-Market Units or-Market Cameras: Minolta Canon Light Meters: Vivitar Kodak Total

$170 145

$158 152

$158 145

5 7

$ 790 1,015

125 120

114 135

114 120

12 10

1,368 1,200 $4,373

LO 3 BT: AP Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Measurement and Reporting

EXERCISE 6-10 Type of Bean Coffea arabica Coffea robusta

Quantity 13,000 bags 5,000 bags

Unit Total Total Cost Cost Market Market LCM $5.60 $72,800 $5.55 $72,150 $72,150 3.40 17,000 3.50 17,500 17,000 $89,800 $89,650 $89,150

LO 3 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement and Reporting

EXERCISE 6-11

(a) Inventory turnover

(b) Days in inventory

2015

2016

2017

$18,038 ($1,926 +$2,290) ÷ 2

$20,351 ($2,290 +$2,522) ÷ 2

$20,099 ($2,522+$2,618) ÷2

$18,038 = 8.6 times $2,108

$20,351 = 8.5 times $2,406

$20,099 = 7.8 times $2,570

365 = 42.4 days 8.6

365 = 42.9 days 8.5

365 = 46.8 days 7.8

$43,251 – $20,351 = 52.9% $43,251

$43,232 – $20,099 = 53.5% $43,232

Kimmel, Financial Accounting, 8/e, Solutions Manual

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6-19

EXERCISE 6-11 (Continued) (d) The inventory turnover decreased by approximately 10% from 2015 to 2017 while the days in inventory increased by a similar amount (10%) over the same time period. Both of these changes would be considered unfavorable since it’s better to have a higher inventory turnover with a corresponding lower days in inventory. PepsiCo., Inc.’s gross profit rate decreased by 1.5% from 2015 to 2017. LO 3 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 6-12

Inventory Turnover (2017): Days in Inventory (2017):

$1,552,000 = 2.8 times ($553,000 + $568,000) ÷ 2

365 2.8

=130days

Gross Profit Rate (2017):

($1,948,000 − $1,552,000) = 20.3% $1,948,000

Inventory Turnover (2016):

$1, 288, 000 = 2.9 times ($568, 000 + $332, 000) ÷ 2

365

=126days

Days in Inventory (2016):

2.9

Gross Profit Margin (2016):

$1,725,000- $1,288,000 =25.3% $1,725,000

(b) In 2017, Zoe’s Activewear experienced a deterioration in liquidity and profitability. The liquidity has been deteriorated due to the increase in time required to turn over its inventory, from 126 days to 130 days. The company has experienced deteriorated profitability due to a significant drop in its gross profit rate from 25.3% to 20.3%. LO 3 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

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Kimmel, Financial Accounting, 8/e, Solutions Manual

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EXERCISE 6-13 (a) Inventory turnover

$16,255 $16,255 = = 5.98 ($3,042 + $2,397) ÷ 2 $2,719.5

Days in inventory

365 = 61 days 5.98

(b) Based on data presented: Current ratio $30,857 ÷ $12,753 = 2.42 : 1 After adjusting for LIFO reserve: Current ratio ($30,857 + $1,367) ÷ $12,753 = 2.53 : 1 (c) After adjusting for the LIFO reserve, Deere’s current ratio increases from 2.42 : 1 to 2.53 : 1. Deere’s liquidity looks slightly better after the adjustment. LO 3 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

*EXERCISE 6-14 (a) Date June 1

Purchases

June 12

(370 @ $6) $2,220

FIFO Cost of goods sold

Balance (120 @ $5) $ 600 (120 @ $5) (370 @ $6)

June 15 June 23

(120 @ $5)

$ 600

(290 @ $6)

$1,740

(200 @ $7) $1,400

(80 @ $6) $ 480 (80 @ $6) (200 @ $7)

June 27

(50 @ $6)

$ 300

$2,820

$1,880

(30 @ $6) $1,580 (200 @ $7)

$2,640 Ending inventory: $1,580. Cost of goods sold: $2,640.

Kimmel, Financial Accounting, 8/e, Solutions Manual

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6-21

*EXERCISE 6-14 (Continued) LIFO Cost of Goods Sold

Date Purchases June 1 June 12 (370 @ $6) $2,220 June 15 June 23

(370 @ $6) (40 @ $5)

$2,220 $ 200

(50 @ $7)

$ 350 $2,770

Balance (120 @ $5) $ 600 (120 @ $5) $2,820 (370 @ $6) (80 @ $5) $ 400 (80 @ $5) $1,800 (200 @ $7) (80 @ $5) $1,450 (150 @ $7)

(200 @ $7) $1,400

June 27

Ending inventory: $1,450. Cost of goods sold: $2,770.

Date

Purchases

Moving-Average Cost of Goods Sold

June 1

Balance (120 @ $5)

June 12

(370 @ $6) $2,220

June 15

(490 @ $5.755) $2,820 (410 @ $5.755) $2,360* (80 @ $5.755)

June 23

(200 @ $7) $1,400

June 27

$ 600 $ 460*

(280 @ $6.643*) $1,860 (50 @ $6.643) $ 332* (230 @ $6.643) $1,528 $2,692

*rounded Ending inventory: $1,528. Cost of goods sold: $2,692. (A new average cost per unit is computed each time a purchase is made)

6-22

Kimmel, Financial Accounting, 8/e, Solutions Manual

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*EXERCISE 6-14 (Continued) (b) FIFO gives the same ending inventory and cost of goods sold values under both the periodic and perpetual inventory system. LIFO and moving-average give different ending inventory and cost of goods sold values under the periodic and perpetual inventory systems. (c) The simple average would be [($5 + $6 + $7) ÷ 3] or $6. However, the moving-average method uses a weighted-average unit cost that changes each time a purchase is made rather than a simple average. LO 4 BT: AP Difficulty: Hard TOT: 20 min. AACSB: Analytic AICPA FC: Measurement and Reporting

*EXERCISE 6-15 Date 9/1 9/5 9/12

FIFO Cost of Goods Sold

Purchases

(8 @ $100) $ (45 @ $103) $4,635

9/16 9/19 9/26

800

(4 @ $100) (44 @ $103) $ 4,932 (50 @ $104) $5,200 (20 @ $105) $2,100

9/29

(1 @ $103) (45 @ $104)

$ 4,783 $10,515

Balance (12 @ $100) $1,200 (4 @ $100) $ 400 (4 @ $100) (45 @ $103) $5,035 (1 @ $103) (1 @ $103) (50 @ $104) (1 @ $103) (50 @ $104) (20 @ $105) (5 @ $104) (20 @ $105)

$ 103 $5,303 $7,403 2,620

Ending inventory = $2,620

Kimmel, Financial Accounting, 8/e, Solutions Manual

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6-23

*EXERCISE 6-15 (Continued) Date 9/1 9/5 9/12

LIFO Cost of Goods Sold

Purchases

9/19 9/26

(8 @ $100)

(45 @ $103) (3 @ $100)

$ 4,935

(45 @ $103) $4,635

9/16 (50 @ $104) $5,200 (20 @ $105) $2,100

9/29

Balance (12 @ $100) $1,200 800 (4 @ $100) $ 400 (4 @ $100) (45 @ $103) $5,035

(20 @ $105) (26 @ $104)

(1 @ $100) (1 @ $100) (50 @ $104) (1 @ $100) (50 @ $104) (20 @ $105)

$ 4,804 (1 @ $100) $10,539 (24 @ $104)

$ 100 $5,300 $7,400

$2,596

Ending inventory = $2,596 Date 9/1 9/5 9/12 9/16 9/19 9/26 9/29

Purchases

MOVING-AVERAGE Cost of Goods Sold

Balance (12 @ $100) $1,200 (8 @ $100) $ 800 (4 @ $100) $ 400 a (45 @ $103) $4,635 (49 @ $102.755) $5,035 (48 @ $102.755) $ 4,932* (1 @ $102.755) $ 103 (50 @ $104) $5,200 (51 @ $103.980)b $5,303 (20 @ $105) $2,100 (71 @ $104.268)c $7,403 (46 @ $104.268) $ 4,796* (25 @ $104.268) $2,607 $10,528

Ending inventory = $2,607 *Rounded a 5,035 ÷ 49 = $102.755 b 5,303 ÷ 51 = $103.980 c 7,403 ÷ 71 = $104.268 (A new average cost percent is computed each time a purchase is made) LO 4 BT: AP Difficulty: Hard TOT: 20 min. AACSB: Analytic AICPA FC: Measurement and Reporting

6-24

Kimmel, Financial Accounting, 8/e, Solutions Manual

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*EXERCISE 6-16 Beginning inventory................................................... Cost of goods purchased .......................................... Cost of goods available for sale................................ Less: Corrected ending inventory ........................... Cost of goods sold ..................................................... a

2016 2017 $ 20,000 $ 28,000 164,000 175,000 184,000 203,000 28,000a 42,000b $156,000 $161,000

$30,000 – $2,000 = $28,000 $37,000 + $5,000 = $42,000

LO 5 BT: AN Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Measurement and Reporting

*EXERCISE 6-17 (a) Sales .................................................................... Cost of goods sold Beginning inventory .................................... Cost of goods purchased ............................ Cost of goods available for sale ................. Less: Ending inventory ($40,000 – $8,000) ............................. Cost of goods sold ............................. Gross profit .........................................................

2016 2017 $210,000 $250,000 32,000 173,000 205,000

32,000 202,000 234,000

32,000 173,000 $ 37,000

55,000 179,000 $ 71,000

(b) The cumulative effect on total gross profit for the two years is zero as shown below: Incorrect gross profits: Correct gross profits: Difference

$45,000 + $63,000 = $108,000 $37,000 + $71,000 = 108,000 $ 0

Kimmel, Financial Accounting, 8/e, Solutions Manual

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6-25

*EXERCISE 6-17 (Continued) (c) Dear Mr./Ms. President: Because your ending inventory of December 31, 2016 was overstated by $8,000, your net income for 2016 was overstated and net income for 2017 was understated by $8,000. In a periodic system, the cost of goods sold is calculated by deducting the cost of ending inventory from the total cost of goods you have available for sale in the period. Therefore, if this ending inventory figure is overstated, as it was in December 2016, the cost of goods sold is understated and therefore net income will be overstated by that amount. Consequently, this overstated ending inventory figure goes on to become the next period’s beginning inventory amount and is a part of the total cost of goods available for sale. Therefore, the mistake repeats itself in the reverse. Thank you for allowing me to bring this to your attention. If you have any questions, please contact me at your convenience. Sincerely, LO 5 BT: AN Difficulty: Hard TOT: 20 min. AACSB: Analytic AICPA FC: Measurement and Reporting

6-26

Kimmel, Financial Accounting, 8/e, Solutions Manual

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SOLUTIONS TO PROBLEMS PROBLEM 6-1A

(a) The goods should not be included in inventory as they were shipped FOB shipping point and shipped February 26. Title to the goods transfers to the customer February 26. Pitt should have recorded the transaction in the Sales Revenue and Accounts Receivable accounts at the sales price. (Legal title determines if an item should be included in inventory) (b) The amount should not be included in inventory as they were shipped FOB destination and not received until March 2. The seller still owns the inventory. No entry is recorded. (Legal title determines if an item should be included in inventory) (c) Include $500 in inventory. (Legal title determines if an item should be included in inventory) (d) Include $400 in inventory. (Legal title determines if an item should be included in inventory) (e) $750 should be included in inventory as the goods were shipped FOB shipping point. (Legal title determines if an item should be included in inventory) (f)

The sale will be recorded on March 2. The goods should be included in inventory at the end of February at their cost of $280. (Legal title determines if an item should be included in inventory)

(g) The damaged goods should not be included in inventory. They should be recorded in a loss account since they are not saleable. (Legal title determines if an item should be included in inventory) LO 1 BT: AN Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Measurement and Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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6-27

PROBLEM 6-2A

(a) COST OF GOODS AVAILABLE FOR SALE Date March 1 5 13 21 26

Explanation Units Beginning inventory 2,500 Purchase 2,000 Purchase 3,500 Purchase 5,000 Purchase 2,000 Total 15,000

Unit Cost $ 7 8 9 10 11

Total Cost $ 17,500 16,000 31,500 50,000 22,000 $137,000

(b) FIFO (1)

Ending Inventory Unit Total Date Units Cost Cost March 26 2,000 $11 $22,000 21 1,000 10 10,000 3,000* $32,000

(2) Cost of Goods Sold Cost of goods available for sale $137,000 Less: Ending inventory 32,000 Cost of goods sold $105,000

*15,000 – 12,000 = 3,000 Proof of Cost of Goods Sold Unit Total Date Units Cost Cost March 1 2,500 $7 $ 17,500 5 2,000 8 16,000 13 3,500 9 31,500 21 4,000 10 40,000 12,000 $105,000

6-28

Kimmel, Financial Accounting, 8/e, Solutions Manual

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PROBLEM 6-2A (Continued) LIFO (1)

Ending Inventory Unit Total Date Units Cost Cost March 1 2,500 $7 $17,500 5 500 8 4,000 3,000 $21,500

(2) Cost of Goods Sold Cost of goods available for sale $137,000 Less: Ending inventory 21,500 Cost of goods sold $115,500

Proof of Cost of Goods Sold Unit Total Date Units Cost Cost March 26 2,000 $ 11 $ 22,000 21 5,000 10 50,000 13 3,500 9 31,500 5 1,500 8 12,000 12,000 $115,500 AVERAGE-COST (1) Ending Inventory (2) Cost of Goods Sold Cost of goods $137,000 ÷ 15,000 = $9.133 available for sale $137,000 Less: Ending Unit Total inventory 27,399 Units Cost Cost Cost of goods sold $109,601 3,000 $9.133 $27,399 (c) (1) As shown in (b), FIFO produces the highest inventory amount, $32,000. (2) As shown in (b), LIFO produces the highest cost of goods sold, $115,500. LO 2 BT: AP Difficulty: Medium TOT: 30 min. AACSB: Analytic AICPA FC: Measurement and Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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6-29

PROBLEM 6-3A

(a)

COST OF GOODS AVAILABLE FOR SALE Date

Explanation

Units

Unit Cost

Jan. 1 Feb. 20 May 5 Aug. 12 Dec. 8

Beginning inventory Purchase Purchase Purchase Purchase Total

100 600 500 400 100 1,700

$ 8 9 10 11 12

Total Cost $

800 5,400 5,000 4,400 1,200 $16,800

(b) FIFO (1) Date Dec. 8 Aug. 12

Ending Inventory Unit Units Cost 100 100 200*

$12 11

Total Cost

(2) Cost of Goods Sold Cost of goods available for sale $16,800

$1,200 1,100 $2,300

Less: Ending inventory Cost of goods sold

2,300 $14,500

*1,700 – 1,500 = 200 Proof of Cost of Goods Sold Unit Total Date Units Cost Cost Jan. 1 Feb. 20 May 5 Aug. 12

6-30

100 600 500 300 1,500

$ 8 9 10 11

800 5,400 5,000 3,300 $14,500

Kimmel, Financial Accounting, 8/e, Solutions Manual

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PROBLEM 6-3A (Continued) LIFO (1) Date Jan. 1 Feb. 20

Ending Inventory Unit Units Cost 100 100 200

$8 9

Total Cost

(2) Cost of Goods Sold Cost of goods available for sale $16,800

$ 800 900 $1,700

Less: Ending inventory Cost of goods sold

1,700 $15,100

Proof of Cost of Goods Sold Unit Total Date Units Cost Cost Dec. 8 Aug. 12 May 5 Feb. 20

100 400 500 500 1,500

$12 11 10 9

$ 1,200 4,400 5,000 4,500 $15,100

AVERAGE-COST (1) Ending Inventory (2) Cost of Goods Sold Cost of goods $16,800 ÷ 1,700 = $9.882 available for sale $16,800 Less: Ending Unit Total inventory 1,976 Units Cost Cost Cost of goods sold $14,824 200 $9.882 $1,976 Proof of Cost of Goods Sold 1,500 @ $9.882 = $14,824* *Rounded up $1 (c) LIFO results in the lowest inventory amount for the balance sheet, $1,700. FIFO results in the lowest cost of goods sold for the income statement $14,500. LO 2 BT: AP Difficulty: Medium TOT: 30 min. AACSB: Analytic AICPA FC: Measurement and Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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6-31

PROBLEM 6-4A

(a)

NATIONAL, INC. Condensed Income Statements For the Year Ended December 31, 2017 Sales ..................................................................... Cost of goods sold Beginning inventory .................................... Cost of goods purchased ............................ Cost of goods available for sale ................. Less: Ending inventory .............................. Cost of goods sold ...................................... Gross profit .......................................................... Operating expenses ............................................ Income before income taxes .............................. Income tax expense (28%) .................................. Net income ........................................................... a

FIFO LIFO $750,000 $750,000 35,000 35,000 468,500 468,500 503,500 503,500 132,300a 116,400b 371,200 387,100 378,800 362,900 124,000 124,000 254,800 238,900 71,344 66,892 $183,456 $172,008

(25,000 @ $4.20) + (7,000 @ $3.90) = $132,300. (10,000 @ $3.50) + (22,000 @ $3.70) = $116,400.

(b) Answers to questions: (1) The FIFO method produces the inventory amount that most closely approximates the amount that would have to be paid to replace the inventory because the units are costed at the most recent purchase’s cost. (2) The LIFO method produces the net income amount that is a more likely induction of next period’s net income because the costs of the most recent purchases are matched against sales. (3) The FIFO method is most likely to approximate actual physical flow because the oldest goods are usually sold first to minimize spoilage and obsolescence.

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PROBLEM 6-4A (Continued) (4) There will be $4,452 additional cash available under LIFO because income taxes are $66,892 under LIFO and $71,344 under FIFO. (5) The illusionary gross profit is $15,900 ($378,800 – $362,900) under FIFO. Under LIFO, National Inc. has recovered the current replacement cost of the units ($387,100), whereas under FIFO, it has only recovered the earlier costs ($371,200). This means that under FIFO, the company must reinvest $15,900 of the gross profit to replace the units used. Answer in business-letter form: Dear National Inc. After preparing the comparative condensed income statements for 2017 under the FIFO and LIFO methods, we have found the following: The FIFO method produces the most meaningful inventory amount for the balance sheet because the units are costed at the most recent purchases. This method is most likely to approximate actual physical flow because the oldest goods are usually sold first to minimize spoilage and obsolescence. The LIFO method produces the most meaningful net income because the costs of the most recent purchases are matched against sales. There will be $4,452 additional cash available under LIFO because income taxes are $66,892 under LIFO and $71,344 under FIFO. There exists an illusionary gross profit of $15,900 ($378,800 – $362,900). Under LIFO, you have recovered the current replacement cost of the units ($387,100) whereas under FIFO you have only recovered the earlier costs ($371,200). This means that under FIFO, the company must reinvest $15,900 of the gross profit to replace the units used. Sincerely, LO 2 BT: AN Difficulty: Medium TOT: 35 min. AACSB: Analytic AICPA FC: Measurement and Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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6-33

PROBLEM 6-5A

Cost of Goods Available for Sale Date Explanation October 1 Beginning inventory 9 Purchase 17 Purchase 25 Purchase

Ending Inventory in Units

Units 60 120 100 70 350

Unit Cost $24 26 27 29

Total Cost $1,440 3,120 2,700 2,030 $9,290

Sales revenue

Units available for sale Sales (100 + 60 + 110) Units remaining in ending inventory

350 270 80

Date October 11 22 29

Units 100 60 110 270

Unit Price $35 40 40

Total Sales $ 3,500 2,400 4,400 $10,300

(a) (1) LIFO (i) Ending inventory October 1 60 @ $24 = $1,440 9 20 @ $26 = $ 520 80 $1,960

(ii) Cost of goods sold Cost of goods available for sale Less: Ending inventory Cost of goods sold

(iii) Gross profit Sales revenue Cost of goods sold Gross profit

(iv) Gross profit rate Gross profit $2,970 = 28.8% Net Sales $10,300

6-34

$10,300 7,330 $ 2,970

Kimmel, Financial Accounting, 8/e, Solutions Manual

$9,290 1,960 $7,330

(For Instructor Use Only)

PROBLEM 6-5A (Continued) (2) FIFO (i) Ending inventory October 25 70 @ $29 = $2,030 October 17 10 @ $27 = $ 270 80 $2,300 (iii) Gross profit Sales revenue Cost of goods sold Gross profit

$10,300 6,990 $ 3,310

(ii) Cost of goods sold Cost of goods available for sale Less: Ending inventory Cost of goods sold

$9,290 2,300 $6,990

(iv) Gross profit rate Gross profit $3,310 = =32.1% Net sales $10,300

(3) Average-Cost Weighted-average cost per unit:

(i) Ending inventory 80 @ $26.543 = $2,123* *rounded to nearest dollar (iii) Gross profit Sales revenue Cost of goods sold Gross profit

$10,300 7,167 $ 3,133

Cost of goods available for sale Units available for sale $9,290 =$26.543 350

(ii) Cost of goods sold Cost of goods available for sale Less: Ending inventory Cost of goods sold

$9,290 2,123 $7,167

(iv) Gross profit rate Gross profit $3,133 = =30.4% Net sales $10,300

(b) LIFO produces the lowest ending inventory value, gross profit, and gross profit rate because its cost of goods sold is higher than FIFO or average-cost. LO 2 BT: AP Difficulty: Medium TOT: 30 min. AACSB: Analytic AICPA FC: Measurement and Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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6-35

PROBLEM 6-6A

(a) (1) To maximize gross profit, Jewels’ Gems should sell the diamonds with the lowest cost. Sale Date March 5 March 25

Cost of goods sold 150 @ $310 $ 46,500 30 @ $350 10,500 170 @ $350 59,500 220 @ $375 82,500 570 $199,000

Sales Revenue 180 @ $600 $108,000 390 @ 650 570

253,500 $361,500

Gross profit $361,500 – $199,000 = $162,500 (2) To minimize gross profit, Jewels’ Gems should sell the diamonds with the highest cost. Sale Date March 5 March 25

Cost of goods sold 180 @ $350 $ 63,000 330 @ $375 123,750 20 @ $350 7,000 40 @ $310 12,400 570 $206,150

Sales Revenue 180 @ $600 $108,000 390 @ 650 253,500 570 $361,500

Gross profit: $361,500 – $206,150 = $155,350 (b) FIFO Cost of goods available for sale March 1 3 10

Beginning inventory Purchase Purchase

Goods available for sale Units sold Ending inventory

6-36

150 @ $310 200 @ $350 330 @ $375 680

$ 46,500 70,000 123,750 $240,250

680 570 110 @ $375

$41,250

Kimmel, Financial Accounting, 8/e, Solutions Manual

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PROBLEM 6-6A (Continued) Cost of goods available for sale – Ending inventory Cost of goods sold Gross profit:

$361,500 – $199,000 = $162,500.

$240,250 41,250 $199,000

$240,250 34,100 $206,150

$361,500 – $206,150 = $155,350.

(d) The choice of inventory method depends on the company’s objectives. Since the diamonds are marked and coded, the company could use specific identification. This could, however, result in “earnings management” by the company because, as shown, it could carefully choose which diamonds to sell to result in the maximum or minimum income. Employing a cost flow assumption, such as LIFO or FIFO, would reduce record-keeping costs; FIFO would result in higher income, but LIFO would reduce income taxes and provide better matching of current sales revenue with current costs. LO 2 BT: AP Difficulty: Medium TOT: 25 min. AACSB: Analytic AICPA FC: Measurement and Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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6-37

PROBLEM 6-7A

(a) Inventory turnover

$166,259 ($13,921+ $14,939)÷2 $166,259 =11.5 times $14,430

Days in inventory (b) Current ratio

365 =31.7days 11.5

$60,135 =.86:1 $70,308

Current ratio

$60,135 1,423 $61,558

$61,558 =.88:1 $70,308

(d) The current ratio was slightly higher in (c) compared to (b) because current assets (i.e., inventory) are larger in (c). LO 3 BT: AP Difficulty: Moderate TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

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*PROBLEM 6-8A (a) Sales: Date January 6 January 10 January 30 Total sales

180 @ $40 50 @ $45 130 @ $48

$ 7,200 2,250 6,240 $15,690

(1) LIFO Date January

Purchases 1

January January

2 6

(100 @ $22) $2,200

January

(75 @ $24) $1,800

(100 @ $22) $3,800 (80 @ $20)

January 10 January 23

Cost of goods sold

(50 @ $24) $1,200 (100 @ $25) $2,500

January 30

(100 @ $25) (25 @ $24) $3,200 (5 @ $20) $8,200

Balance (160 @ $20) $3,200 (160 @ $20) $5,400 (100 @ $22) (80 @ $20) $1,600 (80 @ $20) $3,400 (75 @ $24) (80 @ $20) $2,200 (25 @ $24) (80 @ $20) (25 @ $24) $4,700 (100 @ $25) (75 @ $20) $1,500

(i) Cost of goods sold: $8,200. (ii) Ending inventory = $1,500. (iii) Gross profit = $15,690 – $8,200 = $7,490.

Kimmel, Financial Accounting, 8/e, Solutions Manual

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6-39

*PROBLEM 6-8A (Continued) (2) FIFO Date January

January

Purchases

(100 @ $22) $2,200 (160 @ $20) (20 @ $22)

$3,640

(75 @ $24) $1,800

January 10 January 23

Cost of goods sold

(50 @ $22)

$1,100

(100 @ $25) $2,500

January 30

(30 @ $22) (75 @ $24) (25 @ $25)

$3,085

Balance (160 @ $20) $3,200 (160 @ $20) (100 @ $22)

$5,400

(80 @ $22)

$1,760

(80 @ $22) (75 @ $24)

$3,560

(30 @ $22) (75 @ $24)

$2,460

(30 @ $22) (75 @ $24) (100 @ $25)

$4,960

(75 @ $25)

$1,875

$7,825

(i) Cost of goods sold: $7,825. (ii) Ending inventory = $1,875. (iii) Gross profit = $15,690 – $7,825 = $7,865. (3) Moving-Average: Date January 1 January 2 January 6 January 9 January 10 January 23 January 30

Purchases

Cost of goods sold

(100 @ $22) $2,200 (180 @ $20.769) $3,738* (75 @ $24) $1,800 (50 @ $22.335) $1,117 (100 @ $25) $2,500

$5,400 ÷ 260 = $20.769 b $3,462 ÷ 155 = $22.335 *Rounded

(130 @ $23.634) $3,072 $7,927 c

Balance (160 @ $20) $3,200 a (260 @ $20.769) $5,400 (80 @ $20.769) $1,662 (155 @ $22.335)b $3,462 (105 @ $22.335) $2,345 (205 @ $23.634)c $4,845 (75 @ $23.634) $1,773

$4,845 ÷ 205 = $23.634

(i) Cost of goods sold: $7,927. (ii) Ending inventory = $1,773. (iii) Gross profit = $15,690 – $7,927 = $7,763. (A new average cost per unit is computed each time a purchase is made)

6-40

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

*PROBLEM 6-8A (Continued) (b) LIFO

FIFO

MovingAverage

$15,690

8,200

7,825

7,927

Gross profit

$ 7,490

$ 7,865

$ 7,763

Ending Inventory

$ 1,500

$ 1,875

$ 1,773

Gross profit: Sales – Cost of goods sold

In a period of rising costs, the LIFO cost flow assumption results in the highest cost of goods sold and lowest gross profit. FIFO gives the lowest cost of goods sold and highest gross profit. The moving-average cost flow assumption results in amounts between the other two. On the balance sheet, FIFO gives the highest ending inventory (representing the most current costs); LIFO gives the lowest ending inventory (representing the oldest costs); and moving-average cost results in an ending inventory falling between the other two. LO 4 BT: AP Difficulty: Hard TOT: 40 min. AACSB: Analytic AICPA FC: Measurement and Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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6-41

*PROBLEM 6-9A (a) (1)

FIFO Cost of Goods Sold

Date Purchases July 1 (7 @ $ 62) $434 6 (5 @ $62) $310 11 (3 @ $ 66) $198 14

(2 @ $62) (1 @ $66) $190

21 (4 @ $ 71) $284 27

(2 @ $66) (1 @ $71) $203

Balance (7 @ $ 62) $434 (2 @ $ 62) $124 (2 @ $ 62) (3 @ $ 66) $322 (2 @ $ 66) $132 (2 @ $ 66) (4 @ $ 71) $416 (3 @ $ 71) $213

(2)

MOVING-AVERAGE Cost of Date Purchases Goods Sold Balance July 1 (7 @ $ 62) $434 (7 @ $62) $434 6 (5 @ $62) $310 (2 @ $62) $124 11 (3 @ $ 66) $198 (5 @ $64.40)* $322 14 (3 @ $64.40) $193 (2 @ $64.40) $129 21 (4 @ $ 71) $284 (6 @ $68.83)** $413 27 (3 @ $68.83) $206*** (3 @ $68.83) $207*** *$322 ÷ 5 = $64.40. **$413 ÷ 6 = $68.83. ***rounded (A new average cost per unit is computed each time a purchase is made under the moving average method.) (3)

LIFO Cost of Goods Sold

Date Purchases July 1 (7 @ $ 62) $434 6 (5 @ $ 62) $310 11 (3 @ $ 66) $198 14 (3 @ $ 66) $198 21 (4 @ $ 71) $284 27 (b)

(3 @ $ 71) $213

Balance (7 @ $ 62) $434 (2 @ $ 62) $124 (2 @ $ 62) $322 (3 @ $ 66) (2 @ $ 62) $124 (2 @ $ 62) $408 (4 @ $ 71) (2 @ $ 62) $195 (1 @ $ 71)

The highest ending inventory is $213 under the FIFO method.

LO 4 BT: AP Difficulty: Hard TOT: 30 min. AACSB: Analytic AICPA FC: Measurement and Reporting

6-42

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

ACCOUNTING CYCLE REVIEW SOLUTION (a)

Dec. 3 5

17 22

Inventory (4,000 X $0.72) ........................... Accounts Payable ..............................

2,880

Accounts Receivable (4,400 X $0.90)........ Sales Revenue ....................................

3,960

Cost of Goods Sold ................................... Inventory (3,000 X $0.60) + (1,400 X $0.72)..................................

2,808

Sales Returns and Allowances ................. Accounts Receivable .........................

180

Inventory..................................................... Cost of Goods Sold ............................

144

Inventory (2,200 X $0.80) ........................... Cash ....................................................

1,760

Accounts Receivable (2,000 X $0.95)........ Sales Revenue ....................................

1,900

Cost of Goods Sold (2,000 X $0.72) .......... Inventory .............................................

1,440

Salaries and Wages Expense .................... Salaries and Wages Payable .............

400

Depreciation Expense................................ Accumulated Depreciation— Equipment ........................................

200

Income Tax Expense.................................. Income Taxes Payable .......................

215

Kimmel, Financial Accounting, 8/e, Solutions Manual

2,880 3,960

2,808 180 144 1,760 1,900 1,440 400

200

(For Instructor Use Only)

215

6-43

ACCOUNTING CYCLE REVIEW SOLUTION (Continued) (b)

General Ledger

Bal. Bal. Bal.

Bal.

Cash 4,800 3,040 Accounts Receivable 3,900 3,960 1,900 9,580

Bal.

Inventory 1,800 2,880 144 1,760 2,336

Bal.

Equipment 21,000

Bal.

180

Bal.

10,000

Retained Earnings Bal. 17,000 Sales Revenue

2,808 1,440

Accumulated Depreciation—Equipment Bal. 1,500 200 Bal. 1,700 Accounts Payable Bal.

Common Stock Bal.

1,760

3,000 2,880 5,880

Salaries and Wages Payable 400 Bal. 400

Bal.

Cost of Goods Sold 2,808 1,440 4,104

Bal.

Depreciation Expense 200 200

3,960 1,900 5,860 144

Salaries and Wages Expense 400 Bal. 400 Sales Returns & Allowances 180 Bal. 180

Bal.

Income Tax Expense 215 215

Income Taxes Payable Bal.

6-44

215 215

Kimmel, Financial Accounting, 8/e, Solutions Manual

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ACCOUNTING CYCLE REVIEW SOLUTION (Continued) (c)

WAYLON COMPANY Adjusted Trial Balance December 31, 2017 Cash ............................................................... Accounts Receivable .................................... Inventory ....................................................... Equipment ..................................................... Accumulated Depreciation—Equipment ..... Accounts Payable ......................................... Salaries and Wages Payable ........................ Income Taxes Payable .................................. Common Stock ............................................. Retained Earnings ........................................ Sales Revenue .............................................. Sales Returns & Allowances ........................ Cost of Goods Sold ...................................... Salaries and Wages Expense ....................... Depreciation Expense .................................. Income Tax Expense ....................................

(d)

DR. $ 3,040 9,580 2,336 21,000

CR.

$ 1,700 5,880 400 215 10,000 17,000 5,860 180 4,104 400 200 215 $41,055

$41,055

WAYLON COMPANY Income Statement For the Month Ending December 31, 2017 Sales revenue............................................. Less: Sales returns and allowances ........ Net sales ..................................................... Cost of goods sold .................................... Gross profit ................................................ Operating expenses Salaries and wages expense ............. Depreciation expense ........................ Income before income tax ......................... Income tax expense ................................... Net income .................................................

Kimmel, Financial Accounting, 8/e, Solutions Manual

$5,860 180 $5,680 4,104 1,576 400 200

600 976 215 $ 761

(For Instructor Use Only)

6-45

ACCOUNTING CYCLE REVIEW SOLUTION (Continued) WAYLON COMPANY Balance Sheet December 31, 2017 Assets Current assets Cash........................................................ Accounts receivable .............................. Inventory ................................................ Total current assets ......................... Property, plant, and equipment Equipment .............................................. Less: Accumulated depreciation— Equipment .................................. Total assets ...................................................

$ 3,040 9,580 2,336 $14,956 21,000 1,700

19,300 $34,256

Liabilities and Stockholders’ Equity Current liabilities Accounts payable .................................. Salaries and wages payable ................. Income taxes payable ............................ Total current liabilities .....................

$ 5,880 400 215

Stockholders’ equity Common stock ....................................... Retained earnings ($17,000 + $761)...... Total stockholders’ equity ............... Total liabilities and stockholders’ equity ....

10,000 17,761

$ 6,495

27,761 $34,256

(Ending retained earnings = Beginning retained earnings ± Changes to retained earnings)

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Kimmel, Financial Accounting, 8/e, Solutions Manual

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ACCOUNTING CYCLE REVIEW SOLUTION (Continued) (e) FIFO Method

Beg. Inventory Dec. 3 purchase Dec. 17 purchase

Units 3,000 4,000 2,200 9,200

Cost of Goods Available for Sales $1,800 2,880 1,760 $6,440

Unit Cost $0.60 $0.72 $0.80

Ending Inventory

Cost of Goods Sold

Dec. 17 2,200 X $0.80 = $1,760 Dec. 3 800* X $0.72 = 576 3,000 $2,336

Cost of goods available for sale Less: Ending inventory Cost of goods sold

$6,440 2,336 $4,104

*(9,200 – 4,400 + 200 – 2,000) – 2,200 (f)

LIFO Method Ending Inventory

Cost of Goods Sold

Dec. 1

Cost of goods available for sale Less: Ending inventory Cost of goods sold

3,000 X $0.60 = $1,800

$6,440 1,800 $4,640

LO 2 BT: AP Difficulty: Hard TOT: 120 min. AACSB: Analytic AICPA FC: Measurement and Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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6-47

CT 6-1

FINANCIAL REPORTING PROBLEM

(Note: All dollar amounts are in millions) (a) Inventories were $2,111 at September 27, 2014 and $1,764 at September 28, 2013. (b) Inventories increased $347 in 2014. Using 2013 as the base year, the increase was approximately 19.7% ($347 ÷ $1,764). In 2014, inventories were approximately 3.1% of current assets ($2,111 ÷ $68,531). (c) Cost of sales was: 2014, $112,258; 2013, $106,606; and 2012, $87,846. In 2014, cost of sales was 61.4% of net sales ($112,258 ÷ $182,795). LO 3 BT: AN Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Measurement and Reporting

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Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 6-2

COMPARATIVE ANALYSIS PROBLEM

(a)

Columbia Sportswear 1. Inventory turnover

$1, 145,639

$6,288,190

($384,650 + $329,228) ÷ 2

($1,482,804 + $1,399,062) ÷ 2

$1,145, 639 $356, 939 2. Days in inventory

VF Corporation

365 3.2

= 3.2 times

= 114.1 days

$6,288,190 $1,440,933

365 4.4

= 4.4 times

= 83.0 days

(b) Generally, companies that are able to keep their inventory at lower levels and higher turnovers and still satisfy customer needs are the most successful. Both companies have low inventory turnovers. As a result, Columbia keeps more than three months of inventory on hand and VFC keeps more than two months on hand. LO 3 BT: AN Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Measurement and Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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6-49

CT 6-3

COMPARATIVE ANALYSIS PROBLEM

(a)

Amazon.com 1. Inventory turnover

$62,752 ($7,411 + $8,299) ÷ 2

$62, 752 $7, 855 2. Days in inventory

365 8.0

= 8.0 times

= 45.6 days

Wal-Mart $365,086__ __ ($45,141 + $44,858)/2 $365,086 $44,999.5

365 8.1

8.1 times

= 45.1 days

b) The two companies have performed similarly in inventory management. LO 3 BT: AN Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Measurement and Reporting

6-50

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 6-4

INTERPRETING FINANCIAL STATEMENTS

(a) Finished goods are manufactured inventory items that are ready for resale. Work in process is inventory that has been put into production but is not complete. Raw materials are the basic materials that will be used in production. (b) American Greetings may use LIFO for U.S. operations because of its tax advantages. Since many foreign countries do not allow the use of LIFO, American Greetings may use FIFO for non-domestic inventories. Using FIFO will result in higher reported profit and inventory values than LIFO. (c)

2017 Inventory turnover: $809, 956 ($216, 671 + $203, 873)/2

$809, 956 Days in inventory:

= 3.9 times

$210, 272 365/3.9 = 93.6 days

2016 $780, 771 ($182, 618 + $216, 671)/2

$780, 771

= 3.9 times $199, 644.5 365/3.9 = 93.6 days

The inventory turnover remain unchanged from 2016 to 2017. (d) The LIFO reserve, $86,025, represents 42% of total inventory ($86,025/$203,873 = .42). Ending inventory using LIFO ..................... Ending LIFO reserve .................................. Ending inventory assuming FIFO ..............

$203,873 86,025 $289,898

This difference is probably considered “material” since it exceeds 10 percent. Since the reserve is disclosed, analysts can include both FIFO and LIFO amounts when analyzing performance. The FIFO value better represents the current value of American Greetings’ inventory.

Kimmel, Financial Accounting, 8/e, Solutions Manual

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6-51

CT 6-4 (Continued) (e) Current ratio:

$561, 395 = 1.63 : 1 $343, 405

Current assets using LIFO Ending LIFO reserve Current assets assuming FIFO Current ratio:

$561,395 86,025 $647,420

$647, 420 = 1.89 : 1 $343, 405

LO 3 BT: AN Difficulty: Medium TOT: 25 min. AACSB: Analytic AICPA FC: Measurement and Reporting

6-52

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 6-5

REAL-WORLD FOCUS

Answers will vary depending on the company chosen. LO 2, 3 BT: S Difficulty: Medium TOT: 30 min. AACSB: Analytic and Technology AICPA FC: Measurement and Reporting

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6-53

CTP 6-6

REAL WORLD FOCUS

(a) Companies with slow moving inventory, such as industrial manufacturers, benefit most from the use of LIFO, because the extended time that they hold their inventory make them more susceptible to price changes. (b) A proposed 2011 budget estimated that eliminating the use of LIFO for tax purposes would increase federal tax receipts by $59 billion over 10 years. (c) If the U.S. decides to adopt IFRS for financial reporting purposes, LIFO usage would probably end. This is because IFRS does not allow LIFO for financial reporting. Current tax laws require that if LIFO is used for taxes it must also be used for financial reporting. Therefore, unless this so called “conformity rule” was eliminated, the use of LIFO would end. (d) Proponents of LIFO argue that without LIFO, there is mismatch between the price that was paid for the inventory many months earlier, and the price that would now have to be paid to replenish the inventory at the current, higher, price. They argue that this mismatch makes it appear that their profits are higher than they really are, because it is including an inflation component that is not really profit. (e) FIFO tends to be preferred by retailers and manufacturers of fastmoving inventory such as electronics or perishable goods. They say that it better reflects the current values of their inventories. LO 2 BT: S Difficulty: Medium TOT: 30 min. AACSB: Analytic and Technology AICPA FC: Measurement and Reporting

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Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 6-7

DECISION MAKING ACROSS THE ORGANIZATION

(a)

2017 Current ratio

$1, 800

2016

= 3.00:1

$600

Gross profit rate

= 32.9%

= 8.0%

$9, 428 Inventory turnover

Days in inventory

$8, 674 – $5, 474

$6, 328

$987

= 36.9%

$7, 536 – $4, 445

$979 = 11.4%

$5,474

= 13.0%

$7, 536

$4, 445 = 8.1 times

($925 + $757)/ 2

($757 + $602)/ 2

($602 + $418)/ 2

365

7.5

= 48.7 days

= 41.0%

$7, 536

$8, 674

= 7.5 times

= 2.25:1

$525

$8, 674

$9, 428

$754

$1, 183

= 2.41 : 1

$590

$9, 428 – $6, 328

Profit margin

$1, 423

2015

= 45.1 days

8.1

= 8.7 times

= 42.0 days

8.7

(b) The company’s current ratio has increased steadily over this period. While this might be interpreted as a positive, since it would normally represent improved liquidity, the company started this period with a current ratio in excess of 2, thus it already had good liquidity. With its current ratio now 3 it would appear that the company has too many funds tied up in current assets. In particular, it would appear that the company has a surplus of unsold inventory. This is supported by the fact that inventory as a percent of total assets has increased significantly. The gross profit rate has been steadily declining. From the CEO’s comments we learned that the company has frequently been forced to discount its products in order to move them off the shelves. This discounting will directly reduce the gross profit rate. The profit margin has also declined. Originally the company made a profit of 13 cents on each dollar of sales. Now it only makes 8 cents per sales dollar. A significant portion of this decline is most likely the result of the decline in the gross profit rate.

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6-55

CT 6-7 (Continued) Inventory turnover, as measured by the days in inventory has worsened considerably during this period. At the beginning of this period it took 42 days to sell the average inventory item, now it takes 49. (c) The evaluation above suggests that many of the company’s problems stem from poor inventory management. As the company has grown, its ability to manage its inventory has declined. This has caused a decline in its profitability. By implementing a just-in-time inventory system the company could reduce the amount of resources that it has tied up in inventory, thus reducing its storage and handling costs. Also, it should reduce the need for product discounting, since the company will be less likely to be stuck with surplus inventory. (d) The marketing and sales department may well be concerned that a justin-time inventory system will result in more stock-outs. The company already is having stock-out problems, even though it has a lot of inventory. The company’s current inventory system appears to lack good technological support, which would allow it to identify which products are selling well. As discussed in the case of both Caterpillar and Dell computers in the chapter, a well implemented just-in-time system, supported by technology and coordination with suppliers, would enable the company to reduce its inventory balance while actually increasing its ability to deliver products to customers in a timely fashion. LO 1, 3 BT: E Difficulty: Hard TOT: 45 min. AACSB: Analytic and Communication Measurement and Reporting AICPA PC: Interaction, Leadership, and Communication

6-56

Kimmel, Financial Accounting, 8/e, Solutions Manual

AICPA FC:

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CT 6-8

COMMUNICATION ACTIVITY

In a period of changing prices, the cost flow assumption can have a significant impact on income and on evaluations based on income. Under the FIFO method, the costs of the earliest goods purchased are the first to be recognized as cost of goods sold. Under the average-cost method, the calculation of cost of goods sold is made on the basis of the weightedaverage unit cost incurred. In a period of rising prices, FIFO will produce a lower cost of goods sold and a higher net income. Starbucks’ change from FIFO to average-cost will result in a higher cost of goods sold and a lower net income. Because of increasing competition, Starbucks probably is not able to pass the coffee bean price increase on to its customers. Using the average-cost method allows Starbucks to average its changing inventory prices and avoid a distortion of income. A possible disadvantage of the change is the related balance sheet effect. Since inventory is a current asset, Starbucks’ current ratio will be lower because of the change. In addition, the company’s inventory turnover and days in inventory could be adversely affected. LO 2 BT: E Difficulty: Hard TOT: 30 min. AACSB: Reflective Thinking and Communication AICPA FC: Measurement AICPA PC: Communication AICPA BB: Critical Thinking

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6-57

*CT 6-9 COMMUNICATION ACTIVITY

MEMO To:

H.K. Logan, President

From:

Student

Subject: 2016 ending inventory error As you know, 2016 ending inventory was overstated by $1 million. Of course, this error will cause 2016 net income to be incorrect because the ending inventory is used to compute 2016 cost of goods sold. Since the ending inventory is subtracted in the computation of cost of goods sold, an overstatement of ending inventory results in an understatement of cost of goods sold and therefore an overstatement of net income. Unfortunately, unless corrected, this error will also affect 2017 net income. The 2016 ending inventory is also the 2017 beginning inventory. Therefore, 2017 beginning inventory is also overstated, which causes an overstatement of cost of goods sold and an understatement of 2017 net income. LO 5 BT: AN Difficulty: Medium TOT: 15 min. AACSB: Analytic and Communication Measurement AICPA PC: Communication

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AICPA FC:

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CT 6-10

ETHICS CASE

(a) The higher cost of the items ordered, received, and on hand at yearend will be charged to cost of goods sold, thereby lowering current year’s income and income taxes. Next year’s income will be increased because the inventory carried at lower costs from the earlier year will be charged to next year’s cost of goods sold. If the purchase at yearend had been made in the next year, the next year’s cost of goods sold would have absorbed the higher cost. (b) No. The president would not have given the same directive because the purchase under FIFO would have had no effect on net income of the current year. (c) The accountant has no grounds for not ordering the goods if the president insists. The purchase is legal and ethical, even though it allows the company to “manage” this year’s net income. LO 2 BT: E Difficulty: Medium TOT: 20 min. AACSB: Ethics, Reflective Thinking and Communication AICPA FC: Measurement AICPA PC: Communication and Personal Demeanor

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6-59

CT 6-11

ALL ABOUT YOU

Students responses to this question will vary depending on the inventory fraud they choose to investigate. Here are responses for the two examples given in the activity. The fraud at Leslie Fay involved a number of illegal actions, all of which increased net income. The company intentionally overstated ending inventory, which has the effect of understating cost of goods sold. It also understated or completely omitted discounts and allowances that it gave to retailers. In addition, it recorded inventory costs at amounts that differed from the invoice amount. It also reported sales in incorrect periods. McKesson Corporation increased its reported net income through manipulation of inventory and sales records. It back-dated many transactions to increase current period results. It also swapped inventory to increase reported revenue. Many of the transactions that it reported as sales, and which resulted in reductions in inventory, were actually not sales because they had negotiated side agreements which allowed the buyer to return the merchandise. LO 2 BT: E Difficulty: Hard TOT: 40 min. AACSB: Technology, Reflective Thinking and Communication AICPA FC: Reporting AICPA PC: Communication and Personal Demeanor

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CT 6-12

FASB CODIFICATION ACTIVITY

(a) The primary basis of accounting for inventories is cost, which has been defined generally as the price paid or consideration given to acquire an asset. As applied to inventories, cost means in principle the sum of the applicable expenditures and charges directly or indirectly incurred in bringing an article to its existing condition and location. It is understood to mean acquisition and production cost, and its determination involves many considerations. (330-10-30-1) (b) The basis of stating inventories shall be consistently applied and shall be disclosed in the financial statements; whenever a significant change is made therein, there shall be disclosure of the nature of the change and, if material, the effect on income. A change of such basis may have an important effect upon the interpretation of the financial statements both before and after that change, and hence, in the event of a change, a full disclosure of its nature and of its effect, if material, upon income shall be made. Codification reference (330-10-50-1). (c) A departure from the cost basis of pricing the inventory is required when the utility of the goods is no longer as great as their cost. Where there is evidence that the utility of goods, in their disposal in the ordinary course of business, will be less than cost, whether due to physical deterioration, obsolescence, changes in price levels, or other causes, the difference shall be recognized as a loss of the current period. This is generally accomplished by stating such goods at a lower level commonly designated as market. Codification reference (330-10-35-1). LO 1, 3 BT: AP Difficulty: Hard TOT: 40 min. AACSB: Technology, Reflective Thinking and Communication AICPA FC: Measurement and Reporting AICPA PC: Communication AICPA BB: Critical Thinking

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6-61

CT 6-13

CONSIDERING PEOPLE, PLANET, AND PROFIT

(a) The company’s goals were separated into two groups as follows: 2020 Goals for Operations ● Reduce recordable workplace Injury rate to 0.6 and lost-time case rate due to Injury to 0.15 ● Reduce energy intensity by 50% from 2006. ● Reduce greenhouse gas emissions intensity by 50% from 2006. ● Reduce by-product materials intensity by 50% from 2006. ● Reduce water consumption intensity by 50% from 2006. ● Design all new facility construction to meet Leadership in Energy and Environmental Design (LEED) or comparable green building criteria 2020 Goals for Product Stewardship ● Provide leadership in the safety of people in, on and around our products. ● Leverage technology and innovation to improve sustainability of our products, services and solutions for our customers. ● Increase managed fleet hours by 100% from 2013. ● Increase remanufactured and rebuild business sales by 20% from 2013. (b) The company improved its Recordable Injury Frequency rate by 89 percent from our 2003 baseline year and 9 percent from its last reporting period. It improved its Lost-Time Case Frequency rate by 92 percent from our 2003 baseline year and 21 percent from our last reporting period. Both of these would appear to be significant improvements in the area of worker conditions and safety. (c) The company measures its energy intensity by dividing its total revenue in dollars into a measure of its total energy used. This then provides a measure of how much energy it uses to generate revenue. Based on this measure, the company showed significant improvement relative to the base year of 2006. LO None BT: AP Difficulty: Hard TOT: 40 min. AACSB: Technology, Reflective Thinking and Communication AICPA FC: Measurement and Reporting AICPA PC: Communication AICPA BB: Critical Thinking

6-62

Kimmel, Financial Accounting, 8/e, Solutions Manual

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IFRS CONCEPTS AND APPLICATION IFRS6-1 Key Similarities are (1) the definitions for inventory are essentially the same, (2) the guidelines on who owns the goods—goods in transit, consigned goods, and the costs to include in inventory are essentially accounted for the same under IFRS and U.S. GAAP; (3) use of specific identification cost flow assumption, where appropriate. Key differences are related to (1) the LIFO cost flow assumption—U.S. GAAP permits the use of LIFO for inventory valuation, but IFRS prohibits its use. FIFO and average-cost are the only two acceptable cost flow assumptions permitted under IFRS; (2) lower-of-cost-or-market test for inventory valuation—IFRS defines market as net realizable value. U.S. GAAP on the other hand defines market as replacement cost; (3) The requirements for accounting and reporting for inventories are more principles-based under IFRS. That is, U.S. GAAP provides more detailed guidelines for inventory accounting. IFRS6-2 Under IFRS, LaTour’s inventory turnover is computed as follows: Cost of Goods Sold/Average Inventory €578/€154 = 3.75 or approximately 97 days (365 ÷ 3.75). Difficulties in comparison to a company using U.S. GAAP could arise if the U.S. company uses the LIFO cost flow assumption, which is prohibited under IFRS. Generally in times of rising prices, LIFO results in a lower inventory balance reported on the balance sheet (assume more recently purchased items are sold first). Thus, the U.S. GAAP company will report higher inventory turnovers. The LIFO reserve can be used to adjust the reported LIFO numbers to FIFO and to permit an “apples to apples” comparison.

Kimmel, Financial Accounting, 8/e, Solutions Manual

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IFRS6-3

INTERNATIONAL FINANCIAL REPORTING PROBLEM

(a) Louis Vuitton’s Note 1.16 states that inventories are valued using the weighted average or FIFO methods. (b) Note 10 reports €1,323 million (net) of goods purchased for resale and €2,877 million (net) of finished products.

6-64

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CHAPTER 7 Fraud, Internal Control, and Cash Learning Objectives 1. Define fraud and the principles of internal control. 2. Apply internal control principles to cash. 3. Identify the control features of a bank account. 4. Explain the reporting of cash and the basic principles of cash management. *5. Explain the operation of a petty cash fund.

Summary of Questions by Learning Objectives and Bloom’s Taxonomy Item LO

Item

19. 20. 21. 22. 23. 24.

2 2 3 3 3 4

C K K C C C

25. 26. 27. 28.

3 4 4 5*

C C C C

10. 11. 12.

3 3 4

AP AP C

13. 14.

4 5*

AP AP

4a.

4b.

11. 12. 13.

3 4 4

AP AP C

14. 15. 16.

4 5* 5*

AP AP AP

Questions 1. 2. 3. 4. 5. 6.

1 1 1 1 1 1

C C C C K C

7. 8. 9. 10. 11. 12.

1 1 1 1 1 1

C C C C C C

13. 14. 15. 16. 17. 18.

1 4 2 2 2 2

C AP C C C C

1. 2. 3.

1 1 1

C C C

4. 5. 6.

2 2 2

C AP C

Brief Exercises 7 3 C 8. 3 C 9. 3 C Do It Exercises 3. 3 K

E AP AP

Exercises 8. 3 AP 9. 3 AP 10. 3 AP

AP AP

Problems: Set A 5. 3 AP 6. 1,2,3 E

1. 2. 3. 4. 1. 2.

1 1 2 2 2 2

C C E E C C

5. 6. 7.

3. 4.

2 3 3

3 3

*Continuing Cookie Solutions for this chapter are available online.

Kimmel, Financial Accounting, 8/e, Solutions Manual

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7-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

7-2

Description

Difficulty Level

Time Allotted (min.)

Identify internal control weaknesses for cash receipts.

Simple

20–30

Identify internal control weaknesses in cash receipts and cash disbursements.

Simple

20–30

Prepare a bank reconciliation and adjusting entries.

Simple

20–30

Prepare a bank reconciliation and adjusting entries from detailed data.

Moderate

40–50

Prepare a bank reconciliation and adjusting entries.

Moderate

30–40

Prepare a comprehensive bank reconciliation with theft and internal control deficiencies.

Complex

40–50

Prepare a cash budget.

Moderate

30–40

Prepare a cash budget.

Moderate

30–40

Kimmel, Financial Accounting, 8/e, Solutions Manual

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ANSWERS TO QUESTIONS 1.

Fraud is a dishonest act by an employee that results in personal benefit to the employee at a cost to the employer. An example of fraud that might occur at a bank would be a computer operator embezzling funds by transferring a customer’s deposits into another account.

LO 1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

The three main factors that contribute to employee fraud are opportunity, financial pressure, and rationalization. Opportunities that an employee can take advantage of occur when the workplace lacks sufficient controls to deter and detect fraud. Financial pressure occurs when employees want to lead a lifestyle that they cannot afford on their current salary. Rationalization involves employees justifying fraud because they believe they are underpaid while their employer is making lots of money.

LO 1 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting

The five components of a good internal control system are: (1) A control environment, (2) Risk assessment, (3) Control activities, (4) Information and communication, and (5) Monitoring.

LO 1 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

Disagree. Internal control is also concerned with the safeguarding of company assets, increasing efficiency of operations, and ensuring compliance with laws and regulations.

LO 1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting 5.

The Sarbanes-Oxley Act requires that a company develop sound principles of internal control over financial reporting and continually verify that these controls are working. The act specifically requires top management to attest that the company’s internal controls are reliable and effective.

LO 1 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

The principles of internal control that apply to most businesses are: (a) establishment of responsibility, (b) segregation of duties, (c) documentation procedures, (d) physical controls, (e) independent internal verification, and (f) human resource controls.

LO 1 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA: Reporting

Yes, this is a violation of the internal control principle of establishing responsibility. In this case, each sales clerk should have a separate cash register or cash register drawer.

LO 1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

The two applications of segregation of duties are: (1) The responsibility for related activities should be assigned to different individuals. (2) The responsibility for record keeping for an asset should be separate from the physical custody of that asset.

LO 1 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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7-3

Documentation procedures contribute to good internal control by providing evidence of the occurrence of transactions and events and, when signatures (or initials) are added, the documents establish responsibility for the transactions. The prompt transmittal of documents to accounting contributes to recording transactions in the proper period, and the prenumbering of documents helps to ensure that a transaction is not recorded more than once or not at all.

LO 1 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting

10.

Safes, vaults, and locked warehouses contribute to the safeguarding of company assets. Cash registers and computerized accounting equipment contribute to the accuracy and reliability of the accounting records, and electronic burglary systems and sensors help to safeguard assets.

LO 1 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

11.

(a) Independent internal verification involves the review, comparison, and reconciliation of data prepared by employees. (b) Maximum benefit is obtained from independent internal verification when: (1) The verification is made periodically or on a surprise basis. (2) The verification is done by an employee who is independent of the personnel responsible for the information. (3) Discrepancies and exceptions are reported to a management level that can take appropriate corrective action.

LO 1 BT: C Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Reporting

12.

(a) The concept of reasonable assurance means that the costs of establishing control procedures should not exceed their expected benefit. Ordinarily, a system of internal control provides reasonable but not absolute assurance, since absolute assurance would be too costly. (b) The human element is an important factor in a system of internal control. A good system may become ineffective as the result of employee fatigue, carelessness, or indifference. Moreover, internal control may become ineffective as a result of collusion.

LO 1 BT: C Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Reporting

13.

The human resources department plays an important role in internal control by (a) bonding employees who handle cash, (b) rotating employees’ duties and requiring employees to take vacations, (c) conducting thorough background checks.

LO 1 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

14.

Cash should be reported at $21,100 ($8,000 + $1,100 + $12,000).

LO 4 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Reporting

15.

Daily cash counts pertain primarily to the principles of segregation of duties, documentation procedures, and independent internal verification. Daily cash counts also involve the establishment of responsibility for performing the counts.

LO 2 BT: C Difficluty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

7-4

Kimmel, Financial Accounting, 8/e, Solutions Manual

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16.

Cash registers are readily visible to the customer. Thus, they prevent the sales clerk from ringing up a lower amount and pocketing the difference. In addition, the customer receives an itemized receipt, and the cash register tape is locked into the register for further verification, providing documentation and enabling independent internal verification.

LO 2 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting

17.

Two mail clerks contribute to a more accurate listing of mail receipts and to the endorsement of all checks “For Deposit Only.” In addition, two clerks reduce the likelihood of mail receipts being diverted to personal use.

LO 2 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

18.

True. Payment by check contributes to effective internal control over cash disbursements. However, effective control is also possible when small payments are made from petty cash.

LO 2 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

19.

The procedure and related principle are: Procedure

Principle

(1) Treasurer signs checks. (2) Checks imprinted by a checkwriter. (3) Comparing check with approved invoice before signing.

• • •

Establishment of responsibility. Physical controls. Independent internal verification.

LO 2 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting

20. (a) Physical controls apply to cash disbursements when blank checks are stored in a safe, and access to the safe is restricted to authorized personnel, and a check-writing machine is used to print amounts on checks with indelible ink. (b) Human resource controls apply when the company bonds personnel who handle cash, requires employees to take vacations, and conducts background checks. LO 2 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

21. Electronic funds transfer is a cash disbursement system that uses wire, telephone, or computers to transfer cash balances from one location to another. LO 3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

22. True. A bank contributes significantly to internal control over cash because it: (1) safeguards cash on deposit, (2) minimizes the amount of cash that must be kept on hand, and (3) provides a double record of all bank transactions. LO 3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

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7-5

23. The lack of agreement between the balances may be due to either: (1) Time lags—a check written in July does not clear the bank until August. (2) Errors—a check for $110 is recorded by the depositor as $101. LO 3 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting 24. The basic principles of cash management are: (1) increase the speed of receivables collection, (2) keep inventory low, (3) monitor payment of liabilities, (4) plan timing of major expenditures, and (5) invest idle cash. LO 4 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

25. (a) An NSF check occurs when the checkwriter’s bank balance is less than the amount of the check. (b) In a bank reconciliation, a customer’s NSF check is deducted from the balance per books. (c) An NSF check results in an adjusting entry in the company’s books, as a debit to Accounts Receivable and a credit to Cash. LO 3 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting 26. (a) Cash equivalents are short-term highly liquid investments that may be converted to a specific amount of cash. Cash equivalents may be reported with cash in the current assets section of the balance sheet. (b) Cash restricted for a special purpose should be reported separately as a current or noncurrent asset depending on when the cash is expected to be used. LO 4 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting 27.

At September 27, 2014, Apple reported cash and cash equivalents of $13,844 (millions). It reported no restricted cash. In Note 1 to its financial statements it defines cash equivalents as “All highly liquid investments with maturities of three months or less at the date of purchase.”

LO 4 BT: AN Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

*28.

The activities in a petty cash system and the related principles are: • Establishment of responsibility for custody of the fund. (2) Making payments from the fund. • Documentation procedures because the custodian must use a prenumbered petty cash receipt. (3) Replenishing the fund. • Independent internal verification because the request for replenishment must be approved before the check is written.

(a) (1) Establishing the fund.

(b) Journal entries are required for a petty cash fund when it is established and replenished. Entries are also required when the size of the fund is increased or decreased.

7-6

Kimmel, Financial Accounting, 8/e, Solutions Manual

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SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 7-1 (a) (b) (c) (d)

Financial Pressure Rationalization Financial Pressure Opportunity

LO 1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

BRIEF EXERCISE 7-2 The purposes of internal control are to: 1.

Safeguard a company’s assets from employee theft, robbery, and unauthorized use. An application for Young Co. is the use of a cash register to safeguard assets.

Enhance the accuracy and reliability of a company’s accounting records by reducing the risk of errors (unintentional mistakes) and irregularities (intentional mistakes and misrepresentations) in the accounting process. An application for Young Co. is preparation of a bank reconciliation.

Increase efficiency of operations. An application is assignment of responsibility to specific employees.

Ensure compliance with laws and regulations. An application is use of cash register tapes to document sales and applicable sales taxes.

All of these purposes are important to the success of any business endeavor. LO 1 BT: C Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Measurement

BRIEF EXERCISE 7-3 (a) Segregation of duties. (b) Independent internal verification. (c) Documentation procedures. LO 1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

Kimmel, Financial Accounting, 8/e, Solutions Manual

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7-7

BRIEF EXERCISE 7-4 (a) (b) (c) (d) (e)

Physical controls. Human resource controls. Independent internal verification. Segregation of duties. Establishment of responsibility.

LO 2 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

BRIEF EXERCISE 7-5 Cash ($1,125.74 – $150.00)...................................... Cash Over and Short ............................................... Sales Revenue .................................................

975.74 12.88 988.62

LO 2 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 7-6 (a) (b) (c) (d) (e)

Documentation procedures. Independent internal verification. Physical controls. Establishment of responsibility. Segregation of duties.

LO 2 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement

BRIEF EXERCISE 7-7 (a) The use of a checking account minimizes the amount of currency that must be kept on hand. Therefore, cash is safeguarded by using the bank as a depository and clearinghouse for checks written and received. (b) A bank statement provides a double record of a depositor’s bank transactions. It also is used in making periodic independent bank reconciliations. LO 3 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Measurement

7-8

Kimmel, Financial Accounting, 8/e, Solutions Manual

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BRIEF EXERCISE 7-8 (a) Outstanding checks—deducted from cash balance per bank. (b) Bank debit memorandum for service charge—deducted from cash balance per books. (c) Bank credit memorandum for EFT—added to cash balance per books. (d) Deposit in transit—added to cash balance per bank. LO 3 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

BRIEF EXERCISE 7-9 (a) The reconciling items per the books, items (b) and (c) above, will require adjustment on the books of the depositor. (b) The other reconciling items, deposits in transit and outstanding checks, do not require adjustment because they have already been recorded on the depositor’s books. LO 3 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting

BRIEF EXERCISE 7-10 Cash balance per bank statement................................................. Add: Deposits in transit ...............................................................

$7,291 1,350 8,641 762 $7,879

Less: Outstanding checks ............................................................ Adjusted cash balance per bank ................................................... LO 3 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 7-11 Checks written in November ........................................................ Less: Checks paid by bank in November .................................. Checks outstanding at the end of November .............................. Add: Checks written in December............................................. Less: Checks paid by bank in December .................................. Checks outstanding at the end of December ..............................

$ 9,750 8,800 950 11,762 10,889 $ 1,823

LO 3 BT: AP Difficulty: Hard TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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7-9

BRIEF EXERCISE 7-12 Spahn Company should report cash in bank and payroll bank account as current assets. Plant expansion fund cash should be reported as restricted cash, a non-current asset, assuming the fund is not expected to be used during the next year. LO 4 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting

BRIEF EXERCISE 7-13 BONKERS COMPANY Cash Budget For the Month of January Beginning cash balance................................................................ Add: Cash receipts...................................................................... Total available cash....................................................................... Less: Cash disbursements .......................................................... Excess of available cash over cash disbursements ................... Add: Borrowings .......................................................................... Ending cash balance .....................................................................

$12,000 59,000 71,000 67,000 4,000 5,000 $ 9,000

LO 4 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

*BRIEF EXERCISE 7-14 Mar. 20

Postage Expense .......................................................... Supplies ........................................................................ Travel Expense ............................................................. Cash .......................................................................

40 26 15 81

LO 5 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

7-10

Kimmel, Financial Accounting, 8/e, Solutions Manual

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SOLUTIONS TO DO IT! EXERCISES DO IT! 7-1 1.

Violates the control activity of documentation procedures. Source documents should be promptly forwarded to the accounting department so accounting entries can be made. This control activity helps to ensure timely recording of sales transactions and contributes directly to the accuracy and reliability of the accounting records.

Violates the control activity of segregation of duties. Different individuals should be responsible for related activities, such as these three related purchasing activities. Many abuses could occur: placing orders with friends and getting kickbacks; approving fictitious invoices for payment.

Violates the control activity of establishment of responsibility. Guillen’s would be unable to determine who was responsible for a cash shortage; this lapse could even encourage employee theft.

LO 1 BT: C Difficulty: Medium TOT: 10 min. AACSB: None AICPA FC: Measurement

DO IT! 7-2 All mail receipts should be opened in the presence of two mail clerks. Those mail clerks should immediately stamp each check “For Deposit Only.” The mail clerks should prepare, in triplicate, a list of the checks received each day. The checks and the original copy of the list should be sent on to the cashier’s department each day. A copy of the list is sent to the accounting department for recording in the accounting process. The clerks also keep a copy. LO 2 BT: C Difficulty: Medium TOT: 5 min. AACSB: None AICPA PC: Measurement

Kimmel, Financial Accounting, 8/e, Solutions Manual

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7-11

DO IT! 7-3 Ned should treat the reconciling items as follows: 1.

Outstanding checks: Deduct from balance per bank.

A deposit in transit: Add to balance per bank.

The bank charged to our account a check written by another company: Add to balance per bank and notify the bank of its error.

A debit memorandum for a bank service charge: Deduct from balance per books.

LO 3 BT: K Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Reporting

DO IT! 7-4a 1. 2. 3. 4.

True. False. A company that has received NSF checks should report these checks as a current asset (accounts receivable) on the balance sheet. False. Restricted cash that is a current asset is not reported as part of cash and cash equivalents. True.

LO 4 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

DO IT! 7-4b Beginning cash balance................................................ Add: Cash receipts for September .............................. Total available cash....................................................... Less: Cash disbursements for September ................. Excess (deficiency) of available cash over cash disbursements ............................................................ Add: Borrowings .......................................................... Ending cash balance .....................................................

$ 12,270 97,200 109,470 115,000 (5,530) 13,530 $ 8,000

To maintain the desired minimum cash balance of $8,000 Stern must borrow $13,530 of cash. LO 4 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

7-12

Kimmel, Financial Accounting, 8/e, Solutions Manual

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SOLUTIONS TO EXERCISES EXERCISE 7-1 The principles of internal control inherent in the “maker-checker” procedure are: 1.

Segregation of duties. The employee records the transactions. The supervisor verifies and approves the transactions.

Physical controls. Access to the computer system is passwordprotected and task-specific.

LO 1 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement

EXERCISE 7-2 1.

Establishment of responsibility. The counter clerk is responsible for handling cash. Other employees are responsible for making the pizzas.

Segregation of duties. Employees who make the pizzas do not handle cash.

Documentation procedures. The counter clerk uses your order invoice (ticket) in registering the sale on the cash register. The cash register produces a tape of all sales.

Physical controls. A cash register is used to record the sale.

Independent internal verification. The counter clerk, in handling the pizza, compares the size of the pizza with the size indicated on the order.

Human resource controls. No visible application possible.

LO 1 BT: C Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Measurement

Kimmel, Financial Accounting, 8/e, Solutions Manual

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7-13

EXERCISE 7-3 (a) Principle Violated

(b) Recommended Change

Procedure

Weakness

Cashiers are not bonded and background checks are not conducted.

Human resource controls.

Cashiers should be bonded and background checks should be performed.

Inability to establish responsibility for cash on a specific clerk.

Establishment of responsibility.

There should be separate cash drawers and register codes for each clerk.

Cash is not adequately protected from theft.

Physical controls. Cash should be stored in a safe until it is deposited in bank.

Cash is not independently counted.

Independent internal verification.

A cashier office supervisor should count cash, and reconcile the total to the cash register tape.

The accountant should not handle cash.

Segregation of duties.

The cashier’s department should make the deposits.

LO 2 BT: E Difficulty: Hard TOT: 15 min. AACSB: Analytic AICPA FC: Measurement

7-14

Kimmel, Financial Accounting, 8/e, Solutions Manual

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EXERCISE 7-4 (a) Procedure

Weakness

(b) Principle Violated

Recommended Change

Checks are not stored in a secure area.

Physical controls.

Checks should be stored in a safe or locked file drawer.

The approval and payment of bills is done by the same individual.

Segregation of duties.

The store manager should approve bills for payment and the treasurer should sign and issue checks.

Unauthorized employees making purchases.

Establishment of responsibility.

Only employees granted authority should make purchases for the store.

Use of cash instead of checks; no prenumbered invoices.

Documentation procedures.

Purchases should be paid with prenumbered checks and the purchases should be documented by a prenumbered invoice signed by the seller.

Filing does not prevent a bill from being paid more than once.

Documentation procedures.

Bills should be stamped PAID after payment.

The bank reconciliation is not independently prepared.

Independent internal verification.

Someone with no other responsibilities relating to cash should prepare the bank reconciliation.

Kimmel, Financial Accounting, 8/e, Solutions Manual

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7-15

EXERCISE 7-5 (a) Weaknesses

(b) Suggested Improvement

Checks are not prenumbered. (Documentation procedures)

Use prenumbered checks.

The purchasing agent signs checks. (Establishment of responsibility)

Only the treasurer’s department personnel should sign checks.

Unissued checks are stored in unlocked file cabinet. (Physical controls)

Unissued checks should be stored in a locked file cabinet with access restricted to authorized personnel.

Purchasing agent approves and pays for goods purchased. (Segregation of duties)

Purchasing should approve bills for payment by the treasurer.

After payment, the invoice is filed. (Documentation procedures)

The invoice should be stamped PAID.

The purchasing agent records payments in cash disbursements journal. (Segregation of duties)

Only accounting department personnel should record cash disbursements.

The treasurer records the checks in cash disbursements journal. (Segregation of duties)

Same as answer to No. 6 above.

The treasurer reconciles the bank statement. (Independent internal verification)

An internal auditor should reconcile the bank statement.

LO 2 BT: E Difficulty: Hard TOT: 15 min. AACSB: Analytic AICPA FC: Measurement

7-16

Kimmel, Financial Accounting, 8/e, Solutions Manual

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EXERCISE 7-6 (a) Cash balance per bank statement ................... Add: Deposits in transit .................................

$3,677.20 590.00 4,267.20 770.00 $3,497.20

Less: Outstanding checks .............................. Adjusted cash balance per bank ..................... (b) Cash balance per books................................... Less: NSF check .............................................. Bank service charge .............................. Adjusted cash balance per books ...................

$3,975.20 $450.00 28.00

(c) Accounts Receivable ........................................ Cash ...........................................................

450.00

Miscellaneous Expense.................................... Cash ...........................................................

28.00

478.00 $3,497.20 450.00 28.00

LO 3 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 7-7 The outstanding checks are as follows: No. 255 261 264

Amount $ 700 500 360 Total $1,560

LO 3 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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7-17

EXERCISE 7-8 (a)

LANCE COMPANY Bank Reconciliation July 31, 2017 Cash balance per bank statement ................................ Add: Deposits in transit ..............................................

$7,328 2,700 10,028 686 $9,342

Less: Outstanding checks ........................................... Adjusted cash balance per bank .................................. Cash balance per books ................................................ Add: Electronic funds transfer received ....................

$7,364 2,016 9,380 38 $9,342

Less: Bank service charge ........................................... Adjusted cash balance per books ................................ (b) July 31 31

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

2,016

Bank Charges Expense ................................ Cash .......................................................

2,016 38

LO 3 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

7-18

Kimmel, Financial Accounting, 8/e, Solutions Manual

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EXERCISE 7-9 (a)

HOWARD COMPANY Bank Reconciliation September 30, 2017 Cash balance per bank statement ......................... Add: Deposits in transit .......................................

$16,500 4,738 21,238 2,383 $18,855

Less: Outstanding checks .................................... Adjusted cash balance per bank ........................... Cash balance per books......................................... Add: Electronic funds transfer received ............. Interest earned .............................................

$17,600 $1,830 45

Less: NSF check .................................................... Safety deposit box rent ............................... Adjusted cash balance per books ......................... (b) Sept. 30 30 30 30

560 60

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

1,830

Cash ...................................................... Interest Revenue ..........................

Accounts Receivable—H. Kane .......... Cash ..............................................

560

Bank Charges Expense ....................... Cash ..............................................

1,875 19,475 620 $18,855

1,830 45 560 60

LO 3 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

7-19

EXERCISE 7-10 (a) Deposits in transit: Deposits per books in July ........................... Less: Deposits per bank in July .................. Deposits in transit, June 30 ............... July receipts deposited in July .................... Deposits in transit, July 31 ........................... (b) Outstanding checks: Checks per books in July ............................. Less: Checks clearing bank in July ............ Outstanding checks, June 30............ July checks cleared in July .......................... Outstanding checks, July 31 ........................

$16,900 $15,600 (580) 15,020 $ 1,880

$17,500 $16,400 (940)

(c) Deposits in transit: Deposits per bank statement in September.................................................. Add: Deposits in transit, September 30..... Total deposits to be accounted for .............. Less: Deposits per books ............................ Deposits in transit, August 31 ...................... (d) Outstanding checks: Checks clearing bank in September ............ Add: Outstanding checks, September 30 ..................................... Total checks to be accounted for ................. Less: Cash disbursements per books ........ Outstanding checks, August 31 ...................

15,460 $ 2,040

$25,900 2,200 28,100 26,400 $ 1,700

$24,000 2,100 26,100 23,500 $ 2,600

LO 3 BT: AP Difficulty: Hard TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

7-20

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 7-11 (a) Deposits in transit = $74,000 – ($71,000 – $4,800) = $7,800 (b) Outstanding checks = ($73,570 + $360) – ($68,678 – $4,500) = $9,752 (c)

PERTH INC. Bank Reconciliation August 31, 2017 Cash balance per bank statement ...................... Add: Deposits in transit .....................................

$20,692* 7,800 28,492 9,752 $18,740

Less: Outstanding checks .................................. Adjusted cash balance per bank ........................ Cash balance per books...................................... Add: Interest earned ..........................................

$19,130** 45 19,175

Less: Error in recording check ($400 – $40) ..... Service charge .......................................... Safety deposit box rent ............................ Adjusted cash balance per books ......................

$360 50 25

435 $18,740

*Proof of cash balance per bank statement: $18,400 + $71,000 – $68,678 + $45 – $25 – $50 = $20,692 **Proof of cash balance per books: $18,700 + $74,000 – $73,570 = $19,130 (d) Aug. 31 Cash ........................................................... Interest Revenue ............................... 31 31

45 45

Accounts Payable ..................................... Cash ...................................................

360

Bank Charges Expense ($50 + $25) ......... Cash ...................................................

360 75

LO 3 BT: AP Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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7-21

EXERCISE 7-12 (a) Cash and Cash Equivalents 1. 2. 3. 5. 6.

Currency .......................................................................... U.S. Treasury bill............................................................. April checks .................................................................... Checking account ........................................................... Savings account ............................................................. Total ...........................................................................

$ 60 10,000 260 2,500 4,800 $17,620

(b) 4. Post-dated check—Accounts Receivable; Balance Sheet 7. Prepaid postage in postage meter—Prepaid Postage Expense; Balance Sheet, or Postage Expense; Income Statement 8. IOU from company receptionist—Accounts Receivable; Balance Sheet LO 4 BT: AP Difficulty: Medium TOT: 7 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 7-13 Suggestions to improve cash management practices for Lance, Art and Wayne: 1. 2. 3. 4.

Prepare a cash budget. Bill clients as work progresses. Establish a line of credit with bank. Arrange a long-term loan for renovations and equipment and plan the timing of major expenditures.

LO 4 BT: C Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

7-22

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 7-14 RIGLEY COMPANY Cash Budget For the Two Months Ending February 28, 2017 January

February

$ 46,000

$ 24,000

71,000 12,000 83,000 129,000

146,000 0 146,000 170,000

40,000 30,000 20,000 15,000 105,000

75,000 40,000 23,000 20,000 158,000

24,000

12,000

0 0 $ 24,000

8,000 0 $ 20,000

Beginning cash balance ........................................ Add: Cash receipts Collections from customers ....................... Sale of short-term investments.................. Total receipts .............................................. Total available cash ............................................... Less: Cash disbursements Payments to suppliers ................................ Wages .......................................................... Administrative expenses ............................ Selling expenses ......................................... Total disbursements ................................... Excess (deficiency) of available cash over disbursements ..................................................... Financing Add: Borrowings .................................................. Less: Repayments ................................................ Ending cash balance..............................................

LO 4 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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7-23

*EXERCISE 7-15 Oct. 1 31

Petty Cash ........................................................ Cash ..........................................................

150.00

Petty Cash ........................................................ Postage Expense ............................................. Supplies ........................................................... Miscellaneous Expense .................................. Freight-Out ....................................................... Cash Over and Short ....................................... Cash ($200.00 – $59.70) ...........................

50.00 39.70 26.10 16.40 6.80 1.30

150.00

140.30

LO 5 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

*EXERCISE 7-16 (a) Aug. 1 15

16 31

(b) 8/1 8/16 8/31 Bal.

7-24

Petty Cash ............................................... Cash..................................................

200.00

Freight-Out .............................................. Entertainment Expense .......................... Postage Expense .................................... Miscellaneous Expense .......................... Cash Over and Short............................... Cash..................................................

74.40 36.00 33.70 27.50 3.40

Petty Cash ............................................... Cash..................................................

200.00

Postage Expense .................................... Entertainment Expense .......................... Freight-Out .............................................. Cash Over and Short............................... Cash..................................................

145.00 90.60 46.40 1.00

200.00

175.00 200.00

283.00

Petty Cash 200 200 400

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*EXERCISE 7-16 (Continued) (c) The internal control features of a petty cash fund include: (1) A custodian is responsible for the fund. (2) A pre-numbered petty cash receipt signed by the custodian and the individual receiving payment is required for each payment from the fund. (3) The treasurer’s office examines all payments and stamps supporting documents to indicate they were paid when the fund is replenished. (4) Surprise counts can be made at any time to determine whether the fund is intact. LO 5 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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7-25

SOLUTIONS TO PROBLEMS PROBLEM 7-1A (a) Principles

Application to Gary Theater

Establishment of responsibility.

Only cashiers are authorized to sell tickets. Only the manager and cashier can handle cash.

Segregation of duties.

The duties of receiving cash and admitting customers are assigned to the cashier and to the doorperson. The manager maintains custody of the cash, and the company accountant records the cash.

Documentation procedures.

Tickets are prenumbered. Cash count sheets are prepared. Deposit slips are prepared.

Physical controls.

A safe is used for the storage of cash and a machine is used to issue tickets.

Independent internal verification.

Cash counts are made by the manager at the end of each cashier’s shift. Daily comparisons are made by the company treasurer.

Human resource controls.

Cashiers are bonded.

(b) Actions by the doorperson and cashier to misappropriate cash include: (1) Instead of tearing the tickets, the doorperson could return the tickets to the cashier who could resell them, and the two could divide the cash. (2) The cashier could issue a lower price ticket than paid for and the doorperson would admit the customer. The difference between the price of the ticket issued and the cash received could be divided between the doorperson and cashier. LO 2 BT: C Difficulty: Medium TOT: 30 AACSB: None AICPA FC: Measurement

7-26

Kimmel, Financial Accounting, 8/e, Solutions Manual

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PROBLEM 7-2A

Grant has created a situation that leaves many opportunities for undetected theft. Here is a list of some of the weaknesses in internal control. You may find others. 1.

Documentation procedures. The tickets were unnumbered. By numbering the tickets, the students could have been held more accountable for the tickets. See number 3 below.

Physical controls and establishment of responsibility. The tickets were left in an unlocked box on his desk. Instead, Grant should have assigned control of the tickets to one individual, in a locked box which that student alone had control over.

Documentation procedures. No record was kept of which students took tickets to sell or how many they took. In combination with items 1 and 2 above, the student assigned control over the tickets should have kept a record of which tickets were issued to each student for resale. (Note: This problem could have been largely avoided if the tickets had only been sold at the door on the day of the dance.)

Documentation procedures. There was no control over unsold tickets. This deficiency made it possible for students to sell tickets, keep the cash, and tell Grant that they had disposed of the unsold tickets. Instead, students should have been required to return the unsold tickets to the student maintaining control over tickets, and the cash to Grant. In each case, the students should have been issued a receipt for the cash they turned in and the tickets they returned.

Establishment of responsibility. Inadequate control over the cash box. In effect, it was operated like a petty cash fund, but too many people had the key. Instead, Grant should have had the key and dispersed funds when necessary for purchases.

Documentation procedures. Instead of receipts, students simply wrote notes saying how they used the funds. Instead, it should have been required that they provided a valid receipt.

Kimmel, Financial Accounting, 8/e, Solutions Manual

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7-27

PROBLEM 7-2A (Continued) 7.

Segregation of duties. Lynn Dandi counted the funds, made out the deposit slip, and took the funds to the bank. This made it possible for Lynn Dandi to take some of the money and deposit the rest since there was no external check on his work. Grant should have counted the funds, with someone observing him. Then he could have made out the deposit slip and had Lynn Dandi deposit the funds.

Documentation procedures. Grant did not receive a receipt from Kray Zee. Without a receipt, there is no way to verify how much Kray Zee was actually paid. For example, it is possible that he was only paid $100 and that Grant took the rest.

Segregation of duties. Dana Uhler was collecting tickets and receiving cash for additional tickets sold. Instead, there should have been one person selling tickets at the door and a second person collecting tickets.

LO 2 BT: C Difficulty: Medium TOT: 30 AACSB: None AICPA FC: Measurement

7-28

Kimmel, Financial Accounting, 8/e, Solutions Manual

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PROBLEM 7-3A

(a)

KEEDS COMPANY Bank Reconciliation July 31, 2017 Cash balance per bank statement .................... Add: Deposits in transit ..................................

$7,690.80 1,193.30 8,884.10 1,860.10 $7,024.00

Less: Outstanding checks ............................... Adjusted cash balance per bank ...................... Cash balance per books.................................... Add: Electronic funds transfer received .................................... Less: NSF check ............................................... Error in recording check No. 2480 ........ Bank service charge ............................... Adjusted cash balance per books ....................

(b) July 31

31 31 31

$6,140.00 1,520.00 7,660.00 $575.00 36.00 25.00

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

1,520

Accounts Receivable—W. Krueger ... Cash ...........................................

575

Accounts Payable—L. Taylor........... Cash ...........................................

Bank Charges Expense .................... Cash ...........................................

636.00 $7,024.00

1,520 575 36 25

LO 3 BT: AP Difficulty: Medium TOT: 30 AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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7-29

PROBLEM 7-4A

(a)

BOGALUSA COMPANY Bank Reconciliation November 30, 2017 Cash Balance per bank statement ............... Add: Deposits in transit ............................. Less: Outstanding checks No. 2451 .......................................... No. 2472 .......................................... No. 2478 .......................................... No. 2482 .......................................... No. 2484 .......................................... No. 2485 .......................................... No. 2487 .......................................... No. 2488 .......................................... Adjusted cash balance per bank .................

$17,712.50 1,304.00 19,016.50 $1,260.40 426.80 538.20 612.00 829.50 974.80 398.00 800.00

Cash Balance per books .............................. Add: Electronic funds transfer received ................................ Less: Check printing charge ....................... Error in recording check No. 2479 ($1,750 – $1,705) ............. Error in 11-21 deposit ($2,954 – $2,945) ............................ Adjusted cash balance per books ...............

7-30

5,839.70 $13,176.80 $11,073.80 2,242.00 13,315.80

85.00 45.00 9.00

139.00 $13,176.80

Kimmel, Financial Accounting, 8/e, Solutions Manual

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PROBLEM 7-4A (Continued) (b) Nov. 30 30 30 30

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

2,242

Bank Charges Expense ......................... Cash.................................................

Accounts Payable .................................. Cash.................................................

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

2,242 85 45 9

LO 3 BT: AP Difficulty: Medium TOT: 50 AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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7-31

PROBLEM 7-5A

(a)

TIMMINS COMPANY Bank Reconciliation May 31, 2017 Cash balance per bank statement .................... Add: Deposits in transit .................................. $1,880.15 Bank error—Tomins ............................... 360.00 Less: Outstanding checks ............................... Adjusted cash balance per bank ...................... Cash balance per books .................................... Add: Electronic funds transfer received ................................

31 31 31

Cash ................................................... Notes Receivable ....................... Accounts Receivable— S. Ballard ........................................ Cash............................................

2,240.15 9,208.15 276.25 $8,931.90 $6,738.90 2,690.00 9,428.90

Less: NSF check ............................................... $ 380.00 Error in May 12 deposit .......................... 50.00 Error in recording check No. 1181......... 27.00 Check printing charge ............................ 40.00 Adjusted cash balance per books .................... (b) May 31

$6,968.00

497.00 $8,931.90

2,690 2,690 380 380

Sales Revenue ................................... Cash............................................

Accounts Payable—H. Moses .......... Cash............................................

Bank Charges Expense .................... Cash............................................

50 27 40

LO 3 BT: AP Difficulty: Medium TOT: 40 AACSB: Analytic AICPA FC: Reporting

7-32

Kimmel, Financial Accounting, 8/e, Solutions Manual

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PROBLEM 7-6A

(a)

DAISEY COMPANY Bank Reconciliation October 31, 2017 Balance per bank statement .............................................. Plus: Undeposited receipts ..............................................

$18,380.00 3,795.51 22,175.51

Less: Outstanding checks No. 62 183 284

Amount $140.75 180.00 253.25

No. 862 863 864

Amount $190.71 226.80 165.28 ....................

1,156.79

Adjusted balance per bank ................................................

$21,018.72

Cash balance per books..................................................... Add: Bank credit (collection of note receivable) ............ Adjusted balance per books (before theft) ....................... Less: Theft ($22,062.72 – $21,018.72) ............................... Adjusted balance per books ..............................................

$21,877.72 185.00 22,062.72 1,044.00 $21,018.72

(b) The cashier attempted to cover the theft of $1,044.00 by: 1. Not listing as outstanding three checks totaling $574.00 (No. 62, $140.75; No. 183, $180.00; and No. 284, $253.25). 2. Underfooting the outstanding checks listed by $100. (The correct total is $582.79.) 3. Subtracting the $185 credit from the bank balance instead of adding it to the book balance, thereby concealing $370 of the theft. (c) 1. 2.

The principle of independent internal verification has been violated because the cashier prepared the bank reconciliation. The principle of segregation of duties has been violated because the cashier had access to the accounting records and also prepared the bank reconciliation.

LO 1 - 3 BT: E Difficulty: Hard TOT: 50 AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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7-33

PROBLEM 7-7A

MOTNAHAN INC. Cash Budget For the Month Ending April 30, 2017 Beginning cash balance............................................. Add: Cash receipts Cash sales ....................................................... Collections from customers ........................... Total receipts................................................. Total available cash.................................................... Less: Cash disbursements Payment of March purchases ........................ April cash purchases ...................................... Cash operating costs...................................... Equipment purchase....................................... Total disbursements.................................... Excess (deficiency) of available cash over disbursements......................................................... Financing Add: Borrowings ...................................................... Less: Repayments .................................................... Ending cash balance ..................................................

$11,000 42,000 18,400 60,400 71,400 22,400 28,100 11,200 2,500 64,200 7,200 1,800 0 $ 9,000

LO 4 BT: AP Difficulty: Medium TOT: 35 AACSB: Analytic AICPA FC: Reporting

7-34

Kimmel, Financial Accounting, 8/e, Solutions Manual

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PROBLEM 7-8A

BASTILLE CORPORATION Cash Budget For the Two Months Ending February 28, 2017

Beginning cash balance ....................................... Add: Cash receipts Collections from customers ...................... Notes receivable ......................................... Sale of securities ........................................ Total receipts ......................................................... Total available cash .............................................. Less: Cash disbursements Purchases ................................................... Salaries ....................................................... Administrative expenses (Jan. $72,000 – $1,000; Feb. $75,000 – $1,000) ................ Selling expenses ........................................ Dividends .................................................... Total disbursements ............................................. Excess (deficiency) of available cash over disbursements ................................................... Financing Add: Borrowings ................................................. Less: Repayments ................................................ Ending cash balance.............................................

January

February

$ 46,000

$ 43,000

326,000 15,000 0 341,000 387,000

378,000

110,000 84,000

135,000 81,000

71,000 79,000 0 344,000

74,000 88,000 10,000 388,000

43,000

37,000

0 0 $ 43,000

3,000 0 $ 40,000

4,000 382,000 425,000

LO 4 BT: AP Difficulty: Medium TOT: 35 AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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7-35

ACCOUNTING CYCLE REVIEW

(a)

Dec. 7 12 17

19 22

7-36

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

3,600 3,600

Inventory ...................................................... 12,000 Accounts Payable ................................

12,000

Accounts Receivable .................................. 16,000 Sales Revenue .....................................

16,000

Cost of Goods Sold ..................................... 10,000 Inventory ..............................................

10,000

Salaries and Wages Expense ..................... Cash .....................................................

2,200

Accounts Payable ....................................... 12,000 Cash ($12,000 X .99) ............................ Inventory ..............................................

11,880 120

Cash ($16,000 X .98) .................................... 15,680 Sales Discounts .......................................... 320 Accounts Receivable...........................

16,000

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

2,700

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Cash 12/1 Bal. 18,200 12/19 12/7 3,600 12/22 12/26 15,680 12/31 12/31 2,700 12/31 2,000 12/31 Bal. 27,420

2,200 11,880 680

Common Stock 12/1 Bal. 50,000

Notes Receivable 12/1 Bal. 2,000 12/31 12/31 Bal. – 0 –

2,000

Accounts Receivable 12/1 Bal. 7,500 12/7 3,600 12/17 16,000 12/26 16,000 12/31 680 12/31 2,700 12/31 Bal. 1,880 Inventory 12/1 Bal. 16,000 12/17 12/12 12,000 12/22 12/31 Bal. 17,880 Prepaid Insurance 12/1 Bal. 1,600 12/31 12/31 Bal. 1,200

Retained Earnings 12/1 Bal. 14,200 Sales Revenue 12/17 16,000 12/31 Bal. 16,000 Sales Discounts 12/26 320 12/31 Bal. 320

10,000 120

Cost of Goods Sold 12/17 10,000 12/31 Bal. 10,000

400

Depreciation Expense 12/31 200 12/31 Bal. 200 Salaries and Wages Expense 12/19 2,200 12/31 Bal. 2,200

Equipment 12/1 Bal. 28,000 Accumulated Depreciation—Equipment 12/1 Bal. 3,000 12/31 200 12/31 Bal. 3,200 Income Taxes Payable 12/31 425 12/31 Bal. 425

12/22

Accounts Payable 12,000 12/1 Bal. 6,100 12/12 12,000 12/31 Bal. 6,100

Insurance Expense 12/31 400 12/31 Bal. 400 Income Tax Expense 12/31 425 12/31 Bal. 425

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7-37

ACR SOLUTION (Continued) (c)

HAVENHILL COMPANY Bank Reconciliation December 31, 2017 Cash balance per bank statement .......................... Add: Deposits in transit ..........................................

$25,930 2,700 28,630 1,210 $27,420

Less: Outstanding checks ...................................... Adjusted cash balance per bank ............................ Cash balance per books .......................................... Add: Electric funds transfer received ....................

26,100 2,000 28,100 680 $27,420

Less: NSF check ...................................................... Adjusted cash balance per books .......................... (d) Dec. 31 Cash........................................................... Notes Receivable ...............................

2,000

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

680

31 Depreciation Expense .............................. Accumulated Depreciation— Equipment .......................................

200

31 Insurance Expense ................................... Prepaid Insurance ..............................

400

31 Income Tax Expense ................................ Income Taxes Payable .......................

425

7-38

2,000 680

200 400

Kimmel, Financial Accounting, 8/e, Solutions Manual

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ACR SOLUTION (Continued) (f)

HAVENHILL COMPANY Adjusted Trial Balance December 31, 2017 Cash .............................................................. Accounts Receivable ................................... Inventory ...................................................... Prepaid Insurance ........................................ Equipment .................................................... Accumulated Depreciation—Equipment .... Accounts Payable ........................................ Income Taxes Payable ................................. Common Stock ............................................ Retained Earnings ....................................... Sales Revenue ............................................. Sales Discounts ........................................... Cost of Goods Sold ..................................... Depreciation Expense ................................. Salaries and Wages Expense ...................... Insurance Expense ...................................... Income Tax Expense ...................................

(g)

DR. $27,420 1,880 17,880 1,200 28,000

CR.

$ 3,200 6,100 425 50,000 14,200 16,000 320 10,000 200 2,200 400 425 $89,925

$89,925

HAVENHILL COMPANY Income Statement For the Month Ending December 31, 2017 Sales revenue............................................... Less: Sales discounts ................................ Net sales ....................................................... Cost of goods sold ...................................... Gross profit .................................................. Operating expenses Salaries and wages expense ............... Insurance expense ............................... Depreciation expense .......................... Income before income taxes ....................... Income tax expense ..................................... Net income ...................................................

$16,000 320 15,680 10,000 5,680 $2,200 400 200

Kimmel, Financial Accounting, 8/e, Solutions Manual

2,800 2,880 425 $ 2,455

(For Instructor Use Only)

7-39

ACR SOLUTION (Continued) (g)

HAVENHILL COMPANY Balance Sheet December 31, 2017 Assets Current assets Cash........................................................ Accounts receivable .............................. Inventory ................................................ Prepaid insurance.................................. Total current assets ..........................

$27,420 1,880 17,880 1,200

Property, plant, and equipment Equipment .............................................. Less: Accumulated depreciation—Equipment .......... Total assets ...................................................

$48,380 28,000 3,200

24,800 $73,180

Liabilities and Stockholders’ Equity Current liabilities Accounts payable .................................. Income taxes payable ............................ Stockholders’ equity Common stock ....................................... Retained earnings ($14,200 + $2,455)... Total stockholders’ equity ............... Total liabilities and stockholders’ equity ....

$6,100 425

$6,525

50,000 16,655 66,655 $73,180

LO 3 BT: AP Difficulty: Hard TOT: 120 AACSB: Analytic AICPA FC: Reporting

7-40

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 7-1

FINANCIAL REPORTING PROBLEM

(a) The first paragraph of the independent registered public accounting firm’s report states that: We have audited the accompanying consolidated balance sheets of Apple Inc. as of September 27, 2014 and September 28, 2013, and the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended September 27, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. The third paragraph of the report also states that: In our opinion, the financial statements referred to above present fairly, in all material respects the consolidated financial position of Apple Inc. at September 27, 2014 and September 28, 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 27, 2014, in conformity with U.S. generally accepted accounting principles. (b) The consolidated balance sheet shows the combined cash and cash equivalent balances (in millions) at September 27, 2014 and September 28, 2013: 2014—$13,844 and 2013—$14,259 (c) The consolidated statement of cash flows indicates that three activities are responsible for the change in cash in 2014: (1) operating, (2) investing, and (3) financing. (d) In Note 1 under cash equivalents and marketable securities, it states: All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents.

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7-41

(e) The management of Apple Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. After performing an evaluation of company procedures, management concluded that its internal control over financial reporting was effective. Management’s assessment of Apple’s internal control was audited by and addressed in the opinion of its public accounting firm, Ernst & Young, LLP. LO 4 BT: AN Difficulty: Hard TOT: 30 min. AACSB: Technology and Communication AICPA FC: Reporting AICPA PC: Communication

7-42

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 7-2

COMPARATIVE ANALYSIS PROBLEM

(In thousands) (a) Cash/cash equivalents balance (b) Cash as a percentage of total assets 2014: 2013:

Columbia Sportswear

VF Corporation

$413,558

$971,895

23.1%* 27.2%**

9.7%*** 7.5%****

Cash as a percentage of total assets decreased 15% for Columbia Sportswear and increased by 29% for VF Corporation. (c) Cash provided by operating activities

$185,783

$1,697,629

(d) The objective in cash management is to ensure that a company has sufficient cash to meet payments as they come due, yet minimize the amount of non-revenue-generating cash on hand. The decrease in cash as a percentage of total assets experienced by Columbia is a cause of concern only if it is missing opportunities to generate revenue. If not, Columbia could have probably done a better job managing cash in 2014 than 2013. Data from several years would be necessary to look for trends to draw more reliable conclusions. VF Corporation, on the other hand, has done an excellent job of managing its cash *$413,558/$1,792,209 **$437,489/$1,605,588 ***$971,895/$9,980,140 ****$776,403/$10,315,443 LO 4 BT: AN Difficulty: Hard TOT: 40 min. AACSB: Technology and Communication AICPA FC: Reporting AICPA PC: Communication

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7-43

CT 7-3

COMPARATIVE ANALYSIS PROBLEM

Amazon. com

Wal-Mart Stores

(a) Cash/cash equivalents balance

$14,557

$9,135

(b) Cash as a percentage of total assets 2014: 2013:

26.7%* 21.6%**

4.5%*** 3.6%****

(In millions)

Cash as a percentage of total assets increased 23.6% for Amazon and increased 25% for Wal-Mart. (c) Cash provided by operating activities *$14,557/$54,505 **$8,658/$40,159

$6,842

$28,564

***$9,135/$203,706 ****$7,281/$204,751

(d) The percentage of cash to total assets for Wal-Mart was about 6 times lower than the percentage of cash to total assets for Amazon in both 2013 and 2014. However, Wal-Mart generated more than 4 times the operating cash flow during 2014 than did Amazon.com. This may be a somewhat troubling difference that Amazon faces in generating cash from operations (if it continues in the long-term), but perhaps it is part of the company’s shorter-term strategic plan to undercut Wal-Mart prices. Taken together with Amazon’s large percentage of cash to total assets, it seems as if the company is currently not in danger of having to borrow to meet temporary cash shortfalls, if this is its underlying strategic maneuver. LO 4 BT: AN Difficulty: Hard TOT: 40 min. AACSB: Technology and Communication AICPA FC: Reporting AICPA PC: Communication

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Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

CT 7-4

INTERPRETING FINANCIAL STATEMENTS

(a) The global percentage of companies that experienced a significant instance of fraud during the period covered by the survey was 12% and Egypt had the highest rate at 44%. (b) 35% of survey respondents were asked to participate in an ABAC risk assessment in the two years prior to the survey. (c) 61% of C-suite executives have not attended ABAC training. (d) Hackers and hacktivists are the source of Cyber crime that concerns respondents the most. LO 1 BT: AN Difficulty: Hard TOT: 30 min. AACSB: Technology, Communication, and Ethics AICPA FC: Reporting AICPA PC: Communication and Personal demeanor

Kimmel, Financial Accounting, 8/e, Solutions Manual

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7-45

CT 7-5

REAL-WORLD FOCUS

(a) The mission of the Financial Accounting Standards Board is to establish and improve standards of financial accounting and reporting that foster financial reporting by non-governmental entities that provides decision-useful information to investors and other users of financial reports. (b) The Chairman will consult with FASB members, staff directors, and others as appropriate before making a decision to add or remove a project from the FASB’s technical agenda or to change the priorities of existing projects. The FASB and its Chairman consult with FASAC concerning, among other things, major technical issues, the FASB’s agenda of projects and the priorities of the projects, and matters likely to require the attention of the FASB. The FASB also considers timely suggestions from other individuals and organizations. (c) The FASB is committed to following an open, orderly process for setting standards. The FASB designed its comprehensive due process procedures to permit timely, thorough, and open study of financial accounting and reporting issues and to encourage broad public participation in the standards-setting process by creating channels for the communication of all points of view and expressions of opinion at all stages of the process. The cooperation of all concerned with or affected by financial accounting and reporting is fundamental to the operation of the FASB. Of particular importance to the FASB is the receipt of thoughtful, reasoned, and timely input during the FASB’s research, discussion, and deliberative processes. The FASB recognizes that acceptance of its conclusions is enhanced by demonstrating that the comments received in due process are considered carefully. LO None BT: S Difficulty: Hard TOT: 40 min. AACSB: Technology and Communication AICPA FC: reporting AICPA PC: Communication

7-46

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 7-6

REAL-WORLD FOCUS

(a) The PCAOB is a private-sector, non-profit corporation, created by the Sarbanes-Oxley Act of 2002 to oversee the auditors of public companies in order to protect investors and the public interest by promoting informative, fair, and independent audit reports. (b) The PCAOB is required to conduct inspections of public accounting firms to assess compliance with the Sarbanes-Oxley Act, the rules of the Board, the rules of the SEC, and professional standards in connection with the firm’s performance of audits, issuance of audit reports, and related matters involving U.S. public companies and other issuers. Inspections occur annually for larger firms and at least triennially for smaller firms. The PCAOB prepares written reports concerning each inspection for regulatory authorities and the public. (c) The PCAOB has authority to investigate and discipline registered public accounting firms and persons associated with those firms for noncompliance with the Sarbanes-Oxley Act of 2002, the rules of the PCAOB and the Securities and Exchange Commission, and other laws, rules, and professional standards governing the audits of public companies. When violations are found, the PCAOB can impose appropriate sanctions. As required by the Sarbanes-Oxley Act, the Board’s investigations are confidential and nonpublic. The SarbanesOxley Act also requires that disciplinary proceedings are confidential and nonpublic, unless and until there is a final decision imposing sanctions. LO 1 BT: S Difficulty: Hard TOT: 40 min. AACSB: Technology, Communication and Ethics AICPA FC: Measurement AICPA PC: Communication and Personal Demeanor AICPA BB: Legal/Regulatory Perspective

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7-47

CT 7-7

REAL WORLD FOCUS

(a) The article lists 8 different forms of payment. They are: wire transfer, paper checks, automated clearing house (ACH) credits, ACH debits, purchasing cards (p-cards), paying from statements, petty cash, payment via travel and expense (T&E) reimbursement. (b) As more payment options become available, it is more likely that companies will pay the same bill twice. (c) The controls suggested in the article are: 1. 2. 3. 4. 5.

Limit payment type i.e. only p-card. Make sure purchase orders are extinguished whenever a payment is made. Make sure the invoice number is entered using the coding standard whenever payments are made. Make sure the same coding standards are used. Establish a payment timing policy adhered to by everyone.

LO 2 BT: S Difficulty: Hard TOT: 40 min. AACSB: Technology and Communication AICPA FC: Measurement AICPA PC: Communication

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Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 7-8

DECISION MAKING ACROSS THE ORGANIZATION

(a) The material weaknesses and the related principle(s) of internal control that was violated are as follows: Material Weakness

Internal Control Principle

•

Non-timely deposit of cash receipts

•

Physical controls—cash should be deposited in total daily

•

Excessive past due accounts receivable

•

Establishment of responsibility

•

Disregard of advantages offered by vendors for prompt payment of invoices

•

Establishment of responsibility

•

Absence of segregation of duties

•

Segregation of duties

•

Inadequate procedures for applying accounting principles

•

Documentation procedures

•

Lack of qualified management personnel

•

Establishment of responsibility

•

Lack of supervision by outside board of directors

•

Establishment of responsibility; independent internal verification

•

Overall poor recordkeeping

•

Documentation procedures

(b) Under the Sarbanes-Oxley Act, publicly traded companies are required to maintain adequate systems of internal control. Failure to comply with the Act can result in fines and imprisonment of officers. Managers should recognize that good internal control is necessary to stay in business. In addition, good internal control principles should benefit the company by safeguarding its assets and enhancing the accuracy and reliability of accounting records. LO 1, 2 BT: E Difficulty: Hard TOT: 60 min. AACSB: Communication and Ethics AICPA PC: Communication and Personal Demeanor

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7-49

CT 7-9

COMMUNICATION ACTIVITY

Mr. Frank Simon Simon Company Main Street, USA Dear Mr. Simon: During our audit of your financial statements, we reviewed the internal controls over cash receipts. The weaknesses we discovered and our suggested improvements are listed below. Weaknesses

Suggested Improvement

A list of checks received is not prepared by the person who opens the mail.

This list should be prepared so that it can later be compared with the daily cash summary. While this procedure does not assure that all checks will be listed, it does allow the company to verify that all checks on the list did get deposited.

Mail is opened by only one person.

When this occurs, there is no assurance that all incoming checks are forwarded to the cashier’s department.

The cashier is allowed to open the mail.

Under this arrangement, it is possible for the cashier to open the mail, prepare the cash summary and make the bank deposit. This involves no segregation of duties as the cashier controls the cash from the time it is received until it is deposited in the bank.

The accounts receivable clerk is allowed to open the mail.

Again, there is poor segregation of duties. In this case, the clerk could write off a customer’s account as uncollectible and then misappropriate the collection when it’s received.

7-50

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 7-9 (Continued)

Weaknesses

Suggested Improvement

Mail receipts are deposited weekly.

This makes the receipts vulnerable to robbery and to misappropriation. The receipts should be deposited daily.

We would be pleased to discuss the weaknesses and our recommended improvements with you, at your convenience. Yours sincerely,

Blacke and Whyte Certified Public Accountants LO 2 BT: E Difficulty: Hard TOT: 40 min. AACSB: Communication and Reflective Thinking AICPA PC: Measurement and Reporting AICPA PC: Communication

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7-51

CT 7-10

ETHICS CASE

(a) The amount of fee revenue depending on order of processing would be: (1) Largest to smallest: (2) Smallest to largest: (3) In order of check number:

5 bounced checks X $30 = $150 1 bounced check X $30 = $30 2 bounced checks X $30 = $60

(b) Whether this is ethical is subject to debate. On the one hand, it can be argued that customers have a responsibility to maintain an adequate balance in their accounts. Some customers are frequently overdrawn; thus only severe penalties will persuade them to maintain an adequate balance. However, it could be argued that charging $30 for something that has a cost to the bank of $1.50 is “gouging”—that is, taking unfair advantage of the customer. (c) In deciding what approach to take, the bank must consider its relationship with the customer. Clearly, by adopting a “largest to smallest” approach, it is going to anger some customers, who may well decide to leave the bank and go to a more customer-friendly bank. However, it could be argued that some of the customers the bank may lose are customers that are frequently overdrawn and therefore costly to the bank. Also, it can be time-consuming to change banks, and most people don’t have the spare time to change banks unless they really need to. (d) Answer will vary depending on student’s opinion. LO 2 BT: E Difficulty: Hard TOT: 40 AACSB: Communication, Reflective Thinking and Ethics AICPA FC: Measurement and Reporting AICPA PC: Communication and Personal Demeanor

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Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 7-11

ETHICS CASE

Answers will vary depending on article chosen. LO 1 BT: S Difficulty: Hard TOT: 40 min. AACSB: Communication and Technology AICPA FC: Measurement and Reporting

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7-53

CT 7-12

ALL ABOUT YOU

Answers are provided to students on the government website as they complete the ID Theft Faceoff quiz. LO 1 BT: S Difficulty: Hard TOT: 40 min. AACSB: Communication and Technology AICPA FC: Measurement and Reporting

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Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 7-13

FASB CODIFICATION ACTIVITY

(a) Consistent with common usage, cash includes not only currency on hand but demand deposits with banks or other financial institutions. Cash also includes other kinds of accounts that have the general characteristics of demand deposits in that the customer may deposit additional funds at any time without prior notice or penalty. All charges and credits to those accounts are cash receipts or payments to both the entity owning the account and the bank holding it. For example, a bank’s granting of a loan by crediting the proceeds to a customer’s demand deposit account is a cash payment by the bank and a cash receipt of the customer when the entry is made. Codification reference (305-10-20). (b) Cash equivalents are short-term, highly liquid investments that have both of the following characteristics: a.

Readily convertible to known amounts of cash

So near their maturity that they present insignificant risk of changes in value because of changes in interest rates.

Generally, only investments with original maturities of three months or less qualify under that definition. Original maturity means original maturity to the entity holding the investment. For example, both a threemonth U.S. Treasury bill and a three-year Treasury note purchased three months from maturity qualify as cash equivalents. However, a Treasury note purchased three years ago does not become a cash equivalent when its remaining maturity is three months. Examples of items commonly considered to be cash equivalents are Treasury bills, commercial paper, money market funds, and federal funds sold (for an entity with banking operations). Codification reference (305-10-20).

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7-55

CT 7-13 (Continued) (c) Cash and cash items. Separate disclosure shall be made of the cash and cash items which are restricted as to withdrawal or usage. The provisions of any restrictions shall be described in a note to the financial statements. Restrictions may include legally restricted deposits held as compensating balances against short-term borrowing arrangements, contracts entered into with others, or company statements of intention with regard to particular deposits; however, time deposits and short-term certificates of deposit are not generally included in legally restricted deposits. In cases where compensating balance arrangements exist but are not agreements which legally restrict the use of cash amounts shown on the balance sheet, describe in the notes to the financial statements these arrangements and the amount involved, if determinable, for the most recent audited balance sheet required and for any subsequent unaudited balance sheet required in the notes to the financial statements. Compensating balances that are maintained under an agreement to assure future credit availability shall be disclosed in the notes to the financial statements along with the amount and terms of such agreement. LO 4 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

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IFRS CONCEPTS AND APPLICATION

IFRS7-1 Companies listed on U.S. stock exchanges must comply with the SarbanesOxley Act. This compliance gives investors greater assurance that these companies have adequate internal controls in place. In addition, the auditors for these publicly traded companies must attest to the effectiveness of such controls. This process can result in discovery of weaknesses that companies had previously overlooked. After correcting these weaknesses to satisfy auditors, investors may find such companies to be less risky and therefore better investments. In order to comply with SOX, a company must document its internal control procedures and have an auditor attest to their effectiveness. Doing so costs money. A recent study indicated that audit fees can double in the first year of a company’s compliance. Since this cost is incurred only if a company lists on U.S. exchanges, many investors see SOX compliance as a costly undertaking.

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7-57

IFRS7-2

INTERNATIONAL FINANCIAL REPORTING PROBLEM

Note 1.18 Cash and cash equivalents state that: Cash and cash equivalents comprise cash and highly liquid money-market investments subject to an insignificant risk of changes in value over time. Money-market investments are measured at their market value, based on price quotations at the close of trading and on the exchange rate prevailing at the balance sheet date, with any changes in value recognized as part of net financial income/expense

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Kimmel, Financial Accounting, 8/e, Solutions Manual

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CHAPTER 8 Reporting and Analyzing Receivables Learning Objectives 1. 2. 3. 4.

Explain how companies recognize accounts receivable. Describe how companies value accounts receivable and record their disposition. Explain how companies recognize, value, and dispose of notes receivable. Describe the statement presentation of receivables and the principles of receivables management.

Summary of Questions by Learning Objectives and Bloom’s Taxonomy Item

Item

16. 17. 18. 19. 20.

4 4 4 4 4

K K C K C

21. 22. 23. 24.

4 4 4 4

C AP C C

AP AP

10. 11.

2, 4 4

AP AP

12.

Do It! Exercises 2b. 2 AP

11. 12. 13. 14.

3 4 4 4

AP AP K AN

15. 16. 17.

4 4 4

AN C AN

4 C 1, 2, 3, 4 AP

Questions 1. 2. 3. 4. 5.

1 1 2 2 2

C K C C AP

6. 7. 8. 9. 10.

2 2 2 2 2

K C C K C

11. 12. 13. 14. 15.

2 3 3 3 3

AP C K AP C

Brief Exercises 1. 2. 3. 4. 1. 1. 2. 3. 4. 1. 2.

1 1 2 2 1 1 1 1, 2 2 2 2, 4

C AP AP AP AP AP AP AP AP AP AP

5. 6. 7.

2a. 5. 6. 7. 8. 3. 4.

2 2 3

2 2 2 2 2 2 2

AP AP AP

AP AP AP AP AP AP AP

8. 9.

3 3

Exercises 9. 2 AP 10. 3 AP

Problems: Set A 5. 2 AP 1, 3 AP 6.

7. 8.

*Continuing Cookie Solutions for this chapter are available online.

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8-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

8-2

Description

Difficulty Level

Time Allotted (min.)

Journalize transactions related to bad debts.

Moderate

15–20

Prepare journal entries related to bad debt expense, and compute ratios.

Moderate

15–20

Journalize transactions related to bad debts.

Moderate

15–20

Compute bad debt amounts.

Moderate

15–20

Journalize entries to record transactions related to bad debts.

Moderate

20–30

Journalize various receivables transactions.

Moderate

25–30

Explain the impact of transactions on ratios.

Moderate

20–30

Prepare entries for various credit card and notes receivable transactions.

Moderate

20–30

Calculate and interpret various ratios.

Moderate

10–15

Kimmel, Financial Accounting, 8/e, Solutions Manual

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ANSWERS TO QUESTIONS 1.

Accounts receivable are amounts customers owe on account. They result from the sale of goods and services (i.e., in trade). Notes receivable represent claims that are evidenced by formal instruments of credit.

LO 1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting 2.

Other receivables include nontrade receivables such as interest receivable, loans to company officers, advances to employees, and income taxes refundable.

LO 1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting 3.

The essential features of the allowance method of accounting for bad debts are: (1) Uncollectible accounts receivable are estimated and matched against revenues in the same accounting period in which the revenues are recorded. (2) Estimated uncollectibles are debited to Bad Debt Expense and credited to Allowance for Doubtful Accounts through an adjusting entry at the end of each period. (3) Actual uncollectibles are debited to Allowance for Doubtful Accounts and credited to Accounts Receivable at the time the specific account is written off as uncollectible.

LO 2 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting 4.

Lance should realize that the decrease in cash realizable value occurs when estimated uncollectibles are recognized in an adjusting entry. The write-off of an uncollectible account reduces both accounts receivable and the allowance for doubtful accounts by the same amount. Thus, cash realizable value does not change.

LO 2 BT: C Difficulty: Easy TOT: 2 min. AACCSB: None AICPA FC: Reporting 5.

The adjusting entry under the percentage of receivables basis is: Bad Debt Expense .................................................................................. Allowance for Doubtful Accounts ($5,100 – $2,200) ..........................

2,900 2,900

LO 2 BT: AP Difficulty: Medium TOT: 2 min. AACSB: Analytic AICPA FC: Reporting 6.

Apple reports two types of receivables on its balance sheet: Accounts receivable trade, and vendor non-trade receivables. Since Apple’s balance sheet reports allowance amounts for receivables, we know that Apple uses the allowance method rather than the direct write-off method.

LO 2 BT: AN Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting 7.

Under the direct write-off method, bad debt losses are not estimated and no allowance account is used. When an account is determined to be uncollectible, the loss is debited to Bad Debt Expense and credited to Accounts Receivable. The direct write-off method makes no attempt to match bad debts expense to revenues or to show the cash realizable value of the receivables in the balance sheet.

LO 2 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting

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8-3

Offering credit usually results in an increase in sales because customers prefer to “buy now and pay later”. If a company decides to extend credit to customers, it should also establish credit standards to determine if a particular customer is credit worthy. Standards that are easily met can result in additional sales being made to customers that may not be able to meet the “tighter” credit policies of competitors. If such customers fail to pay, the additional sales revenue will be offset by higher collection costs and bad debt expense.

LO 2 BT: E Difficulty: Hard TOT: 5 min. AACSB: Reflective Thinking AICPA FC: Reporting 9.

From its own credit cards, the JC Penney Company may realize financing charges from customers who do not pay the balance due within a specified grace period. National credit cards offer the following advantages: (1) The credit card issuer does the credit investigation of the customer. (2) The issuer maintains individual customer accounts. (3) The issuer undertakes the collection process and absorbs any losses from uncollectible accounts. (4) The retailer receives cash more quickly from the credit card issuer than it would from individual customers. LO 2 BT: C Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Reporting 10.

The reasons companies sell their receivables are: (1) For competitive reasons, companies often must provide financing to purchasers of their goods. Such financing can result in receivables balances that are larger than the company wishes to hold. Selling the receivables reduces the excessive balance. (2) Receivables may be sold because they may be the only reasonable source of cash. (3) Billing and collection are often time-consuming and costly. As a result, it is often easier for a retailer to sell the receivables to another party that has expertise in billing and collecting receivables.

LO 2 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: reporting 11.

Cash ............................................................................................................... 388,000 Service Charge Expense (3% X $400,000) ..................................................... 12,000 Accounts Receivable............................................................................... 400,000

LO 2 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Reporting 12.

A promissory note gives the holder a stronger legal claim than one on an account receivable. As a result, it is easier to sell to another party. Promissory notes are negotiable instruments, which means they can be transferred to another party by endorsement. The holder of a promissory note also can earn interest.

LO 3 BT: AN Difficulty: Medium TOT: 3 min. AACSB: Analytic AICPA FC: Reporting 13.

The maturity date of a promissory note may be stated in one of three ways: (1) on demand, (2) on a stated date, and (3) at the end of a stated period of time.

LO 3 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting 14.

The missing amounts are: (a) $27,000, (b) 10%, (c) six months or 180 days, and (d) $7,200.

LO 3 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting 8-4

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15.

When Mendosa Company has dishonored a note, the lender can renegotiate new terms for the receivable which is equal to the full amount of the note plus the interest due. It will then try to collect the balance due, or as much as possible. If there is no hope of collection, it will write-off the note receivable.

LO 3 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting 16.

Each of the major types of receivables should be identified in the balance sheet or in the notes to the financial statements. Both the gross amount of receivables and the allowance for doubtful accounts should be reported. If collectible within a year or the operating cycle, whichever is longer, these receivables are reported as current assets immediately below short-term investments. Notes receivables are usually listed before accounts receivable because notes are more easily converted to cash.

LO 4 BT: K Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting 17.

The steps involved in receivables management are: (1) Determine to whom to extend credit. (2) Establish a payment period. (3) Monitor collections. (4) Evaluate the liquidity of receivables. (5) Accelerate cash receipts from receivables when necessary.

LO 4 BT: K Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting 18.

A company can prepare an aging schedule to monitor collection success. An aging schedule provides information about the overall collection experience of a company and identifies problem accounts. LO 4 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

19.

A concentration of credit risk is a threat of nonpayment from either a single large customer or class of customers that could adversely affect the company’s financial health.

LO 4 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting 20.

An increase in the current ratio normally indicates an improvement in short-term liquidity. This may not always be the case because the composition of current assets may vary. In order to determine if the increase is an improvement in financial health, other ratios that should be considered include: accounts receivable turnover ratio and average collection period.

LO 4 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting 21.

An increase of more than 100% in the average collection period is probably caused by the adoption of looser credit standards. The new sales director may have increased sales by extending credit to customers that did not meet the company’s previous credit standards. Management should try to determine if the longer collection period jeopardizes the company’s overall financial position. It should compare its collection period to that of its competitors to determine if it is reasonable. It should also monitor collections to see if the additional sales are producing significant increases in costs associated with collection and bad debts. To reduce the average collection period, management might consider offering a sales discount to encourage customers to pay sooner.

Kimmel, Financial Accounting, 8/e, Solutions Manual

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8-5

22.

Net credit sales for the period are 9.05 X $3,424 million = $30,987.2 million. Average collection period in days = 365 days ÷ 9.05 = 40.3 days.

LO 4 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting 23.

Sales revenue is recorded when goods or services are provided, even if cash is yet to be received. As a consequence, if sales are growing rapidly, cash collections are sometimes significantly lower than sales.

LO 4 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting 24.

Cash collections can be determined by adjusting Sales Revenue for the net change in Accounts Receivable. An increase in the receivables balance is deducted from Sales Revenue, a decrease in the receivables balance is added to Sales Revenue.

LO 4 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

8-6

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SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 8-1 (a) Other receivables. (b) Notes receivable. (c) Accounts receivable. LO 1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

BRIEF EXERCISE 8-2 (a) Accounts Receivable ............................................... Sales Revenue .................................................

23,000

(b) Sales Returns and Allowances ............................... Accounts Receivable ......................................

2,400

(c) Cash ($20,600 – $412) .............................................. Sales Discounts ($20,600 X 2%) ............................. Accounts Receivable ($23,000 – $2,400) .......

20,188 412

23,000 2,400

20,600

LO 1 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 8-3 (a) Allowance for Doubtful Accounts .......................... Accounts Receivable ...................................... (b) Accounts receivable Less: Allowance for doubtful accounts Cash realizable value

(1) Before Write-Off $700,000

4,300 4,300 (2) After Write-Off $695,700

25,000 $675,000

20,700 $675,000

LO 2 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

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8-7

BRIEF EXERCISE 8-4 Accounts Receivable ...................................................... Allowance for Doubtful Accounts ..........................

4,300

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

4,300

4,300 4,300

LO 2 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 8-5 (a) Bad Debt Expense [($400,000 X 2%) – $2,800] .................................... Allowance for Doubtful Accounts ..................

5,200

(b) Bad Debt Expense [($400,000 X 2%) + $900]....................................... Allowance for Doubtful Accounts ..................

8,900

5,200

8,900

LO 2 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 8-6 (a) Cash ($200 – $6) ....................................................... Service Charge Expense ($200 X 3%) .................... Sales Revenue ..................................................

194 6

(b) Cash ($65,000 – $1,950) ........................................... Service Charge Expense ($65,000 X 3%)................ Accounts Receivable .......................................

63,050 1,950

200

65,000

LO 2 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 8-7 Interest Maturity Date (a) $800 August 9 (Omit the date the note is issued but include the due date) (b) $875 October 12 (Omit the date the note is issued but include the due date) (c) $200 July 11 (Omit the date the note is issued but include the due date) LO 3 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting 8-8

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 8-8 Maturity Date Annual Interest Rate Total Interest (a) May 31 9% $9,000 (The computation of interest assumes 360 days for the year) (b) August 1 8% $ 600 (The computation of interest assumes 360 days for the year) (c) September 7 10% $6,000 LO 3 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 8-9 Jan. 10 Accounts Receivable ...................................... Sales Revenue ........................................

8,000

Feb. 9 Notes Receivable............................................. Accounts Receivable .............................

8,000

8,000 8,000

LO 3 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 8-10 (a) Bad Debt Expense .................................................. Allowance for Doubtful Accounts ..................

18,000 18,000

(b) Current assets Cash ................................................................. $ 90,000 Accounts receivable ....................................... $400,000 Less: Allowance for doubtful accounts ........ 18,000 382,000 Inventory .......................................................... 180,000 Supplies ........................................................... 13,000 $665,000 (c) Accounts receivable turnover = Average collection period =

$3, 000, 000 = 10 times $300, 000

365 days = 36.5 days 10

The accounts receivable turnover is a liquidity measure. The average collection period indicates the effectiveness of a company’s credit and collection policies. To evaluate Fertig’s liquidity and credit policies, these measures should be compared to the same measures for competitors. LO 2, 4 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Measurement and Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

8-9

BRIEF EXERCISE 8-11 Accounts Receivable Turnover: $23.1B $23.1B = = 7.2 times ($3.2B + 3.25B) ÷ 2 $3.225B

Average Collection Period:

365 days = 50.7 days 7.2 times LO 4 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Measurement and Reporting

BRIEF EXERCISE 8-12 Accounts Receivable

Beg. Sales End

70,000 598,000 577,000 91,000

Collections or

Sales – Increase in Receivables = Cash Collections $598,000 – ($91,000 – $70,000) = $577,000 (Collections reduce the accounts receivable balance) LO 4 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

SOLUTIONS TO DO IT! EXERCISES DO IT! 8-1 Mar. 1 Mar. 6 Mar. 11

8-10

Accounts Receivable ...................................... Sales Revenue ..........................................

28,000

Sales Returns and Allowances ....................... Accounts Receivable ................................

1,000

Cash ($27,000 – $270) ..................................... Sales Discounts ($27,000 X 1%) ..................... Accounts Receivable ................................

26,730 270

28,000 1,000

Kimmel, Financial Accounting, 8/e, Solutions Manual

27,000

(For Instructor Use Only)

LO 1 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

DO IT! 8-2a The following entry should be prepared to bring the balance in the Allowance for Doubtful Accounts up from $5,700 credit to $21,700 credit (7% X $310,000): Bad Debt Expense ................................................................. Allowance for Doubtful Accounts ............................... (To record estimate of uncollectible accounts)

16,000 16,000

LO 2 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

DO IT! 8-2b To speed up the collection of cash, Neumann sells $170,000 of its accounts receivable to a factor. Assuming the factor charges Neumann a 2% service charge, it would make the following entry: Cash ................................................................................. Service Charge Expense ($170,000 X 2%) ..................... Accounts Receivable ............................................. (To record sale of receivables to factor)

166,600 3,400 170,000

LO 2 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

DO IT! 8-3 The interest payable at maturity is $186: Face X Rate X Time = Income $6,200 X 9% X 4/12 = $186 The entry recorded by Buffet Wholesalers at the maturity date is: Cash ................................................................................. 6,386 Notes Receivable ...................................................... Interest Revenue....................................................... (To record collection of Gates note and interest)

6,200 186

LO 3 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

8-11

DO IT! 8-4 (a)

(b)

Net credit sales ÷

Average net accounts receivable

Accounts receivable turnover

$1,600,000

$108,000 + $120,000 2

14.0 times

Days in year

Accounts receivable turnover

365

14.0 times

Average collection period in days 26.1 days

LO 4 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Measurement

8-12

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO EXERCISES EXERCISE 8-1 Jan. 6 16

Accounts Receivable—Harley Inc .................. Sales Revenue ..........................................

9,200

Cash ($9,200 – $92) ......................................... Sales Discounts (1% X $9,200) ....................... Accounts Receivable—Harley Inc ...........

9,108 92

9,200

LO 1 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 8-2 Jan. 10 Feb. 12 Mar. 10

Accounts Receivable—Amise ........................ Sales Revenue ..........................................

1,700

Cash ................................................................. Accounts Receivable—Amise .................

1,100

Accounts Receivable—Amise ........................ Interest Revenue [1% X ($1,700 – $1,100)] ........................

1,700 1,100

LO 1 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 8-3 (a)

(b)

Accounts Receivable ........................................... Sales Revenue .................................................

800,000

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

763,000

Allowance for Doubtful Accounts ....................... Accounts Receivable ......................................

7,300

Kimmel, Financial Accounting, 8/e, Solutions Manual

800,000 763,000 7,300

(For Instructor Use Only)

8-13

EXERCISE 8-3 (Continued) (c)

(d)

Accounts Receivable ............................................ Allowance for Doubtful Accounts ..................

3,100

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

3,100

Bad Debt Expense ................................................ Allowance for Doubtful Accounts ..............

20,200

3,100 3,100 20,200

Allowance for Doubtful Accounts Beg. Bal. 9,000 Write-off 7,300 Recovery 3,100 Bad Debts 20,200 [$25,000 – ($9,000 + $3,100 – $7,300)] End Bal. 25,000

(e)

Accounts Receivable Beg. Bal. 200,000 Collections 763,000 Sales 800,000 Write-off 7,300 Recovery 3,100 Collections 3,100 End Bal. 229,700

(f)

Net realizable value of receivables is $204,700 ($229,700 – $25,000)

Allowance for Doubtful Accounts Beg. Bal. 9,000 Write-off 7,300 Recovery 3,100 Bad Debts 20,200 End Bal. 25,000

LO 1, 2 BT: AP Difficulty: Hard TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 8-4 (a) Dec. 31

Bad Debt Expense ........................................... Accounts Receivable—Matisse ...............

900 900

(b) Dec. 31

Bad Debt Expense ........................................... 6,700 Allowance for Doubtful Accounts [($78,000 X 10%) – $1,100]..................... 6,700 (Bad Debt Expense takes into account any existing balance in the allowance account)

8-14

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 8-4 (Continued) (c) Dec. 31

Bad Debt Expense ........................................... 6,740 Allowance for Doubtful Accounts [($78,000 X 8%) + $500] ......................... 6,740 (Bad Debt Expense takes into account any existing balance in the allowance account)

LO 2 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 8-5 (a)

Accounts Receivable Current 1–30 days past due 31–90 days past due Over 90 days past due

Amount $65,000 12,900 10,100 7,400

% 2 5 30 50

Estimated Uncollectible $1,300 645 3,030 3,700 $8,675

(b) Mar. 31

Bad Debt Expense ........................................... 6,575 Allowance for Doubtful Accounts ($8,675 – $2,100) .................................... 6,575 (Bad Debt Expense takes into account any existing balance in the allowance account)

(c) The total balance of receivables increased from 2016 to 2017. However, of concern is the fact that each of the three categories of older accounts increased substantially during 2017. That is, customers are taking longer to pay and bad debts are likely to increase. Management needs to investigate the causes of this change. LO 2 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 8-6 December 31, 2016 Bad Debt Expense .......................................................... 9,500 Allowance for Doubtful Accounts [(9% X $90,000) + $1,400]...................................... (Bad Debt Expense takes into account any existing balance in the allowance account)

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

9,500

8-15

EXERCISE 8-6 (Continued) May 11, 2017 Allowance for Doubtful Accounts .................................. Accounts Receivable—Jared ..................................

1,200

June 12, 2017 Accounts Receivable—Jared ......................................... Allowance for Doubtful Accounts...........................

1,200

Cash ................................................................................. Accounts Receivable—Jared ..................................

1,200 1,200

LO 2 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 8-7 Mar. 3

Cash ($710,000 – $28,400)............................... Service Charge Expense (4% X $710,000) ..... Accounts Receivable ................................

681,600 28,400 710,000

LO 2 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 8-8 May 10

Cash ($4,000 – $152) ....................................... Service Charge Expense (3.8% X $4,000) ...... Sales Revenue ..........................................

3,848 152 4,000

LO 2 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 8-9 July 4

Cash ($250 – $10) ............................................ Service Charge Expense (4% X $250) ............ Sales Revenue ..........................................

240 10 250

LO 2 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

8-16

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 8-10 Nov. 1 Notes Receivable............................................. Cash ..........................................................

60,000

Dec. 11 Notes Receivable............................................. Sales Revenue ..........................................

3,600

16 Notes Receivable............................................. Accounts Receivable—A. Murdock .........

12,000

31 Interest Receivable.......................................... Interest Revenue* .....................................

761

60,000 3,600 12,000 761

*Calculation of interest revenue: Bohr’s note: $60,000 X 7% X 2/12 = $700 Pine’s note: 3,600 X 8% X 20/360 = 16 Murdock’s note: 12,000 X 9% X 15/360 = 45 Total accrued interest = $761 (The computation of interest assumes a 360 day year) LO 3 BT: AP Difficulty: Hard TOT: 12 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 8-11 May

2016 1 Notes Receivable............................................. Accounts Receivable—R. Stoney ............

5,000 5,000

Dec. 31 Interest Receivable.......................................... Interest Revenue ($5,000 X 6% X 8/12) ..............................

200 200

(At the end of each year, interest is accrued for the time elapsed since the date of a note.) May

2017 1 Cash ................................................................. Notes Receivable ...................................... Interest Receivable ................................... Interest Revenue ($5,000 X 6% X 4/12) ..............................

5,300 5,000 200 100

LO 3 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

8-17

EXERCISE 8-12 EILEEN CORP. Balance Sheet (Partial) October 31, 2017 (in thousands) Receivables Notes receivable ........................................................ Accounts receivable .................................................. Other receivables....................................................... Total receivables........................................................ Less: Allowance for doubtful accounts ........................ Net receivables ................................................................

$1,353 2,910 189 $4,452 52 $4,400

LO 4 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 8-13 (a) 2. Reviewing company ratings in the Dun and Bradstreet Reference Book of American Business. (b) 3. Collecting information on competitors’ payment period policies. (c) 4. Preparing monthly accounts receivable aging schedule and investigating problem accounts. (d) 5. Calculating the accounts receivable turnover ratio and average collection period. (e) 1. Selling receivables to a factor. LO 4 BT: K Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Measurement

EXERCISE 8-14 (a)

$35,497 Accounts receivable = = 9.2 times turnover ($3,391 + $4,359)/2 Average collection 365 days = = 39.7 days period 9.2

8-18

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 8-14 (Continued) (b) Accounts receivable comprise 48% ($3,391/$7,116) of the company’s total current assets. This is certainly a material component. (c) The balance in the allowance account increased $38 million ($196 – $158) while its accounts receivable decreased $930 million ($3,587 – $4,517). As a result, the allowance for uncollectible accounts increased from 3.5% of accounts receivable in 2016 to 5.5% in 2017. LO 4 BT: AN Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Measurement and Reporting

EXERCISE 8-15 (a) At first glance it appears that Ming’s liquidity had deteriorated over the past year since the company’s current ratio has fallen from 1.5:1 to 1.3:1. However, it is taking the company less time to collect its accounts receivable as evidenced by the higher accounts receivable turnover. The company also appears to be moving its inventory more quickly as evidenced by the higher inventory turnover. It is possible that the lower current ratio is due to the fact that with improved collections and inventory turnover, the company is carrying fewer current assets and not because the company’s liquidity has deteriorated. (b) Changes in the turnover ratios do not directly affect profitability. However, improvements in turnover generally indicate that the company is better able to convert sales to cash. Improved liquidity could allow the company to better manage its cash flows and therefore, indirectly improve profitability. (c) There are several steps that Ming might have taken to improve its receivables and inventory turnover: Receivables -

The company could limit credit to only the best customers, however, this could negatively affect sales.

The company could initiate the use of a cash discount to encourage early payment of receivables.

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

8-19

EXERCISE 8-15 (Continued) -

The company could more aggressively monitor collections to encourage customers to pay on time.

The company could sell its receivables to a factor to accelerate cash receipts.

Inventory -

The company could limit the amount of inventory by improving its purchasing relationships with suppliers. If inventory could be purchased more frequently, required inventory levels could be reduced.

Improvements in production processes could reduce the amount of work in process, thereby reducing inventory and improving the turnover ratio.

Moving to a system whereby inventory is only produced as needed, will reduce the amount of finished goods inventory and improve the turnover ratio. However, there is some risk to this option as sales could be lost if stock-outs occur.

LO 4 BT: AN Difficulty: Hard TOT: 15 min. AACSB: Analytic AICPA FC: Measurement and Reporting

EXERCISE 8-16 One possible reason Office Depot chose to sell its receivables may have been to improve its financial ratios. Other reasons include not wanting to deal with the administration of collecting accounts or the desire to accelerate cash receipts. LO 4 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

EXERCISE 8-17 (a)

Accounts Receivable

Beg 38,000 Sales 380,000 227,000 End 191,000

Collections or

Sales – Increase in Receivables = Cash Collections $380,000 – ($191,000 – $38,000) = $227,000 (Collections reduce the accounts receivable balance) 8-20

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 8-17 (Continued) (b) The quality of earnings ratio is net cash provided by operating activities divided by net income. If accrual sales exceed cash collections, then net income will exceed net cash provided by operating activities, all else being equal. Therefore, this would cause a drop in the quality of earnings ratio. (c) If the company relaxed its credit requirements it should increase its estimated bad debts expense. If it doesn’t do this, net income in the current period will likely be overstated. LO 4 BT: AN Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Measurement and Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

8-21

SOLUTIONS TO PROBLEMS PROBLEM 8-1A

(a)

Total estimated bad debts Number of Days Outstanding 31–60 61–90 91–120

Over 120

$377,000 $222,000 1%

$90,000 4%

$38,000 5%

$15,000 8%

$12,000 10%

$10,120

$3,600

$1,900

$1,200

(b) Bad Debt Expense .......................................... 14,120 Allowance for Doubtful Accounts ($10,120 + $4,000) ................................. (Bad Debt Expense takes into account any existing balance in the allowance account.)

14,120

Total Accounts receivable % uncollectible Estimated bad debts

(c)

0–30

$2,220

Allowance for Doubtful Accounts ................. Accounts Receivable...............................

5,000

(d) Accounts Receivable ..................................... Allowance for Doubtful Accounts ..........

5,000

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

5,000

(e)

5,000 5,000 5,000

If Rianna.com used 3% of total accounts receivable rather than aging the individual accounts, the bad debt expense adjustment would be $15,310 [($377,000 X 3%) + $4,000]. Aging the individual accounts rather than applying a percentage to the total accounts receivable should produce a more accurate allowance account and bad debts expense.

LO 2 BT: AP Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

8-22

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 8-2A

(a)

Accounts Receivable ..................................... 2,500,000 Sales Revenue ......................................... 2,500,000

Sales Returns and Allowances...................... Accounts Receivable ..............................

Cash ................................................................ 2,200,000 Accounts Receivable .............................. 2,200,000

Allowance for Doubtful Accounts ................. Accounts Receivable ..............................

41,000

Accounts Receivable ..................................... Allowance for Doubtful Accounts ..........

15,000

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

15,000

Accounts Receivable Bal. 600,000 (1) 2,500,000 (5) 15,000 Bal.

(c)

50,000

(b)

50,000

(2) 50,000 (3) 2,200,000 (4) 41,000 (5) 15,000

41,000 15,000 15,000

Allowance for Doubtful Accounts (4)

41,000

809,000

Bal. (5)

37,000 15,000

Bal.

11,000

Balance needed ...................................................... Balance before adjustment [See (b)] .................... Adjustment required ..............................................

$46,000 (11,000) $35,000

The journal entry would therefore be as follows: Bad Debt Expense .................................................. 35,000 Allowance for Doubtful Accounts ............... (Bad Debt Expense takes into account any existing balance in the allowance account.) Copyright © 2016 John Wiley & Sons, Inc.

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

35,000

8-23

PROBLEM 8-2A (Continued) (d)

$2,500, 000 – $50,000 $2,450,000 = = 3.7 times ($563,000* + $763,000**) ÷ 2 $663,000 *$600,000 – $37,000 **$809,000 – $46,000 The average collection period is: 365 days = 98.6 days 3.7

LO 2, 4 BT: AP Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA FC: Measurement and Reporting

8-24

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 8-3A

(a) Dec. 31 Bad Debt Expense ...................................... 34,400 Allowance for Doubtful Accounts ($42,400 – $8,000) ............................. (Bad Debt Expense takes into account any existing balance in the allowance account.)

34,400

(a) & (b) 12/31 12/31

Bad Debt Expense

Allowance for Doubtful Accounts

34,400 Bal. 34,400

2016

2017 3/1

(b) (1) (2)

Mar. 1 May 1

1 (c) Dec. 31

12/31 Bal. 8,000 12/31 34,400 12/31 Bal. 42,400 600 5/1

2017 Allowance for Doubtful Accounts ....... Accounts Receivable....................

600

600 600

Accounts Receivable............................ Allowance for Doubtful Accounts ....................................

600

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

600

2017 Bad Debt Expense ...................................... Allowance for Doubtful Accounts ($36,700 + $1,400) ..............................

600 600 38,100 38,100

LO 2 BT: AP Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

8-25

PROBLEM 8-4A

(a) $37,000. (b) $30,600 [($840,000 X 4%) – $3,000]. (Bad Debt Expense takes into account any existing balance in the allowance account.) (c) $34,600 [(840,000 X 4%) + $1,000]. (d) The are two major weaknesses with the direct write-off method. First, it does not match expenses with revenues. Second, the accounts receivable are not stated at cash realizable value at the balance sheet date. LO 2 BT: AP Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

8-26

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 8-5A

Bad Debt Expense ($10,200 – $1,500) ..... 8,700 Allowance for Doubtful Accounts ..... (Bad Debt Expense takes into account any existing balance in the allowance account.) (a) Dec. 31

(b) Dec. 31

(c)

(d)

(e)

Bad Debt Expense ($10,200 + $1,500) ..... Allowance for Doubtful Accounts .....

11,700

Allowance for Doubtful Accounts ........................... Accounts Receivable ........................................

2,100

Bad Debt Expense .................................................... Accounts Receivable ........................................

2,100

8,700

11,700

2,100

The advantages of the allowance method over the direct write-off method are: 1.

It attempts to match bad debts expense related to uncollectible accounts receivable with sales revenues on the income statement.

It attempts to show the cash realizable value of the accounts receivable on the balance sheet.

LO 2 BT: AP Difficulty: Medium TOT: 25 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

8-27

PROBLEM 8-6A

Jan. 5 Feb. 2 12 26 Apr. 5

Accounts Receivable—Rian Company .......... Sales Revenue ..........................................

4,000

Notes Receivable............................................. Accounts Receivable—Rian Company ...

4,000

Notes Receivable............................................. Sales Revenue ..........................................

12,000

Accounts Receivable—Malcolm Co ............... Sales Revenue ..........................................

5,200

Notes Receivable............................................. Accounts Receivable—Malcolm Co ........

5,200

4,000 4,000 12,000 5,200 5,200

Cash ($12,000 + $200) ..................................... 12,200 Notes Receivable ...................................... 12,000 Interest Revenue ($12,000 X 10% X 2/12) .......................... 200 (When the terms of a note are expressed in months, the time element is based on 12 months) June 2

Cash ($4,000 + $120) ....................................... 4,120 Notes Receivable ...................................... 4,000 Interest Revenue ($4,000 X 9% X 4/12) .... 120 (When the terms of a note are expressed in months, the time element is based on 12 months) June 15

Notes Receivable............................................. Sales Revenue ..........................................

2,000 2,000

LO 1, 3 BT: AP Difficulty: Medium TOT: 25 min. AACSB: Analytic AICPA FC: Reporting

8-28

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 8-7A

Transaction 1. Recorded cash sale. 2. Recorded bad debts expense. Use allowance method 3. Wrote off an account receivable as uncollectible. Use allowance method 4. Recorded sales on account.

Current Ratio (2:1) I

Accounts Receivable Turnover (10X) NE

Average Collection Period (36.5 days) NE

LO 4 BT: C Difficulty: Medium TOT: 20 min. AACSB: None AICPA FC: Measurement

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

8-29

PROBLEM 8-8A

(a) July

Accounts Receivable ............................... Sales Revenue ....................................

4,500

Cash ($600 – $18) ..................................... Service Charge Expense ($600 X 3%) ..... Sales Revenue ....................................

582 18

Cash ......................................................... Notes Receivable ................................ Interest Revenue ($6,000 X 8% X 90/360)..................... (The interest computation assumes a 360-day year)

6,120

Cash ......................................................... Notes Receivable ................................ Interest Revenue ($7,800 X 10% X 60/360)................... (The interest computation assumes a 360-day year) 31

4,500

600 6,000 120 7,930 7,800 130

Interest Receivable .................................. Interest Revenue ($10,000 X 6% X 1/12).......................

50 50

(b) Notes Receivable 7/1 Bal. 23,800 7/20 7/24 7/31 Bal. 10,000

6,000 7,800

7/31

Interest Receivable 50

7/31 Bal.

Accounts Receivable 7/5 4,500 7/31 Bal. 4,500

8-30

Kimmel, Financial Accounting, 8/e, Solutions Manual

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PROBLEM 8-8A (Continued) MILTON COMPANY Balance Sheet (Partial) July 31, 201X (c) Current assets Notes receivable ............................................... Accounts receivable ........................................ Interest receivable ............................................ Total receivables ........................................

$10,000 4,500 50 $14,550

LO 1 - 4 BT: AP Difficulty: Medium TOT: 25 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

8-31

PROBLEM 8-9A

Nike Accounts receivable turnover

adidas

$10,381

$19,176.1 a

($2,795.3 + $2,883.9 )/2 $19,176.1 $2,839.6

= 6.8 times

($1,624 + $1,429 )/2 $10,381 $1,526.5

= 6.8 times

a2,873.7 – 78.4 b2,994.7 – 110.8 c1,743 – 119 d1,553 – 124

Average collection period

365 6.8

= 53.7 days

365 6.8

= 53.7 days

Both companies have the same turnover ratios and average collection periods. LO 4 BT: AN Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Measurement

8-32

Kimmel, Financial Accounting, 8/e, Solutions Manual

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ACCOUNTING CYCLE REVIEW (a) Jan. 1

3 8 11

17 21 24

27 31

Notes Receivable ........................................... Accounts Receivable— Betheny Company ..............................

1,200

Allowance for Doubtful Accounts ................ Accounts Receivable .............................

730

Inventory ........................................................ Accounts Payable ..................................

17,200

Accounts Receivable .................................... Sales Revenue .......................................

25,000

Cost of Goods Sold ....................................... Inventory ................................................

17,500

Cash ............................................................... Service Charge Expense ............................... Sales Revenue .......................................

970 30

Cost of Goods Sold ....................................... Inventory ................................................

700

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

22,900

Accounts Payable ......................................... Cash ........................................................

16,300

Accounts Receivable .................................... Allowance for Doubtful Accounts.........

280

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

280

Supplies ......................................................... Cash ........................................................

1,400

Other Operating Expenses ........................... Cash ........................................................

3,218

Kimmel, Financial Accounting, 8/e, Solutions Manual

1,200 730 17,200 25,000 17,500

1,000 700 22,900 16,300 280 280 1,400

(For Instructor Use Only)

3,218 8-33

ACR SOLUTION (Continued) Adjusting Entries Jan. 31 31

31 31

(b)

Interest Receivable ........................................ Interest Revenue ($1,200 X 8% X 1/12) ....... Bad Debt Expense [($19,950 X 6%) – ($800 – $730 + $280)] .................................. Allowance for Doubtful Accounts..........

8 847 847

Supplies Expense .......................................... Supplies ($1,400 – $560) ........................

840

Income Tax Expense ...................................... Income Taxes Payable [$2,873 (See c) X 30%] .........................

862

840

862

HUDSON CORPORATION Adjusted Trial Balance January 31, 2017 Cash ............................................................ Notes Receivable ....................................... Accounts Receivable ................................. Allowance for Doubtful Accounts ............. Interest Receivable .................................... Inventory ..................................................... Supplies ...................................................... Accounts Payable ...................................... Income Taxes Payable ............................... Common Stock ........................................... Retained Earnings...................................... Sales Revenue............................................ Cost of Goods Sold.................................... Supplies Expense ...................................... Bad Debt Expense...................................... Service Charge Expense ........................... Other Operating Expenses ........................ Interest Revenue ........................................ Income Tax Expense..................................

8-34

Debit $16,332 1,200 19,950

Credit

$ 1,197 8 8,400 560 9,650 862 20,000 12,730 26,000 18,200 840 847 30 3,218 8 862 $70,447

Kimmel, Financial Accounting, 8/e, Solutions Manual

$70,447 (For Instructor Use Only)

ACR SOLUTION (Continued) (b)

Optional T accounts for accounts with multiple transactions

Cash 1/1 Bal. 13,100 1/21 1/15 970 1/27 1/17 22,900 1/31 1/24 280 1/31 Bal. 16,332

16,300 1,400 3,218

1/21

Accounts Receivable 1/1 Bal. 19,780 1/1 1,200 1/11 25,000 1/3 730 1/24 280 1/17 22,900 1/24 280 1/31 Bal. 19,950 Allowance for Doubtful Accounts 1/3 730 1/1 Bal. 800 1/24 280 1/31 847 1/31 Bal. 1,197 Inventory 1/1 Bal. 9,400 1/11 1/8 17,200 1/15 1/31 Bal. 8,400

1/27 1/31 Bal.

Supplies 1,400 1/31 560

840

Accounts Payable 16,300 1/1 Bal. 8,750 1/8 17,200 1/31 Bal. 9,650 Sales Revenue 1/11 25,000 1/15 1,000 1/31 Bal. 26,000

Cost of Goods Sold 1/11 17,500 1/15 700 1/31 Bal. 18,200

17,500 700

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8-35

ACR SOLUTION (Continued) (c)

HUDSON CORPORATION Income Statement For the Month Ending January 31, 2017 Sales revenue .................................................. Cost of goods sold.......................................... Gross profit ..................................................... Operating expenses ........................................ Other operating expenses....................... Bad debt expense .................................... Supplies expense .................................... Service charge expense .......................... Total operating expenses ............................... Income from operations ................................. Other revenues and gains .............................. Interest revenue ....................................... Income before taxes ....................................... Income tax expense ($2,873 X 30%) ....... Net income.......................................................

8-36

$26,000 18,200 7,800 $3,218 847 840 30

Kimmel, Financial Accounting, 8/e, Solutions Manual

4,935 2,865 8 2,873 862 $ 2,011

(For Instructor Use Only)

ACR SOLUTION (Continued) HUDSON CORPORATION Retained Earnings Statement For the Month Ending January 31, 2017 Retained earnings, January 1 ........................................... Add: Net income ................................................................ Retained earnings, January 31 .........................................

$12,730 2,011 $14,741

HUDSON CORPORATION Balance Sheet January 31, 2017 Assets Current assets Cash ........................................................... Notes receivable ........................................ Accounts receivable.................................. Less: Allowance for doubtful accounts ......................................... Interest receivable ..................................... Inventory .................................................... Supplies ..................................................... Total assets .......................................................

$16,332 1,200 $19,950 1,197

18,753 8 8,400 560 $45,253

Liabilities and Stockholders’ Equity Current liabilities Accounts payable ...................................... Income taxes payable ............................... Total liabilities ................................................... Stockholders’ equity Common stock .......................................... Retained earnings ..................................... Total stockholders’ equity ........................ Total liabilities and stockholders’ equity ........

$ 9,650 862 $10,512 $20,000 14,741 34,741 $45,253

LO 1 – 4 BT: AP Difficulty: Hard TOT: 120 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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8-37

CT 8-1

FINANCIAL REPORTING PROBLEM

2014 (a)

Accounts receivable turnover

$182,795 ($17, 460 + $13,102) ÷ 2

$182,795 = 12.0 times $15, 281

Average collection period = (b)

365 = 30.4 days 12.0

Note 2 under Accounts Receivable states that As of September 27, 2014, the Company had two customers that represented 10% or more of total trade receivables, one of which accounted for 16% and the other 13%. As of September 28, 2013, the Company had two customers that represented 10% or more of total trade receivables, one of which accounted for 13% and the other 10%. The Company's cellular network carriers accounted for 72% and 68% of trade receivables as of September 27, 2014 and September 28, 2013, respectively. The additions and write-offs to the Company's allowance for doubtful accounts during 2014, 2013 and 2012 were not significant.

(c)

At 30.4 days, Apple’s average collection period appears reasonable. It should be compared to its credit terms (normally 30 days) and to previous years to determine whether it is of concern.

LO 4 BT: AN Difficulty: Hard TOT: 20 min. AACSB: Analytic and Communication AICPA FC: Reporting AICPA PC: Communication

8-38

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 8-2

(a) (1)

COMPARATIVE ANALYSIS PROBLEM

Accounts receivable turnover ratio Columbia Sportswear $2,100, 590 ($344, 390 + $306, 878) ÷ 2

$2,100, 590 = 6.5 times $325, 634 (2)

VF Corporation $12,154,784 ($1, 276, 224 + $1, 360, 443) ÷ 2

$12,154,784 = 9.2 times $1, 318, 333.5

Average collection period

365 = 56.2 days 6.5

365 = 39.7 days 9.2

(b) The general rule for the average collection period is that it should not greatly exceed the credit term period. VFC’s average collection period (approximately 40 days) is longer than the normal credit term period of 30 days but is better than Columbia's 56 day average collection period. LO 4 BT: AN Difficulty: Hard TOT: 20 min. AACSB: Analytic and Communication AICPA FC: Reporting AICPA PC: Communication

Kimmel, Financial Accounting, 8/e, Solutions Manual

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8-39

CT 8-3

(a) (1)

COMPARATIVE ANALYSIS PROBLEM

Accounts receivable turnover Amazon.com

(2)

Wal-Mart stores

$70, 080 ($5, 612 + $4,767) ÷ 2

$485,651 ($6,778 + $6,677) ÷ 2

$70, 080 = 13.5 times $5,189.5

$485,651 = 72.2 times $6,727.5

Average collection period 365 = 27.0 days 13.5

365 = 5.1 days 72.2

(b) The general rule for the average collection period is that it should not greatly exceed the credit term period. Amazon’s average collection period (approximately 27 days) is shorter than the normal credit term period of 30 days but is much longer than Wal-Mart’s 5.1 days. LO 4 BT: AN Difficulty: Hard TOT: 20 min. AACSB: Analytic and Communication AICPA FC: Reporting AICPA PC: Communication

8-40

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 8-4

(a)

INTERPRETING FINANCIAL STATEMENTS

Accounts receivable turnover

$2,981.8 = 11.7 times ($259.8* + $248.3**)/2

*$270.4 – $10.6 **$259.7 – $11.4 Average collection period =

365 days = 31.2 days 11.7

(b)

Accounts receivable represent 24.9% [($270.4 – $10.6)/$1,044.9] of the company’s current assets. This is a material amount of the current assets.

(c)

The ratios would probably vary throughout the year as receivables increase during the busy season and decrease in the “off” season. To improve the accuracy of the ratio, average receivables should be calculated using monthly or quarterly data, rather than just the beginning and ending balance.

(d)

It is difficult to evaluate Scotts’ credit risk with only a single year’s data and no industry norms. An average collection period of 31.2 days may be reasonable for the type of customers that make up Scotts’ receivables. Scotts explained that a majority of its receivables were from its North American Consumer segment. Within this segment, there were several subgroups (i.e., home centers, mass merchandisers, hardware stores). The note explains that its top 3 customers accounted for 48% of its total receivables from the North American consumer business. In addition its two largest customers accounted for more than 34% of its net sales. These facts indicate a higher degree of credit risk than having numerous smaller customers.

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8-41

CT 8-4 (Continued) (e)

Note 19 addressed the issues that surround credit risk. It provided the reader with at least a moderate degree of “comfort” that Scotts’ accounts receivable and allowance policies were acceptable. The note also appears to comply with the full disclosure principle required under GAAP. It does not, however, disclose what the company’s credit exposure is to any individual customers. This would be of interest, since some of its customers are probably very large. As noted in part (d), having the receivables balance spread across multiple customers is usually less risky than having a few large customers.

LO 4 BT: AN Difficulty: Hard TOT: 25 min. AACSB: Analytic and Communication AICPA FC: Reporting AICPA PC: Communication

8-42

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 8-5 (a)

REAL-WORLD FOCUS

Factoring invoices enhances cash flow and allows a company to meet business expenses and take on new opportunities. The benefits of factoring include: • • • •

Predictable cash flow and elimination of slow payments Flexible financing, as factoring line is tied to sales. It’s the ideal tool for growth Factoring is easy to obtain. Works well with startups and established companies Factoring financing lines can be setup in a few days

(b)

Factoring rates range between 1.5% and 3.5% per month. The two major variables considered when determining the rate are: (1) the size of the transaction, and (2) the credit quality of the company’s clients .

(c)

The first installment is paid within a couple of days and is typically 90% of the invoice amount. After customers pay the invoice amount to the factor, the second installment (10%) is paid, less a fee for the transaction.

LO 2, 4 BT: S Difficulty: Hard TOT: 20 min. AACSB: Analytic, Communication and Technology AICPA FC: Reporting AICPA PC: Communication

Kimmel, Financial Accounting, 8/e, Solutions Manual

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8-43

CT 8-6

RESEARCH CASE

(a) InBev told its suppliers that it would take up to 120 days to pay. This is compared to 30 days previously. (b) To free up cash, General Electric shortened collection times, collected on past-due accounts, and stretched out its payments to suppliers. By doing this the company says that it freed up $3.8 billion. (c) Companies with sales of more than $5 billion took an average of 55.8 days to pay suppliers and they took an average of 41 days to collect from customers. Companies with sales of less than $500 million took an average of 40.1 days to pay suppliers and they took an average of 58.9 days to collect from customers. (d) If a company negotiates payment terms that are too severe for its suppliers, the suppliers may be forced out of business. This can then disrupt the company’s operations as it searches for substitute suppliers. LO 4 BT: S Difficulty: Hard TOT: 25 min. AACSB: Analytic, Communication and Technology AICPA FC: Reporting AICPA PC: Communication

8-44

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 8-7

DECISION MAKING ACROSS THE ORGANIZATION

(a) 2017 Net credit sales ................................. $500,000 Credit and collection expenses Collection agency fees ............. $ 2,900 Salary of accounts receivable clerk ..................................... 4,400 Uncollectible accounts ............. 8,000 Billing and mailing costs .......... 2,500 Credit investigation fees ........... 1,000 Total ..................................... $ 18,800 Total expenses as a percentage of net credit sales ...................... 3.8% (b)

2016 2015 $600,000 $400,000 $ 2,600

$ 1,600

4,400 9,600 3,000 1,200 $ 20,800

4,400 6,400 2,000 800 $ 15,200

3.5%

3.8%

Average accounts receivable (5%) ...

$ 25,000

$ 30,000

$ 20,000

Investment earnings (10%) ..............

2,500

$ 3,000

$ 2,000

Total credit and collection expense per above .................................. Add: Investment earnings* ............. Net credit and collection expense ....

$ 18,800 2,500 $ 21,300

$ 20,800 3,000 $ 23,800

$ 15,200 2,000 $ 17,200

Net expenses as a percentage of net sales ...............................

4.3%

4.0%

4.3%

*The investment earnings on the cash tied up in accounts receivables is an additional expense of continuing the existing credit policies. (c)

The analysis shows that the credit card fee of 4% of net credit sales will be higher than the percentage cost of credit and collection expenses in each year before considering the effect of earnings from other investment opportunities. However, after considering investment earnings, the credit card fee of 4% will be less than or equal to the company’s percentage cost.

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8-45

CT 8-7 (Continued) Finally, the decision hinges on (1) the accuracy of investment earnings, (2) the expected trend in credit sales, and (3) the effect the new policy will have on sales. Nonfinancial factors include the effects on customer relationships of the alternative credit policies and whether the Santos want to continue with the handling of their own accounts receivable. LO 4 BT: AN Difficulty: Hard TOT: 40 min. AACSB: Analytic and Communication AICPA FC: Reporting AICPA PC: Interaction, Leadership and Communication

8-46

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

CT 8-8

COMMUNICATION ACTIVITY

To:

John Doe, President

From:

Mary Jane, Student

Re:

Improving debt-paying ability

Date:

September 14, 2017

The first step that should be taken to improve your company’s debt-paying ability is to accelerate collections of your accounts receivable. The current credit policy (i.e., “pay when they can”) encourages slow payment from credit customers. Most companies have a 30-day credit period with finance charges applied on late payments. You may also want to consider adopting a discount period which allows customers a reduction in the amount owed if payment is made within a specified time period. Measuring success in improving collections can be done by monitoring collections and evaluating the receivables balance. Monitoring collections is done by preparing an accounts receivable aging schedule on a monthly basis. Evaluating receivables is accomplished by computing an accounts receivable turnover and an average collection period. Another step that can be taken with receivables to ease your company’s liquidity problems is to sell the receivables to another company for cash. Selling receivables to another company (called a factor) shortens the cashto-cash operating cycle. It should be pointed out that factors normally charge a commission of 1% to 3%. Hopefully this memo addresses the questions you have on improving your company’s debt-paying ability. Please contact me if you have any questions or need additional information. LO 4 BT: S Difficulty: Hard TOT: 30 min. AACSB: Analytic and Communication AICPA FC: Reporting AICPA PC: Communication

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8-47

CT 8-9

(a)

ETHICS CASE

The stakeholders in this situation are: The president of Mendez Corp. The controller of Mendez Corp. The stockholders of Mendez Corp.

(b)

Yes. The controller is posed with an ethical dilemma—should he/she follow the president’s “suggestion” and prepare misleading financial statements (understated net income) or should he/she attempt to stand up to and possibly anger the president by preparing a fair (realistic) income statement.

(c)

No. Mendez Corp.’s growth rate should be a product of fair and accurate financial statements, not vice versa. That is, one should not prepare financial statements with the objective of achieving or sustaining a predetermined growth rate. The growth rate should be a product of management and operating results, not of creative accounting.

LO 2 BT: E Difficulty: Hard TOT: 30 min. Communication and Professional Demeanor

8-48

AACSB: Analytic, Communication and Ethics

Kimmel, Financial Accounting, 8/e, Solutions Manual

AICPA PC:

(For Instructor Use Only)

CT 8-10

ALL ABOUT YOU

(a) There are a number of sources that compare features of credit cards. Here are three: www.creditcards.com/, www.federalreserve.gov/pubs/shop/, and www.creditorweb.com/. (b) Here are some of the features you should consider: annual percentage rate, credit limit, annual fees, billing and due dates, minimum payment, penalties and fees, premiums received (airlines miles, hotel discounts etc.), and cash rebates. (c) Answer depends on present credit card and student’s personal situation. LO 2 BT: S Difficulty: Hard TOT: 30 min. AACSB: Analytic, Communication and Technology AICPA PC: Communication AICPA BB: Critical Thinking

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8-49

CT 8-11

FASB CODIFICATION ACTIVITY

(a) Receivables represent contractual rights to receive money on fixed or determinable dates, whether or not there is any stated provision for interest. Receivables may arise from credit sales, loans, or other transactions. Receivables may be in the form of loans, notes, and other types of financial instruments and may be originated by an entity or purchased from another entity. (Codification reference 310-10-05-4). (b) The conditions under which receivables exist usually involve some degree of uncertainty about their collectibility, in which case a contingency exists. Subtopic 450-20 requires recognition of a loss when both of the following conditions are met: a. Information available prior to issuance of the financial statements indicates that it is probable that an asset has been impaired at the date of the financial statements. b. The amount of the loss can be reasonably estimated. Losses from uncollectible receivables shall be accrued when both the preceding conditions are met. Those conditions may be considered in relation to individual receivables or in relation to groups of similar types of receivables. If the conditions are met, accrual shall be made even though the particular receivables that are uncollectible may not be identifiable. (Codification reference 310-10-35-7, 35-8-35-9). LO 1, 2 BT: S Difficulty: Hard TOT: 40 min. AACSB: Analytic, Communication and Technology AICPA FC: Measurement AICPA PC: Communication

8-50

Kimmel, Financial Accounting, 8/e, Solutions Manual

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IFRS 8-1

INTERNATIONAL FINANCIAL REPORTING PROBLEM

(a)

Note 1.17 states: Trade accounts receivable are recorded at their face value. A provision for impairment is recorded if their net realizable value, based on the probability of their collection, is less than their carrying amount.

(b)

Note 11 indicates that provisions for impairment and product returns accounted for the difference between gross and net trade accounts receivable.

(c)

According to Note 11, the primary reason for the increase in gross accounts receivable was an increase in trade receivables.

(d)

2014 :

€66 = 2.59% €2, 546

2013 :

€67 = 2.77% €2,416

The provision for impairment as a percentage of trade receivables decrease from 2.76% to 2.59%. This decrease indicates that Louis Vuitton is doing a better job collecting its receivables. LO 2, 4 BT: AN Difficulty: Medium TOT: 30 min. AACSB: Analytic, Communication, Technology and Diversity AICPA: FC: Measurement and Reporting AICPA PC: International/Global Perspective

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8-51

CHAPTER 9 Reporting and Analyzing Long-Lived Assets Learning Objectives 1. Explain the accounting for plant asset expenditures. 2. Apply depreciation methods to plant assets. 3. Explain how to account for the disposal of plant assets. 4. Identify the basic issues related to reporting intangible assets. 5. Discuss how long-lived assets are reported and analyzed. *6. Compute periodic depreciation using the declining-balance method and the units- of-activity method.

Summary of Questions by Learning Objectives and Bloom’s Taxonomy Item LO 1. 2. 3. 4. 5. 6.

1 1 1 1 1 1

BT C K C C C K

Item 7. 8. 9. 10. 11. 12.

LO 2 2 2 2 3 3, 5

Item

K C C C K C

Questions 13. 5 K 14. 4 C 15. 4 C 16. 4 C 17. 4 C 18. 4 C

19. 20. 21. 22. 23. 24.

4 4 5 5 5 5

K C AP C C C

25. 26. 27.

5 5 5

C C C.

10. 11. 12.

5 5 5

AP AP AP

13. 14.

6* 6*

AP AP

13. 14.

4 2, 4

C C

17. 18.

5 5

AP AN

15. 16.

5 5

AP AP

19. 20.

6* 6*

AP AP

7. 8.

5 2, 6*

AN AP

2, 6*

1. 2. 3.

1 1 1

AP AP AP

4. 5. 6.

2 2 2

AP AN AP

1. 2a.

1 2

C AP

2b. 3.

2 3

AP AP

1. 2.

1 1

C C

5. 6.

2 2

AP AN

3. 4.

1 2

AP C

7. 8

3 3

AP AP

Brief Exercises 7. 3 AP 8. 3 AP 9. 4 AP Do It! Exercises 4. 4 C 5. 5 AP Exercises 9. 1, 2, 3 AN 10. 1, 2, 3, C 4 11. 4 AN 12. 4 AN Problems: Set A

1. 1 2. 2, 3, 5

C AP

3. 3 AP 4. 1, 2, 3, AP 5

5. 6.

4, 5 4

AP AP

*Continuing Cookie Solutions for this chapter are available online.

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9-1

ASSIGNMENT CLASSIFICATION TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Determine acquisition costs of land and building.

Simple

20–30

Journalize equipment transactions related to purchase, sale, retirement, and depreciation.

Moderate

40–50

Journalize entries for disposal of plant assets.

Moderate

20–30

Record property, plant and equipment transactions; prepare partial balance sheet

Moderate

40–50

Prepare entries to record transactions related to acquisition and amortization of intangibles; prepare the intangible assets section and note.

Moderate

30–40

Prepare entries to correct errors in recording and amortizing intangible assets.

Moderate

15–20

Calculate and comment on return on assets, profit margin, and asset turnover.

Moderate

15–20

*8A

Compute depreciation under different methods.

Simple

30–40

*9A

Compute depreciation under different methods.

Moderate

30–40

9-2

Kimmel, Financial Accounting, 8/e, Solutions Manual

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ANSWERS TO QUESTIONS 1.

For plant assets, the historical cost principle states that plant assets are recorded at cost, which consists of all expenditures necessary to acquire the asset and make it ready for its intended use.

LO 1 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting 2.

In a cash transaction, cost is equal to the cash paid. In a noncash transaction, cost is equal to the cash equivalent price paid, which is the fair value of the asset given up or the fair value of the asset received, whichever is more clearly determinable.

LO 1 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting 3.

When only the land is to be used, all demolition and removal costs of the building less any proceeds from salvaged materials are necessary expenditures to make the land ready for its intended use. Any costs for clearing, draining, filling, and grading are also part of the cost of the land. Also any back taxes are also included in the cost of the land. When both the land and building are to be used, necessary costs of the building include remodeling expenditures and the cost of replacing or repairing the roofs, floors, wiring, and plumbing.

LO 1 BT: C Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Reporting 4.

Ordinary repairs are made to maintain the operating efficiency and expected productive life of the asset. Capital expenditures are additions and improvements made to increase efficiency, productive capacity, or expected useful life of the asset. Ordinary repairs are recognized as expenses when incurred; capital expenditures are generally debited to the plant asset affected.

LO 1 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting 5.

The potential benefits of leasing are (1) reduced risk of obsolescence (an obvious concern to Nolan), (2) little or no required down payment, (3) shared tax advantages, (4) assets and liabilities may not reported on the balance sheet.

LO 1 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting 6.

You should explain to the president that depreciation is a process of allocating the cost of a plant asset to expense over its service (useful) life in a rational and systematic manner. Recognition of depreciation is not intended to result in the accumulation of cash for replacement of the asset.

LO 2 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting 7.

(a) Salvage value is the expected cash value of the asset at the end of its useful life. (b) Salvage value is used in determining depreciable cost in the straight-line method by subtracting it from the plant asset’s cost.

LO 2 BT: C Difficulty: Essy TOT: 2 min. AACSB: None AICPA FC: Reporting

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9-3

(a) Useful life is expressed in years under the straight-line method and in units of activity under the units-of-activity method. (b) The pattern of periodic depreciation expense over an asset’s useful life is constant under the straight-line method and variable under the units-of-activity method.

LO 2 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting 9.

The effects of the three depreciation methods on annual depreciation expense are: Straightline—constant amount; units-of-activity—varying amounts; declining-balance—decreasing amounts.

LO 2 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting 10.

A revision of depreciation is made in current and future years but not retroactively. The rationale is that continual restatement of prior periods would adversely affect the reader’s confidence in the financial statements.

LO 2 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting 11.

In a sale of plant assets, the book value of the asset is compared to the proceeds received from the sale. If the proceeds of the sale exceed the book value of the plant asset, a gain on disposal occurs. If the proceeds of the sale are less than the book value of the plant asset sold, a loss on disposal occurs.

LO 3 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC; Reporting 12.

The plant asset and related accumulated depreciation should continue to be reported on the balance sheet without further depreciation or adjustment until the asset is retired. Reporting the asset and related accumulated depreciation on the balance sheet informs the reader of the financial statements that the asset is still being used by the company. However, once an asset is fully depreciated, even if it is still being used, no additional depreciation should be taken on this asset. In no situation can the depreciation on the plant asset exceed the cost of the plant asset.

LO 2, 4 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting 13.

Apple depreciates its buildings over the lesser of 30 years or the remaining life of the underlying building, and its machinery and equipment between 2 to 5 years.

LO 5 BT: AN Difficulty: Medium TOT: 4 min. AACSB: Analytic & Technology AICPA FC: Reporting & Technology 14.

Depreciation and amortization are both concerned with writing off the cost of an asset to expense over the periods benefited. Depreciation refers to allocating the cost of a plant asset to expense and amortization to allocating the cost of an intangible asset to expense.

LO 2, 4 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

9-4

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15.

It is true that successful marketing campaigns often benefit multiple accounting periods in the future, enhancing the company’s value, and potentially creating goodwill. However, from an accounting perspective Bruce’s proposal is unacceptable. First of all, accounting standards only allow the recording of “purchased goodwill” that results from the purchase of another business. Internally created goodwill is not allowed to be recorded. Second, marketing expenditures are to be treated as expenses of the period in which they are incurred. They cannot be capitalized. It is unethical to capitalize costs simply to boost reported income by spreading the cost over multiple periods.

LO 4 BT: C Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Reporting 16.

The intern is not correct. If an intangible asset has a limited life, the cost of the asset should be amortized over that asset’s useful life (the period of time when operations are benefited by use of the asset) or its legal life, whichever is shorter. The cost of intangible assets with indefinite lives should not be amortized.

LO 4 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting 17.

The favorable attributes which could result in goodwill include exceptional management, desirable location, good customer relations, skilled employees, high quality products, fair pricing policies, and harmonious relations with labor unions.

LO 4 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting 18.

Goodwill is the value of many favorable attributes that are intertwined in the business enterprise. Goodwill can be identified only with the business as a whole and, unlike other assets, cannot be sold separately. Goodwill can only be sold if the entire business is sold.

LO 4 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting 19.

Goodwill is recorded only when there is an exchange transaction that involves the purchase of an entire business. Goodwill is the excess of cost over the fair value of the net assets (assets less liabilities) acquired. The recognition of goodwill without an exchange transaction would lead to subjective valuations which would reduce the reliability of financial statements. Goodwill is not amortized because it has an indefinite life. It remains at its original value as an intangible asset unless it is considered to be impaired. If it is impaired, it is written down.

LO 4 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

9-5

Questions Chapter 9 (Continued) 20.

Research and development costs present several accounting problems. It is sometimes difficult to assign the costs to specific projects, and there are uncertainties in identifying the extent and timing of future benefits. As a result, research and development costs are usually recorded as an expense when incurred.

LO 4 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting 21.

Campbell Soup Company’s return on assets is computed as follows:

Net Income Average Total Assets

$736

= 11.7%

$6,265

LO 5 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Reporting 22.

The return on assets is closely monitored by management. It is the product of the profit margin and the asset turnover. At first glance, if this new product line has a lower profit margin, then it will reduce the company’s asset turnover. However, it is likely that it will have a higher turnover than the company’s more expensive offerings. As a consequence, it is not possible to know what effect the new product line will have on the company’s return on assets without knowing the expected effect on the company’s asset turnover.

LO 5 BT: AN Difficulty: Hard TOT: 5 min. AACSB: Analytic AICPA FC: Reporting 23.

(a) Grocery stores usually have a high asset turnover and a low profit margin. (b) Car dealerships normally have a low asset turnover and a high profit margin.

LO 5 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

24.

Since Peyton uses the straight-line depreciation method, its depreciation expense will be lower in the early years of an asset’s useful life as compared to using an accelerated method. Rogers’ depreciation expense in the early years of an asset’s useful life will be higher as compared to the straight-line method. Peyton’s net income will be higher than Rogers’ in the first few years of the asset’s useful life.

LO 2 BT: AN Difficulty: Medium TOT: 3 min. AACSB: Analytic AICPA FC: Reporting 25.

Yes, the tax regulations of the IRS allow a company to use a different depreciation method on the tax return than is used in preparing financial statements. Mesa Corporation uses an accelerated depreciation method for tax purposes to minimize its income taxes in the early years of the assets’ lives.

LO 2 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

9-6

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

26.

By selecting a higher estimated useful life, Gore Corp. is spreading the plant assets’ cost over a longer period of time. The depreciation expense reported in each period is lower and net income is higher. Ross’s choice of a shorter estimated useful life will result in higher depreciation expense reported in each period and lower net income.

LO 2 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting 27.

In the operating activities section of the statement of cash flows, depreciation expense (from plant assets) and amortization expense (from intangible assets) are added back to net income in the determination of net cash provided by operating activities. In the investing section, cash paid to purchase plant assets or intangible assets is shown as a use of cash. If the company sells any of its used plant assets, or if it sells intangibles, it would report the amount of cash received as a source of cash from investing activities.

LO 5 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

9-7

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 9-1 All of the expenditures should be included in the cost of the land. Therefore, the cost of the land is $73,900 ($60,000 + $5,000 + $2,100 + $3,300 + $3,500). LO 1 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 9-2 The cost of the truck is $26,780 (cash price $24,000 + sales taxes $1,080 + painting and lettering $1,700). The expenditures for insurance and motor vehicle license should not be added to the cost of the truck. LO 1 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 9-3 (a) Maintenance and Repairs Expense ........................ Cash ....................................................................

(b) Equipment ................................................................ Cash ....................................................................

400

38 400

LO 2 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 9-4 The depreciable cost is $27,000 ($31,000 – $4,000). With a 4-year useful life, annual depreciation is $6,750 ($27,000 ÷ 4). Under the straight-line method, depreciation is the same each year. Thus, depreciation is $6,750 for both the first and second years. LO 2 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

9-8

Kimmel, Financial Accounting, 8/e, Solutions Manual

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BRIEF EXERCISE 9-5 It is likely that management requested this accounting treatment to boost reported net income. Land is not depreciated; thus, by reporting land at $130,000 above its actual value the company increased yearly income by  $130,000  $6,500   or the reduction in depreciation expense. This practice  20 years  is not ethical because management is knowingly misstating asset values. LO 2 BT: AN Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 9-6 Book value, 1/1/17 ($36,000 – $13,600) ........................................... Less: Salvage value ........................................................................ Depreciable cost .............................................................................. Remaining useful life ....................................................................... Revised annual depreciation ($20,400 ÷ 2) .....................................

$22,400 2,000 $20,400 2 years $10,200

LO 2 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 9-7 (a) Accumulated Depreciation—Equipment ................ Equipment ...........................................................

41,000

(b) Accumulated Depreciation—Equipment ................ Loss on Disposal of Plant Assets .......................... Equipment ..........................................................

37,200 3,800

Cost of delivery equipment Less accumulated depreciation Book value at date of disposal Proceeds from sale Loss on disposal

41,000

$41,000 37,200 3,800 0 $ 3,800

LO 3 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

9-9

BRIEF EXERCISE 9-8 (a) 7/31/17 Depreciation Expense .............................. Accumulated Depreciation— Equipment ........................................

4,600

(b) 7/31/17 Accumulated Depreciation—Equipment .... Cash........................................................... Loss on Disposal of Plant Assets ........... Equipment ..........................................

46,600 21,000 4,400

Cost of office equipment Less accumulated depreciation Book value at date of disposal Proceeds from sale Loss on disposal

4,600

72,000

$72,000 46,600* 25,400 21,000 $ 4,400

*$42,000 + $4,600 LO 3 BT: AP Difficulty: Medium TOT: 7 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 9-9 (a) Amortization Expense ($156,000 ÷ 6) ..................... Patents ..............................................................

26,000

(b) Intangible Assets Patents (Net of $26,000 of amortization) .........

26,000 $130,000

LO 4 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 9-10 $4.55

(a) Return on assets =

= 15.5%

($28.46 + $30.22)÷2

(b) Asset turnover =

$22.74 = .78 times ($28.46 + $30.22) ÷ 2

LO 5 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement and Reporting

9-10

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 9-11 NIKE, INC. Partial Balance Sheet As of May 31, 2017 (in millions) Property, plant, and equipment Land ........................................................ Buildings ................................................ Machinery and equipment..................... Other plant assets ................................. Less: Accumulated depreciation ......... Total property, plant, and equip. .. Intangible assets Goodwill ................................................. Patents and trademarks ........................ $515.1 Less: Accumulated amortization ......... 47.7 Total intangible assets...................

$ 221.6 $ 974.0 2,094.3 965.8 2,298.0

1,736.1 1,957.7

193.5 467.4 660.9*

*Alternatively, many companies would simply show a single line for net intangibles. LO 5 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 9-12 In the determination of net cash provided by operating activities, add depreciation expense and amortization expense to net income: Net cash provided by = $157,000 + $12,000 + $8,000 = $177,000 operating activities LO 5 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

9-11

*BRIEF EXERCISE 9-13 The declining-balance rate is 50% (1/4 X 2) and this rate is applied to the book value at the beginning of the year. The computations are: Book Value Year 1 Year 2

$31,000 ($31,000 – $15,500)

Rate

Depreciation

50% 50%

$15,500 $ 7,750

LO 6 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

*BRIEF EXERCISE 9-14 The depreciation cost per unit is 18 cents per mile computed as follows: Depreciable cost ($27,500 – $500) ÷ 150,000 = $.18 Depreciation expense for each year is as follows: 2016 32,000 miles X $.18 = $5,760 2017 33,000 miles X $.18 = $5,940 LO 6 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

9-12

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO DO IT! EXERCISES DO IT! 9-1 The following four items are expenditures necessary to acquire the truck and get it ready for use: Negotiated purchase price ........................................ Installation of special shelving.................................. Painting and lettering ................................................. Sales tax ..................................................................... Total paid .........................................................

$24,000 1,100 900 1,440 $27,440

Thus, the cost of the truck is $27,440. The cost of the motor vehicle license is an operating cost and is expensed. The annual insurance policy would be recorded as prepaid insurance and then expensed over the year. LO 1 BT: C Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Reporting

DO IT! 9-2a Depreciation expense = Cost – Salvage = $15,000 – $1,000 = $1,400 Useful life 10 years The entry to record the first year’s depreciation would be: Depreciation Expense .......................................................... Accumulated Depreciation—Equipment ....................

1,400 1,400

LO 2 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

DO IT! 9-2b Original depreciation expense = ($50,000 – $2,000) ÷ 8 years = $6,000 Accumulated depreciation after three years = 3 X $6,000 = $18,000 Book value, $50,000 – $18,000 ............................................ Less: Salvage value ............................................................ Depreciable cost .................................................................. Remaining useful life ........................................................... Revised annual depreciation ($28,000 ÷ 7) .........................

$32,000 4,000 $28,000 7 years $ 4,000

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

9-13

DO IT! 9-3 (a)

(b)

Sale of machine for cash at a gain: Accumulated Depreciation—Equipment .................... Cash.............................................................................. Equipment ............................................................. Gain on Disposal of Plant Assets ........................ Sale of machine for cash at a loss: Accumulated Depreciation—Equipment .................... Cash.............................................................................. Loss on Disposal of Plant Assets .............................. Equipment ..............................................................

28,000 25,000 50,000 3,000 28,000 15,000 7,000 50,000

LO 3 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

DO IT! 9-4 1. 2. 3. 4. 5.

Intangible assets Amortization Franchise Research and development costs Goodwill

LO 4 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement

DO IT! 9-5 Asset turnover = $400,000/[($300,000 + $340,000)/2] = 1.25 times LO 5 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Measurement and Reporting

9-14

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO EXERCISES EXERCISE 9-1 (a)

The following points explain the application of the historical cost principle to plant assets. 1. 2. 3.

(b)

1. 2. 3. 4.

Under the historical cost principle, the acquisition cost for a plant asset includes all expenditures necessary to acquire the asset and make it ready for its intended use. Cost is measured by the cash paid in a cash transaction, or by the cash equivalent price paid when noncash assets are used in payment. The cash equivalent price is equal to the fair value of the asset given up or the fair value of the asset received, whichever is more clearly determinable. Land Equipment Equipment Land Improvements

5. 6. 7. 8.

Equipment Equipment Prepaid Insurance License Expense

LO 1 BT: C Difficulty: Medium TOT: 10 min AACSB: None AICPA FC: Measurement

EXERCISE 9-2 1. 2. 3. 4. 5. 6. 7. 8. 9.

Equipment Equipment Equipment Land Prepaid Insurance Land Improvements Land Improvements Land Building

LO 1 BT: C Difficulty: Medium TOT: 4 min AACSB: None AICPA FC: Measurement

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

9-15

EXERCISE 9-3 (a)

(b)

Cost of land Cash paid .................................................................. Net cost of removing warehouse ($8,200 – $1,700) ... Attorney’s fee ........................................................... Real estate broker’s fee ........................................... Total....................................................................

$80,000 6,500 1,900 5,200 $93,600

The architect’s fee ($9,100) should be debited to the building account. The cost of the driveways and parking lot ($14,000) should be debited to Land Improvements.

LO 1 BT: AP Difficulty: Medium TOT: 5 min AACSB: None AICPA FC: Measurement and Reporting

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

False. Depreciation is a process of cost allocation, not asset valuation. True. False. The book value of a plant asset may be quite different from its market value. False. Depreciation applies to three classes of plant assets: land improvements, building, and equipment. False. Depreciation does not apply to land because its usefulness and revenue-producing ability generally remain intact over time. True. False. Recognizing depreciation on an asset does not result in an accumulation of cash for replacement of the asset. True. False. Depreciation expense is reported on the income statement, and accumulated depreciation is reported as a deduction from plant assets on the balance sheet. True.

LO 2 BT: C Difficulty: Medium TOT: 10 min AACSB: None AICPA FC: Measurement

EXERCISE 9-5

 $90,000 – $8,000  Straight-line method:   = $10,250 per year. 8   2017 depreciation = $10,250 X 3/12 = $2,562.50 2018 depreciation = $10,250. LO 2 BT: AP Difficulty: Medium TOT: 5 min AACSB: Analytic AICPA FC: Reporting 9-16

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 9-6 (a)

Type of Asset Cost ........................................................ Less: Accumulated depreciation ......... Book value, 1/1/17 ................................. Less: Salvage value ............................. Depreciable cost (1) ..............................

Building $700,000 130,000 570,000 35,000 $535,000

Warehouse $120,000 23,000 97,000 3,600 $ 93,400

40*

15**

Revised remaining useful life in years (2) *(48 – 8)

**(20 – 5)

Revised annual depreciation (1) ÷ (2) (b) Dec. 31

$13,375

Depreciation Expense ............................ Accumulated Depreciation— Buildings .......................................

$6,227 13,375 13,375

LO 2 BT: AN Difficulty: Hard TOT: 15 min AACSB: Analytic AICPA FC: Reporting

EXERCISE 9-7 (a) Loss on Disposal of Plant Assets .......................... Accumulated Depreciation—Equipment.................. Equipment ........................................................

26,000 24,000

(b) Cash.......................................................................... Accumulated Depreciation—Equipment ................ Equipment ........................................................ Gain on Disposal of Plant Assets ...................

37,000 24,000

(c) Accumulated Depreciation—Equipment ................ Cash.......................................................................... Loss on Disposal of Plant Assets .......................... Equipment ........................................................

24,000 20,000 6,000

50,000

50,000 11,000

50,000

LO 3 BT: AP Difficulty: Medium TOT: 8 min AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

9-17

EXERCISE 9-8 Jan.

1 Accumulated Depreciation—Equipment ........... Equipment .....................................................

62,000

June 30 Depreciation Expense ........................................ Accum. Depreciation—Equipment ($36,000 X 1/3 X 6/12) .................................

6,000

Accumulated Depreciation—Equipment ($36,000 X 2/3 = $24,000; $24,000 + $6,000) ..... Cash .................................................................... Loss on Disposal of Plant Assets [$5,000 – ($36,000 – $30,000)] ......................... Equipment .....................................................

62,000

6,000 30,000 5,000 1,000 36,000

Dec. 31 Depreciation Expense ........................................ Accumulated Depreciation—Equipment [($25,000 – $4,000) X 1/5] ........................... 31 Accumulated Depreciation—Equipment [($25,000 – $4,000) X 4/5] ................................. Cash .................................................................... Equipment ..................................................... Gain on Disposal of Plant Assets ................

4,200 4,200 16,800 9,000 25,000 800

LO 3 BT: AP Difficulty: Hard TOT: 15 min AACSB: Analytic AICPA FC: Reporting

Exercise 9-9 (a) The amount paid for the equipment is $1, 100 Jan.1

Equipment ........................................................... Cash ...............................................................

1,100 1,100

(b) The amount of depreciation expense is $100 Dec. 31 Depreciation Expense ........................................ Accumulated Depreciation—Equipment .....

100

9-18

(For Instructor Use Only)

Kimmel, Financial Accounting, 8/e, Solutions Manual

100

EXERCISE 9-9 (Continued) (c) The amount of the gain on disposal is $50 and is derived from the disposal entry that follows. Dec. 31 Cash ..................................................................... Accumulated Depreciation—Equipment ........... Gain on Disposal ........................................... Equipment ......................................................

450 40 50 440

LO 1 – 3 BT: AN Difficulty: Hard TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 9-10 1.

Depreciation is the process of allocating the cost of a long-lived asset to expense over the asset’s useful life. Because the value of land generally does not decline with time and usage, its usefulness and revenue producing ability does not decline. In addition, the useful life of land is indefinite. Therefore, it would be incorrect for the student to depreciate the land.

Goodwill is an intangible asset with an indefinite life. According to generally accepted accounting principles, goodwill is not amortized but reviewed annually for impairment. If a permanent decline in value has occurred the goodwill is written down and an impairment loss is recorded on the income statement. Therefore the amortization entry should be reversed and no decline in value recorded until an impairment in value occurs.

This is a violation of the historical cost principle. Because current market values are subjective and not reliable, they are not used to increase the recorded value of an asset after acquisition. The appropriate accounting treatment is to leave the building on the books at its zero book value.

LO 1, 2, 3, 4 BT: C Difficulty: Medium TOT: 10 min. AACSB: None AICPA FC: Measurement

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

9-19

EXERCISE 9-11 Dec. 31 Amortization Expense ..................................... Copyright ($120,000 X 1/6) .......................

20,000

31 Amortization Expense ..................................... Patents ($54,000 X 1/4 X 10/12) ................

11,250

20,000 11,250

The goodwill would not require an adjusting entry because it has an indefinite life. LO 4 BT: AN Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 9-12 (a)

1/2/17

Patents ...................................................... Cash ....................................................

280,000

Franchise................................................... Cash ....................................................

540,000

Research and Development Expense ..... Cash ....................................................

185,000

Amortization Expense ............................................ Patents ($280,000 ÷ 5) ..................................... Franchise [($540,000 ÷ 9) X 6/12] ....................

86,000

7/1/17 9/1/17 (b)

(c)

280,000 540,000 185,000 56,000 30,000

Ending balances, 12/31/17: Patents = $224,000 ($280,000 – $56,000) Franchise = $510,000 ($540,000 – $30,000)

LO 4 BT: AN Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Reporting

9-20

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 9-13 Alliance Atlantis Communications Inc.’s change of accounting policy to amortize broadcast rights will probably increase its reported income. Prior to the change, Alliance Atlantis had amortized broadcast rights over a maximum of two years. Their new policy calls for amortization over the contracted exhibition period. If this is greater than two years, annual amortization expense will decrease and income will increase. A change of this nature will make comparison of financial results with previous years’ difficult. To evaluate the company’s performance one will need to make an adjustment for such changes in estimated lives. LO 4 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Measurement

EXERCISE 9-14 (a)

A company should depreciate its buildings because depreciation is necessary in order to allocate the cost of the buildings to the periods in which they are in use. This allows the cost of the buildings to be matched against the revenues generated each year in accordance with the expense recognition principle.

(b)

A building can have a zero book value if it has no salvage value and it is fully depreciated—that is, if it has been used for a period at least as long as its expected life. Because depreciation is used to allocate cost rather than to reflect actual value, it is not at all unlikely that a building could have a low or zero book value, but a substantial fair value.

(c)

Examples of intangibles that might be found on a college campus are a franchise of a bookstore chain, the license to operate a radio station, a patent developed by professors, and a permit to operate a bus service.

(d)

Typical company or product trade names are: Clothes—Gap, Gitano, Dockers, Calvin Klein, Chaus, Guess. Perfume—Passion, Ruffles, Chanel No. 5, Diamonds. Cars—Accord, Charger, Mustang, Corvette. Shoes—Nike, Florsheim, L.A. Gear, adidas. Breakfast cereals—Cheerios, Wheaties, Frosted Mini-Wheats, Rice Krispies.

Kimmel, Financial Accounting, 8/e, Solutions Manual

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9-21

EXERCISE 9-14 (Continued) Trade names and trademarks are reported on a balance sheet if there is a cost attached to them. If the trade name or trademark is purchased, the cost is the purchase price. If it is developed by the enterprise, the cost includes attorney’s fees, registration fees, design costs, successful legal defense costs, and other expenditures directly related to securing the trade name or trademark. LO 2, 4 BT: C Difficulty: Medium TOT: 15 min. AACSB: None AICPA FC: Measurement and Reporting

EXERCISE 9-15 $35,497 = 1.42 times ($25,633 + $24,244) ÷ 2

(a)

Asset turnover =

(b)

Return on assets =

$98 = .4% ($25,633 + $24,244) ÷ 2

LO 5 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement and Reporting

EXERCISE 9-16 (a)

Without new products

With new products

Return on assets

$500,000 = 10% $5,000,000

$960,000 = 8% $12,000,000

Profit margin

$500,000 = 5% $10,000,000

$960,000 = 6% $16,000,000

Asset turnover

$10,000,000 = 2.0 $5,000,000

$16,000,000 = 1.3 $12,000,000

(b) The return on assets declined from 10% to 8%. This means that the company is not generating as much income from each dollar invested in assets. It is common for companies to try to maximize their return on assets, thus top management might not find this proposal very desirable. The new product line would increase the company’s profit margin (the amount of net income generated from each dollar of sales) from 5% to 6%. However, because of the huge investment in new assets that the proposal requires, the asset turnover plummets from 2.0 times down to 1.3 times. LO 5 BT: AP Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Measurement and Reporting 9-22

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 9-17 (a) ($ in millions) 1. Return on assets

$264.8 = 6.2% ($4,312.6 + $4,254.3) ÷ 2

2. Asset turnover

$11,408.5 = 2.7 times ($4,312.6 + $4,254.3) ÷ 2

3. Profit margin

$264.8 = 2.3% $11,408.5

(b) Profit Margin X Asset Turnover = Return on Assets = 2.3% X 2.7 times = 6.2% (c) Asset turnover and profit margin vary considerably across industries. Therefore, when you have a diverse group of businesses from several industry types combined into one company, such as in Linley Company, the ability to compare these ratios to other businesses becomes very difficult. Linley Company would almost need to calculate ratios for each of the separate industry segments to allow for a meaningful analysis. LO 5 BT: AP Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Measurement and Reporting

EXERCISE 9-18 Net Income

10-year life $58,000

15-year life $102,000*

*$58,000 + ($132,000 – $88,000) Calculation of net cash provided by operating activities: 10-year Net income $ 58,000 Plus: depreciation expense 132,000 Net cash provided by operating activities $190,000

Kimmel, Financial Accounting, 8/e, Solutions Manual

15-year $102,000 88,000 $190,000

(For Instructor Use Only)

9-23

EXERCISE 9-18 (Continued) The CEO is correct regarding the impact on net income. By increasing the expected useful life depreciation, expense would be lowered and net income would increase. However, this move would be appropriate only if, in fact, a 15-year life was a better estimate of the expected period of use. The CEO is incorrect in stating that cash provided by operating activities would be increased. Depreciation expense does not use up cash. Therefore, net cash provided by operating activities would be the same no matter what expected life was used. LO 5 BT: AN Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Measurement and Reporting

*EXERCISE 9-19 (a)

Depreciation cost per unit is $.575 per mile [($100,000 – $8,000) ÷ 160,000].

(b)

Computation

End of Year

Years

Annual Units of Depreciation Depreciation Accumulated Activity X Cost/Unit = Expense Depreciation

Book Value

2017 2018 2019 2020

40,000 52,000 41,000 27,000

$77,000 47,100 23,525 8,000

$.575 .575 .575 .575

$23,000 29,900 23,575 15,525

$23,000 52,900 76,475 92,000

LO 6 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

*EXERCISE 9-20 (a)

Declining-balance method: 2017 depreciation = $90,000 X 25%* X 3/12 = $5,625 Book value January 1, 2018 = $90,000 – $5,625 = $84,375 2018 depreciation = $84,375 X 25% = $21,093.75. *(1/8) X 2 = 25%

9-24

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 9-20 (Continued) (b)

Units-of-activity method:  $90,000 – $8,000    = $1.17 per hour 70,000  

2017 depreciation = 480 hours X $1.17 = $562 (rounded). LO 6 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

9-25

SOLUTIONS TO PROBLEMS PROBLEM 9-1A

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

Land

Building

Other Accounts

$ 23,000 33,000 640,000 $280,000 $29,000

Land Improvements

6,800

Land Improvements

6,400

Property Tax Expense

3,170 31,000 (12,000) $302,170

$696,000

LO 1 BT: C Difficulty: Easy TOT: 20 min. AACSB: Analytic AICPA FC: Measurement and Reporting

9-26

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 9-2A (a) April

Land ...................................................... 2,200,000 Cash ............................................... 2,200,000

May

Depreciation Expense .......................... Accumulated Depreciation— Equipment ($600,000 X 1/10 X 4/12)..............

20,000 20,000

Accumulated Depreciation— Equipment.......................................... Cash ...................................................... Equipment ...................................... Gain on Disposal of Plant Assets .........................................

440,000 170,000 600,000 10,000

Cost .......................................... $600,000 Accum. depr.—Equipment...... (440,000) [($600,000 X 1/10) X 7 + $20,000)]

Book value ............................... 160,000 Cash proceeds ........................ 170,000 Gain on disposal ..................... $ 10,000 June

Cash ...................................................... 1,600,000 Land................................................ 1,000,000 Gain on Disposal of Plant Assets ......................................... 600,000

July

Equipment............................................. 1,100,000 Cash ............................................... 1,100,000

Dec. 31

Depreciation Expense .......................... Accumulated Depreciation— Equipment ($700,000 X 1/10) ..... Accumulated Depreciation— Equipment.......................................... Equipment ......................................

Kimmel, Financial Accounting, 8/e, Solutions Manual

70,000 70,000 700,000 700,000

(For Instructor Use Only)

9-27

PROBLEM 9-2A (Continued) Cost ........................................ Accum. depr.—Equipment ($700,000 X 1/10 X 10) ........ Book value ............................. (b) Dec. 31

$700,000 (700,000) $ 0

Depreciation Expense ............................ Accumulated Depreciation— Buildings ($26,500,000 X 1/40) .....

662,500 662,500

Depreciation Expense ............................ 3,925,000 Accumulated Depreciation— Equipment ..................................... 3,925,000 $38,700,000* X 1/10 ............... $ 1,100,000 X 1/10 X 6/12 .....

$3,870,000 55,000 $3,925,000

*($40,000,000 – $600,000 – $700,000) (c)

ARNOLD CORPORATION Partial Balance Sheet December 31, 2018 Plant Assets* Land ......................................................... Buildings ................................................. Less: Accumulated depreciation— buildings ...................................... Equipment ............................................... Less: Accumulated depreciation— equipment .................................... Total plant assets ..............................

$ 4,200,000 $26,500,000 12,587,500 39,800,000

13,912,500

7,875,000

31,925,000 $50,037,500

*See T-accounts which follow.

9-28

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 9-2A (Continued) Land 12/31/17 04/01/18

3,000,000 2,200,000

12/31/18

Bal. 4,200,000

6/1/17

1,000,000

Buildings 12/31/17

26,500,000

12/31/18

Bal. 26,500,000

Equipment 12/31/17 07/01/18

40,000,000 1,100,000

12/31/18

Bal. 39,800,000

05/01/18 12/31/18

600,000 700,000

Accumulated Depreciation—Buildings 12/31/17 12/31/18

11,925,000 662,500

12/31/18

Bal. 12,587,500

Accumulated Depreciation—Equipment 05/01/18 12/31/18

440,000 700,000

12/31/17 5/1/18 12/31/18 12/31/18

5,000,000 20,000 70,000 3,925,000

12/31/18

Bal. 7,875,000

LO 2, 3, 5 BT: AP Difficulty: Medium TOT: 50 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

9-29

PROBLEM 9-3A Jan. 1 June 30

June 30

Dec. 31

Accumulated Depreciation—Equipment....... Equipment ................................................

71,000

Depreciation Expense .................................... Accum. Depreciation—Equipment ($30,000 X 1/5 X 6/12)............................

3,000

Cash ................................................................ Accumulated Depreciation—Equipment....... Equipment ................................................ Gain on Disposal of Plant Assets ...........

12,000 21,000

Cost ................................................................. Accumulated Depreciation—Equipment [($30,000 X 1/5) X 3 + $3,000] ...................... Book Value ...................................................... Cash Proceeds ............................................... Gain on Disposal ............................................

$30,000

Depreciation Expense .................................... Accumulated Depreciation—Equipment [($33,400 – $3,000) X 1/8] ......................

3,800

Loss on Disposal of Plant Assets ................. Accumulated Depreciation—Equipment....... Equipment ................................................

10,600 22,800

Cost ................................................................. Accumulated Depreciation—Equipment [($33,400 – $3,000) X 1/8 X 6] ...................... Book Value ...................................................... Proceeds ......................................................... Loss on Disposal ............................................

$33,400

71,000

3,000

30,000 3,000

(21,000) 9,000 12,000 $ 3,000

3,800

33,400

(22,800) 10,600 0 $10,600

LO 3 BT: AP Difficulty: Medium TOT: 30 min. AACSB: Analytic AICPA FC: Reporting

9-30

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 9-4A (a)

April

May

June

July

Dec. 31

Land ............................................................... Cash ...................................................... Mortgage Payable .................................

4,400,000

Depreciation Expense .................................. Accumulated Depreciation—Equipment. ($2,800,000 ÷ 10 × 4/12 = $93,333)

93,333

Cash............................................................... Accumulated Depreciation—Equipment .... Loss on Disposal .......................................... Equipment .............................................

300,000 2,333,333 166,667

Cost Accumulated depreciation—equipment [($2,800,000 ÷ 10) × 8 + $93,333)] Carrying amount Cash proceeds Loss on disposal

$2,800,000

1,100,000 3,300,000

93,333

2,800,000

2,333,333 466,667 300,000 $ (166,667)

Cash............................................................... Notes Receivable .......................................... Land ....................................................... Gain on Disposal ..................................

900,000 2,700,000

Equipment ..................................................... Cash ......................................................

2,200,000

Depreciation Expense .................................. Accumulated Depreciation—Equipment ($1,000,000 ÷ 10 = $100,000)

100,000

Accumulated Depreciation—Equipment .... Equipment ................................................

1,000,000

Kimmel, Financial Accounting, 8/e, Solutions Manual

1,400,000 2,200,000

2,200,000

100,000

1,000,000

(For Instructor Use Only)

9-31

PROBLEM 9-4A (Continued) (b) Dec.

Depreciation Expense .................................... Accumulated Depreciation—Buildings . ($97,400,000 ÷ 40 = $2,435,000)

2,435,000

Depreciation Expense .................................... Accumulated Depreciation—Equipment

14,730,000

$146,200,000* ÷ 10 $2,200,000 ÷ 10 × 6/12

$14,620,000 110,000 $14,730,000

2,435,000

14,730,000

* $150,000,000 – $2,800,000 – $1,000,000 = $146,200,000 31

Interest Expense ............................................. Interest Payable ...................................... ($3,300,000 × 6% × 9/12 = $148,500)

148,500

Interest Receivable ......................................... Interest Revenue ..................................... ($2,700,000 × 5% × 7/12 = $78,750)

78,750

148,500

78,750

(c) YOUNGSTOWN Company Statement of Financial Position (Partial) December 31, 2017 Property, plant, and equipment1 Land.................................................................. Buildings .......................................................... Less: Accumulated depreciation ................... Equipment........................................................ Less: Accumulated depreciation ................... Total property, plant, and equipment .....

$ 23,000,000 $97,400,000 64,635,000 $148,400,000 65,590,000

32,765,000 82,810,000 $138,575,000

1 See T accounts on the following page.

9-32

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 9-4A (Continued) (c) (Continued) Land Jan. 1, 2017 April 1, 2017

20,000,000 4,400,000

Dec. 31, 2017

Bal. 23,000,000

June 1, 2017

1,400,000

Buildings Jan. 1, 2017

97,400,000

Dec. 31, 2017

Bal. 97,400,000

Equipment Jan. 1, 2017 July 1, 2017

150,000,000 2,200,000

Dec. 31, 2017

Bal. 148,400,000

May 1, 2017 Dec. 31, 2017

2,800,000 1,000,000

Accumulated Depreciation—Buildings Jan. 1, 2017 Dec. 31, 2017

62,200,000 2,435,000

Dec. 31, 2017

Bal. 64,635,000

Accumulated Depreciation—Equipment May 1, 2017 Dec. 31, 2017

2,333,333 1,000,000

Jan. 1, 2017 May 1, 2017 Dec. 31, 2017 Dec. 31, 2017

54,000,000 93,333 100,000 14,730,000

Dec. 31, 2017

Bal. 65,590,000

LO 1, 2, 3, 5 BT: AP Difficulty: Medium TOT: 50 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

9-33

PROBLEM 9-5A (a) Jan. 2

Patents ........................................................ Cash .......................................................

46,800 46,800

Jan.– June

Research and Development Expense ....... 230,000 Cash .......................................................

230,000

July 1

Patents ........................................................ Cash .......................................................

20,000 20,000

Advertising Expense .................................. Cash .......................................................

40,000

Sept. 1 Oct. 1 (b) Dec. 31

40,000

Copyright .................................................... 200,000 Cash ....................................................... Amortization Expense ................................ Patents................................................... [($60,000 X 1/10) + ($46,800 X 1/9) + ($20,000 X 1/20 X 6/12)]

11,700

Amortization Expense ................................ Copyrights............................................. [($36,000 X 1/10) + ($200,000 X 1/50 X 3/12)]

4,600

11,700

4,600

(c) Intangible Assets Patents ($126,800 cost less $17,700 amortization) (1) ......... Copyrights ($236,000 cost less $29,800 amortization) (2)..... Total intangible assets .................................................. (1) (2) (d)

200,000

$109,100 206,200 $315,300

Cost ($60,000 + $46,800 + $20,000); amortization ($6,000 + $11,700). Cost ($36,000 + $200,000); amortization ($25,200 + $4,600).

The intangible assets of Amato Corporation consist of two patents and two copyrights. One patent with a cost of $60,000 is being amortized over 10 years. In addition, legal costs of $46,800 incurred in the successful defense of this patent are being amortized over the remaining useful life, 9 years. The other patent with a cost of $20,000 is being amortized over 20 years. A copyright with a cost of $36,000 is being amortized over 10 years; the other copyright with a cost of $200,000 is being amortized over 50 years.

LO 4, 5 BT: AP Difficulty: Medium TOT: 40 min. AACSB: Analytic AICPA FC: Reporting 9-34

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 9-6A

Research and Development Expense ....................... 160,000 Patents ................................................................ Patents ........................................................................ Amortization Expense [$10,000 – ($40,000 X 1/20)] .............................

8,000

Goodwill ...................................................................... Amortization Expense ........................................

2,000

160,000

8,000 2,000

LO 4 BT: AP Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

9-35

PROBLEM 9-7A

(a)

(b)

Blythe

Jacke

Return on assets

$240,000 = 7.5% $3,200,000

$300,000 = 10.0% $3,000,000

Profit margin

$240,000 = 20.9% $1,150,000

$300,000 = 25.0% $1,200,000

Asset turnover

$1,150,000 = .36 times $3,200,000

$1,200,000 = .40 times $3,000,000

Based on the asset turnover, Jacke Corp. is more effective in using assets to generate sales. Its asset turnover is 11% higher than Blythe’s ratio. A factor that inhibits comparing the two companies is the differing composition of total assets for each company. Eighty-four percent [($2,400,000 + $300,000) ÷ $3,200,000] of Blythe’s total assets are plant or intangible assets compared to only sixty percent ($1,800,000 ÷ $3,000,000) for Jacke. Also, Jacke reports no intangible assets.

LO 5 BT: AN Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA FC: Measurement and Reporting

9-36

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 9-8A

(a) Year

Computation

Accumulated Depreciation 12/31

2015 2016 2017 2018

MACHINE 1 $84,000* X 1/8 = $10,500 $84,000 X 1/8 = $10,500 $84,000 X 1/8 = $10,500 $84,000 X 1/8 = $10,500

$10,500 21,000 31,500 42,000

*($96,000 – $12,000) 2016 2017 2018

MACHINE 2 $85,000 X 40%* X 6/12 = $17,000 $68,000 X 40% = $27,200 $40,800 X 40% = $16,320

$17,000 44,200 60,520

*(1/5) X 2 MACHINE 3 800 X $2.00a = $ 1,600 4,500 X $2.00 = 9,000 6,000 X $2.00 = 12,000

2016 2017 2018 a

(b)

$ 1,600 10,600 22,600

($66,000 – $6,000) ÷ 30,000 Year 2016

Depreciation Expense MACHINE 2 $85,000 X 40% X 9/12 = $25,500

2017

$59,500 X 40%

= $23,800

LO 2, 6 BT: AP Difficulty: Medium TOT: 40 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

9-37

*PROBLEM 9-9A (a)

STRAIGHT-LINE DEPRECIATION Computation Depreciable Years Cost X

End of Year

Annual Depreciation Depreciation Accumulated Rate = Expense Depreciation

2017 $220,000* 2018 220,000 2019 220,000 2020 220,000

25%** 25% 25% 25%

$ 55,000 55,000 55,000 55,000 $220,000

$ 55,000 110,000 165,000 220,000

Book Value $195,000 140,000 85,000 30,000

*($250,000 – $30,000) **1/4 = 25% DOUBLE-DECLINING-BALANCE DEPRECIATION Computation Book Value Beginning Years of Year X 2017 2018 2019 2020

$250,000 125,000 62,500 31,250

End of Year

Annual Depreciation Depreciation Accumulated Rate = Expense Depreciation 50%* 50% 50% 50%

$125,000 62,500 31,250 1,250** $220,000

$125,000 187,500 218,750 220,000

Book Value $125,000 62,500 31,250 30,000

*(1/4) X 2 = 50% **Adjusted so ending book value will equal salvage value.

(b)

Straight-line depreciation provides the lower amount for 2017 depreciation expense ($55,000) and, therefore, the higher 2017 income. Over the four-year period, both methods result in the same total depreciation expense ($220,000) and, therefore, the same total income.

(c)

Double-declining-balance depreciation provides the higher amount for 2017 depreciation expense ($125,000) and, therefore, the lower 2017 income. Both methods result in the same total income over the four-year period.

LO 2, 6 BT: AP Difficulty: Medium TOT: 40 min. AACSB: Analytic AICPA FC: Reporting 9-38

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

ACR9-1

(a)

ACCOUNTING CYCLE REVIEW

Dec. 2 2

Equipment ................................................... 16,800 Cash........................................................ Depreciation Expense ................................. Accumulated Depreciation— Equipment ...........................................

825

Cash ............................................................. Accumulated Depreciation—Equipment ... Equipment .............................................. Gain on Disposal of Plant Assets [$3,500 – ($5,000 – $2,250)] ................

3,500 2,625

15 Accounts Receivable .................................. Sales Revenue .......................................

5,000

Cost of Goods Sold ..................................... Inventory ................................................

3,500

23 Salaries and Wages Expense ..................... Cash........................................................

6,600

31 Bad Debt Expense ($4,000 – $500) ............. Allowance for Doubtful Accounts ........

3,500

Interest Receivable ($10,000 X .08 X 9/12) ............................... Interest Revenue ....................................

600

825

5,000 1,125 5,000 3,500 6,600 3,500

600

Insurance Expense ($3,600 X 4/6) .............. Prepaid Insurance..................................

2,400

Depreciation Expense ................................. Accumulated Depreciation—Building [($150,000 – $30,000) ÷ 30] .................

4,000

Depreciation Expense ................................. Accumulated Depreciation— Equipment [($55,000 – $5,500) ÷ 5] ....

9,900

Kimmel, Financial Accounting, 8/e, Solutions Manual

16,800

2,400

4,000

(For Instructor Use Only)

9,900 9-39

ACR 9-1 (Continued)

9-40

Depreciation Expense .................................... Accumulated Depreciation—Equipment [($16,800 – $1,800) ÷ 5] X 1/12 ...............

250

Amortization Expense ($9,000 ÷ 9) ................ Patent.........................................................

1,000

Salaries and Wages Expense ........................ Salaries and Wages Payable ....................

2,200

Interest Expense............................................. Interest Payable [($11,000 + $35,000) X .10] .....................

4,600

Income Tax Expense ...................................... Income Taxes Payable ..............................

15,000

250 1,000 2,200

4,600

Kimmel, Financial Accounting, 8/e, Solutions Manual

15,000

(For Instructor Use Only)

ACR 9-1 (Continued) (b)

MILO CORPORATION Adjusted Trial Balance December 31, 2017 Debits Cash ................................................................... $ 2,100 Accounts Receivable ........................................ 41,800 Notes Receivable .............................................. 10,000 Interest Receivable............................................ 600 Inventory ............................................................ 32,700 Prepaid Insurance ............................................. 1,200 Land ................................................................... 20,000 Buildings ............................................................ 150,000 Equipment ......................................................... 71,800 Patent ................................................................. 8,000 Allowance for Doubtful Accounts .................... Accumulated Depreciation—Buildings............ Accumulated Depreciation—Equipment ......... Accounts Payable ............................................. Salaries and Wages Payable ............................ Notes Payable (due April 30, 2018) .................. Interest Payable ................................................. Notes Payable (due in 2023) ............................. Income Taxes Payable ...................................... Common Stock .................................................. Retained Earnings ............................................. Dividends ........................................................... 12,000 Sales Revenue ................................................... Interest Revenue ............................................... Gain on Disposal of Plant Assets .................... Bad Debt Expense ............................................. 3,500 Cost of Goods Sold ........................................... 633,500 Depreciation Expense ....................................... 14,975 Insurance Expense............................................ 2,400 Interest Expense ............................................... 4,600 Other Operating Expenses ............................... 61,800 Amortization Expense ....................................... 1,000 Salaries and Wages Expense ........................... 118,800 Income Tax Expense ......................................... 15,000 Total ............................................................ $1,205,775

Kimmel, Financial Accounting, 8/e, Solutions Manual

Credits

4,000 54,000 32,350 27,300 2,200 11,000 4,600 35,000 15,000 50,000 63,600 905,000 600 1,125

$1,205,775

(For Instructor Use Only)

9-41

ACR 9-1 (Continued) (c)

MILO CORPORATION Income Statement For the Year Ended December 31, 2017 Sales revenue ................................................... Cost of goods sold ........................................... Gross profit ....................................................... Operating expenses Salaries and wages expense...................... $118,800 Other operating expenses ..........................61,800 Depreciation expense ......................................14,975 Bad debt expense ....................................... 3,500 Insurance expense ..................................... 2,400 Amortization expense................................. 1,000 Total operating expenses................................. Income from operations ................................... Other revenues and gains Gain on disposal of plant assets ............... 1,125 Interest revenue .......................................... 600 Other expenses and losses Interest expense ......................................... Income before income taxes............................ Income tax expense.......................................... Net income ........................................................

$905,000 633,500 271,500

202,475 69,025 1,725 (4,600) 66,150 15,000 $ 51,150

MILO CORPORATION Retained Earnings Statement For the Year Ending December 31, 2017 Retained earnings, 1/1/17 .......................................... Add: Net income ...................................................... Less: Dividends ........................................................ Retained earnings, 12/31/17 ......................................

9-42

Kimmel, Financial Accounting, 8/e, Solutions Manual

$ 63,600 51,150 114,750 12,000 $102,750

(For Instructor Use Only)

ACR 9-1 (Continued) (d)

MILO CORPORATION Balance Sheet December 31, 2017

Current assets Cash ............................................................. $ 2,100 Accounts receivable ................................... $ 41,800 Less: Allowance for doubtful accounts ...... 4,000 37,800 Notes receivable .......................................... 10,000 Interest receivable ....................................... 600 Inventory ...................................................... 32,700 Prepaid insurance ....................................... 1,200 Total current assets ............................... 84,400 Property, plant, and equipment Land ............................................................. 20,000 Buildings ...................................................... $150,000 Less: Accum. depr.—buildings ................. 54,000 96,000 Equipment.................................................... 71,800 Less: Accum. depr.—equipment ............... 32,350 39,450 Total property, plant, and equipment ..... 155,450 Intangible assets Patents ......................................................... 8,000 Total assets ....................................................... $247,850 Current liabilities Notes payable (due April 30, 2018) ............ Accounts payable........................................ Income taxes payable ................................. Interest payable ........................................... Salaries and wages payable ....................... Total current liabilities........................... Long-term liabilities Notes payable (due in 2023) ....................... Total liabilities ................................................... Stockholders’ equity Common stock ............................................ Retained earnings ....................................... Total liabilities and stockholders’ equity ........

$ 11,000 27,300 15,000 4,600 2,200 60,100 35,000 95,100 50,000 102,750

152,750 $247,850

LO 1 – 5 BT: AP Difficulty: Hard TOT: 120 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

9-43

ACR9-2

ACCOUNTING CYCLE REVIEW

(a)

Date 2/1/2017

3/1/2017

3/28/2017

3/29/2017

3/31/2017

9-44

Account Titles Cash Unearned Service Revenue

Debit Credit 12,000 12,000

Equipment Cash Accounts Payable

9,600

Patents Cash

9,600

3,000 6,600

9,600

Account Receivable Service Revenue

140,000

Cash Accounts Receivable

133,000

Accounts Payable Cash

16,370

Operating Expenses Cash

97,525

140,000

133,000

16,370

97,525

Allowance for Doubtful Accounts Accounts Receivable

200

Depreciation Expense Accumulated Depreciation - Equipment [(11,000–1,000)/5) × (3/12)]

500

Cash Accumulated Depreciation - Equipment Loss on Disposal of Plant Assets Equipment

1,620 8,500 880

Kimmel, Financial Accounting, 8/e, Solutions Manual

200

500

11,000

(For Instructor Use Only)

ACR 9-2 (Continued) (b), (c), and (f)

Bal. Feb. 1 Mar. 29 Mar. 31

Cash 24,300 12,000 3,000 133,000 9,600 1,620 16,370 97,525 100

Feb. 1 Mar. 1 Mar. 29 Mar. 29 Adj Mar. 31

44,325

Bal. Mar. 28

Accounts Receivable 22,400 140,000 133,000 200

Mar. 29 Mar. 31

29,200 Allowance for Doubtful Accts 1,200 Bal. Mar. 31 200 800 Adj Mar. 31

1,800

Bal. Feb. 1

Equipment 20,000 9,600 11,000 Mar. 31

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

9-45

Accum Depreciation—Equipment 15,000 Bal. 500 Mar. 31 Mar. 31 8,500 505 Adj Mar. 31 7,505 Land Bal.

20,000

Bal.

Buildings 100,000 100,000

Accum Depreciation—Buildings 15,000 Bal. 750 Adj Mar. 31 15,750 Patents Mar. 1

9,600 80

Adj Mar. 31

9,520

Mar. 29

Accounts Payable 16,370 12,370 6,600

Bal. Feb. 1

2,600 9-46

Kimmel, Financial Accounting, 8/e, Solutions Manual

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Unearned Service Revenue 12,000 Feb. 1 Adj Mar. 31 2,000 10,000 Income Taxes Payable 12,258 Mar. 31 Adj.

12,258 Common Stock 90,000

Bal.

90,000 Retained Earnings 53,130

Bal.

53,130 Service Revenue 140,000 Mar. 28 2,000 Mar. 31 Adj. 142,000 Operating Expenses Mar. 29 97,525 Mar. 31 Adj. 100 97,625

Kimmel, Financial Accounting, 8/e, Solutions Manual

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9-47

Depreciation Expense Mar. 31 500 Mar. 31 Adj. 505 Mar. 31 Adj. 750 1,755 Loss on Disposal of Equip 31-Mar 880

880 Patent Amortization Exp Mar. 31 Adj. 80

80 Bad Debt Expense Mar. 31 Adj. 800

800 Income Tax Expense Mar. 31 Adj. 12,258

12,258

9-48

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

(d) and (g)

Accounts

Aberkonkie Corporation Trial Balance 3/31/17

Adjusted Trial Balance

Debit

Credit

Cash

44,425

44,325

Accounts receivable

29,200

Allowance for doubtful accounts

1,000

1,800

Land

20,000

Buildings

100,000

Acc. depreciation-buildings

15,000

Equipment

18,600

Acc depreciation-equipment

15,750 18,600

7,000

Patents

9,600

7,505 9,520

Accounts payable

2,600

Unearned service revenue

12,000

10,000

Income taxes payable

12,258

Common stock

90,000

Retained earnings

53,130

Service revenue

140,000

142,000

Operating expenses

97,525

97,625

Depreciation expense

500

1,755

Patent amortization expense

Bad debt expense

800

Loss on disp. of plant assets

880

Income tax expense

12,258

Total

320,730

335,043

(e) BANK RECONCILIATION Balance per Bank .......................................................... Add: Deposits in Transit 3/31/17 .................................. Less: Outstanding Checks ................................... #440 #454 #455 #456 Adjusted balance per bank Balance per books ........................................................ Less: Bank Service Charge .......................................... Adjusted balance per books Copyright © 2016 John Wiley & Sons, Inc.

Kimmel, Financial Accounting, 8/e, Solutions Manual

$64,594 1,620 $3,444 5,845 3,000 9,600

21,889 $44,325 $44,425 100 $44,325

(For Instructor Use Only)

9-49

Date Account titles 3/31/2017 Operating Expense Cash

Debit 100

100

Unearned Service Revenue Service Revenue ($12,000/12×2)

2,000 2,000

Bad Debt Expense Allowance for Doubtful Accounts {($26,000 × .04 = $1,040) + [($29,200 – $26,000) × .2375 = $760]} – $1,000

800

Depreciation Expense Accumulated Depreciation - Equipment (($9,000/10) × (3/12) = $225 + [($9,600 – $1,200)/5) × (2/12) = $280]

505

Depreciation Expense Accumulated Depreciation – Buildings (($100,000 – $10,000)/30) × (3/12)

750

Patent Amortization Expense Patents [($9,600/10) × (1/12)]

800

505

750

Income Tax Expense Income Taxes Payable

9-50

Credit

12,258 12,258

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

Aberkonkie Corporation Income Statement For the Quarter Ended 3/31/17 Service Revenue ........................................................... Operating expenses Operating Expenses .................................................. Depreciation Expense ............................................... Bad Debt Expense ..................................................... Amortization Expense ............................................... Total Expenses .............................................................. Income from Operations ............................................... Other Expenses and Losses Loss on Disposal ....................................................... Income before Taxes ..................................................... Income Tax Expense ................................................. Net Income .....................................................................

$142,000 $97,625 1,755 800 80 100,260 41,740 880 40,860 12,258 $28,602

Aberkonkie Corporation Retained Earnings Statement For the Quarter Ended 3/31/17 Retained Earnings, 1/1/17 ............................................. Add: Net Income ........................................................... Retained Earnings, 3/31/17 ...........................................

Kimmel, Financial Accounting, 8/e, Solutions Manual

$53,130 28,602 $81,732

(For Instructor Use Only)

9-51

Aberkonkie Corporation Balance Sheet 3/31/2017 Assets Current Assets Cash ............................................................... Accounts Receivable .................................... Less: Allowance for Doubtful Accounts ...... Total Current Assets .................... Property, Plant, and Equipment Land................................................................ Equipment ...................................................... Less: Accumulated Depreciation—Equip. ... Buildings ........................................................ Less: Accumulated Depreciation—Build. .... Total property, plant, & equip. ...................... Patents, less amortization ............................ Total Assets ..................................

$44,325 $29,200 1,800

27,400 71,725

20,000 $ 18,600 7,505 100,000 15,750

11,095 84,250 115,345 9,520 $196,590

Liabilities & Stockholder’s Equity Current Liabilities Accounts Payable ............................................. Unearned Revenue............................................. Income Taxes Payable ....................................... Total Liabilities ............................................ Stockholders’ Equity Common Stock ................................................... Retained Earnings.............................................. Total Liabilities and Stockholders’ Equity .

$ 2,600 10,000 12,258 $24,858 90,000 81,732

171,732 $196,590

LO 1 – 5 BT: AP Difficulty: Hard TOT: 120 min. AACSB: Analytic AICPA FC: Reporting

9-52

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

CT 9-1

FINANCIAL REPORTING PROBLEM

(All amounts are in millions) (a)

At September 27, 2014, total cost of property, plant and equipment was $39,015; book value was $20,624.

(b)

Depreciation is computed by use of the straight-line method over the estimated useful lives of the assets.

(c)

Depreciation and amortization was: 2014, $7,946; 2013, $6,757; 2012, $3,277.

(d)

Apple’s purchases of property, plant, and equipment were: 2014, $9,571; 2013, $8,165.

(e)

Goodwill and intangible assets with indefinite lives are not amortized, but rather tested for impairment annually. The company did not have any goodwill impairments during 2014, 2013, or 2012.

LO 1, 2, 4, 5 BT: AN Difficulty: Medium TOT: 20 min. AACSB: Analytic, Communication and Technology AICPA FC: Reporting AICPA PC: Communication

Kimmel, Financial Accounting, 8/e, Solutions Manual

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9-53

CT 9-2

COMPARATIVE ANALYSIS PROBLEM

(a)

Columbia Sports Wear

1. Return on assets 2. Profit margin 3. Asset turnover

$141,859 ($1, 792,209 + $1,605,588) / 2 $141,859 $2,100,590

= 8.4%

VF Corporation

$1,047,505 ($9,980,140 + $10,315,443) / 2 $1 ,047,505

= 6.8%

$12,154,784

$2,100,590 ($1,792, 809 + $1,605,588) ÷ 2

= 1.24 times

= 10.3%

= 8.6%

$12,154,784 ($9,980,140 + 10,315,443) ÷ 2

= 1.20 times

(b) The asset turnover measures how efficiently a company uses its assets to generate sales. It shows the dollars of sales generated by each dollar invested in assets. Both companies generated roughly the same asset turnover. However, VF Corporation was more effective in generating profit from its sales (8.6%) than Columbia Sportswear (6.8%). This resulted in VF Corporation generating a 22.6% higher return on assets than Columbia Sports Wear. LO 5 BT: AN Difficulty: Medium TOT: 25 min. Reporting AICPA PC: Communication

9-54

AACSB: Analytic and Communication

Kimmel, Financial Accounting, 8/e, Solutions Manual

AICPA FC:

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CT 9-3

COMPARATIVE ANALYSIS PROBLEM

(a)

Amazon.com

Return on assets

Profit margin

Asset turnover

$(241) ($54,505 + $40,159) / 2 $(241) $88,988

= (0.5)%

($54, 505 + $40,159) ÷ 2

$16,363 ($204,751 + $203,706) ÷ 2 $16,363

= (0.3)%

$88 ,988

Wal-Mart Stores

$485,651 = 1.88 times

= 8.0%

= 3.4%

$485,651 ($204,751 + $203,706) ÷ 2

= 2.38 times

(b) The asset turnover measures how efficiently a company uses its assets to generate sales. It shows the dollars of sales generated by each dollar invested in assets. Both companies generated an acceptable asset turnover. However, Wal-Mart was much more effective in generating profit from its sales (3.4) than Amazon (–0.3). This resulted in Wal-Mart generating a substantially higher return on assets than Amazon. LO 5 BT: AN Difficulty: Medium TOT: 25 min. Reporting AICPA PC: Communication

AACSB: Analytic and Communication

Kimmel, Financial Accounting, 8/e, Solutions Manual

AICPA FC:

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9-55

CT 9-4 (a)

INTERPRETING FINANCIAL STATEMENTS

Online retailers, such as Amazon, have large investments in sophisticated warehouses, but they have no money tied up in massive stores, such as those of Best Buy. This is would mean that, all else equal, an online retailer would have lower total assets, which would increase the asset turnover as well as the return on assets. We would also expect that the online retailer’s operating costs would be lower since it doesn’t incur salary and other costs of running a store. This should increase its net income, which would increase the profit margin ratio. 2017

(b)

Asset Turnover

Return on Assets

(c)

$1,277

Profit Margin

Profit Margin 2012 3.7% 2017 2.5%

2012

$50,272 $50,272

($17,849 + $18, 302) / 2

$30,848

($17,849 + $18, 302) / 2

Asset Turnover 2.78 2.78

= 3.7%

$30,848

= 2.78 times

$1,277

× × ×

$1,140

= 2.5%

($11,864 + $10,294) / 2

= 2.78 times

$1,140

= 7.1%

($11,864 + $10,294) / 2

= = =

= 10.3

Return on Assets 10.3 7.1%*

*Difference due to rounding. (d)

It is interesting to note that the asset turnover stayed the same, at 2.78 times between 2012 and 2017. This means that the company generates the same amount of sales per dollar invested in assets. However, the profit margin declined from 3.7% down to 2.5%. This means that the company previously generated 3.7 cents on each dollar of sales, but it now only generates only 2.5 cents. From the presentation in part (c) we can clearly see that the decline in the return on assets is due to the decline in the profit margin. This is consistent with the suggestion that the company is having a hard time competing with online retailers. The online retailers can offer lower prices because they have lower operating costs. Best Buy lowers its prices to meet the competitive, which then cuts into its profit margin.

LO 5 BT: AN Difficulty: Hard TOT: 30 min. AACSB: Analytic and Communication AICPA FC: Reporting AICPA PC: Communication

9-56

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 9-5

REAL-WORLD FOCUS

Answers will vary depending on the company chosen by student. LO 2, 5 BT: AN Difficulty: Medium TOT: 25 min. AACSB: Analytic, Technology and Communication AICPA FC: Reporting AICPA PC: Communication

Kimmel, Financial Accounting, 8/e, Solutions Manual

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9-57

CT 9-6

RESEARCH CASE

(a)

All of the companies have market values (that is, the total market price of all of their shares) that is less than the shareholders’ equity on their balance sheet. This means that the reported value of the company’s assets exceeds the fair value of those assets.

(b)

In most instances, when a company’s market value is less than its book value, the company needs to consider writing down its goodwill. It is hard to argue that a company has goodwill (which represents the amount by which fair value of a purchased asset exceeds its recorded value) when its market value is below its book value.

(c)

In order for goodwill to be present on a company’s balance sheet, that company must have purchased another business. If the amount paid for that other business exceeds the fair value of the identifiable assets acquired, then the difference is debited to goodwill.

(d)

The write-down of goodwill as part of an impairment adjustment (or the write-down of any asset) does not affect cash.

LO 4, 5 BT: S Difficulty: Hard TOT: 40 min. AACSB: Analytic, Technology and Communication AICPA FC: Measurement and Reporting AICPA PC: Communication

9-58

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 9-7

DECISION MAKING ACROSS THE ORGANIZATION

(a) (in thousands)

Proposed results Proposed results Current results without cannibalization with cannibalization

Return on assets

$12,000 = .12 $100,000

$13,500 = .135 $100,000

$12,000 = .12 $100,000

Profit margin

$12,000 = .27 $45,000

$13,500 = .225 $60,000

$12,000 = .24 $50,000

Asset turnover

$45,000 = .45 $100,000

$60,000 = .60 $100,000

$50,000 = .50 $100,000

(b)

If there is no cannibalization, return on assets increases from 12% to 13.5%. This occurs even though the profit margin decreases from 27% to 22.5% because the asset turnover increases significantly, from .45 times to .60 times. However, if there is cannibalization, the return on assets remains unchanged at 12% because the increase in the asset turnover is offset by the decrease in the profit margin.

(c)

Yes, there are other alternatives. Here are some examples. 1.

Increase spending on marketing in an effort to increase sales of the high end product, without offering the new, low-end product line. If this was successful it would increase the asset utilization, thus increasing the asset turnover and return on assets.

Consider marketing the new line under a different name, so as to minimize the cannibalization. This might substantially increase the marketing costs, and therefore reduce the profit margin. But the benefit of reducing cannibalization might make up for the increased marketing costs.

If neither of 1. or 2. seem feasible, they should consider closing a plant. This would increase the asset turnover and return on assets.

LO 5 BT: AN Difficulty: Hard TOT: 40 min. AACSB: Analytic and Communication AICPA FC: Reporting AICPA PC: Communication

Kimmel, Financial Accounting, 8/e, Solutions Manual

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9-59

CT 9-8

COMMUNICATION ACTIVITY

Answers will depend on the position selected by the student. Some points that should be considered include: 1.

Some relatively small companies may spend less on R&D because they must expense these costs. However, the vast majority of companies realize that for continued growth and stability, R&D expenditures are a high priority regardless of how they are recorded for accounting purposes. Requiring companies to expense R&D costs instead of allowing them to be capitalized could leave U.S. companies at a competitive disadvantage as compared to non-U.S. companies. U.S. companies may be more reluctant to invest millions of dollars on research and development since the costs would negatively impact their financial statements in the short-run.

The tangible future benefits of R&D costs may not be realized for several years, if ever. Conversely, the purchase of a long-lived asset (i.e., equipment, building) will provide benefits immediately as well as in future years. Accountants often employ an approach called conservatism which dictates that when reasonable doubt exists, a company should choose the option that has the least favorable affect on income. Expensing R&D costs is an example of applying conservatism.

LO 4 BT: AN Difficulty: Medium TOT: 30 min. Reporting AICPA PC: Communication

9-60

AACSB: Analytic and Communication

Kimmel, Financial Accounting, 8/e, Solutions Manual

AICPA FC:

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CT 9-9

ETHICS CASE

(a)

The stakeholders in this situation are: Wade Truman, president of Clean Aire Anti-Pollution Company. Kate Rollins, controller. The stockholders of Clean Aire Anti-Pollution Company. Potential investors in Clean Aire Anti-Pollution Company.

(b)

The intentional misstatement of the life of an asset or the amount of the salvage value is unethical for whatever the reason. There is nothing unethical per se about changing the estimates used for the life of an asset or of an asset’s salvage value if the change is an attempt to better match cost and revenues and is a better allocation of the asset’s depreciable cost over the asset’s useful life. In this case, it appears from the controller’s reaction that the revision in the life is intended only to improve earnings which would be unethical. The fact that the competition uses a longer life for its equipment is not necessarily relevant. The competition’s maintenance and repair policies and activities may be different. The competition may use its equipment fewer hours a year (e.g., one shift rather than two shifts daily) than Clean Aire Anti-Pollution Company.

(c)

Income before income taxes in the year of change is increased $155,000 ($387,500 – $232,500) by implementing the president’s proposed changes. Old Estimates Asset cost ............................................................. Estimated salvage ................................................ Depreciable cost .................................................. Depreciation per year (1/8) ..................................

$3,500,000 400,000 3,100,000 $ 387,500 Revised Estimates

Asset cost ............................................................. Estimated salvage ................................................ Depreciable cost .................................................. Depreciation taken to date ($387,500 X 2) .......... Remaining life in years ........................................ Depreciation per year ($2,325,000 ÷ 10) ..............

$3,500,000 400,000 3,100,000 775,000 2,325,000 10 years $ 232,500

Kimmel, Financial Accounting, 8/e, Solutions Manual

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9-61

CT 9-10

(a) 1 c

ALL ABOUT YOU

(b) For the most part, the value of a brand is not reported on a company’s balance sheet. Most companies are required to expense all costs related to the maintenance of a brand name. Also any research and development that went into the development of the related product is generally expensed. The only way significant costs related to the value of the brand are reported on the balance sheet is when a company purchases another company that has a significant tradename (brand). In that case, given an objective transaction, companies are able to assign value to the brand and report it on the balance sheet. A conservative approach is used in this area because the value of the brand can be extremely difficult to determine. It should be noted that international rules permit companies to report brand values on their balance sheets. LO 4, 5 BT: AN Difficulty: Medium TOT: 30 min. AACSB: Analytic and Communication AICPA FC: Reporting AICPA PC: Communication

9-62

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 9-11

FASB CODIFICATION ACTIVITY

(a) Capitalize is a term used to indicate that the cost would be recorded as the cost of an asset. That procedure is often referred to as deferring a cost, and the resulting asset is sometimes described as a deferred cost. (b)

Intangible assets are assets that lack physical substance. (The term intangible asset is used to refer to intangible assets other than goodwill.)

(c)

Codification reference 360-10-35-2 addresses the concept of depreciation accounting and the various factors to consider in selecting the related periods and methods to be used in such accounting. Generally accepted accounting principles (GAAP) require that the cost of a productive facility be spread over the expected useful life of the facility in such a way as to allocate it as equitably as possible to the periods during which services are obtained from the use of the facility (Codification reference 360-10-35-4).

LO 1, 2, 4 BT: S Difficulty: Medium TOT: 30 min. AACSB: Analytic, Technology and Communication AICPA FC: Measurement AICPA PC: Communication

Kimmel, Financial Accounting, 8/e, Solutions Manual

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9-63

CT 9-12

CONSIDERING PEOPLE, PLANET AND PROFIT

(a)

Airbus developed a wing attachment called a Sharklet that is designed to reduce fuel consumption. It is quite similar to a device that is sold by Aviation Partners called a Winglet. Aviation Partners has a patent on the device. Airbus filed a lawsuit against Aviation Partners claiming that the patent should be declared invalid.

(b)

Aviation Partners says that its Winglets will reduce fuel consumption by 5 to 7 percent. It says that the total amount of jet fuel that its device has saved is approximately 3 billion gallons.

(c)

Airbus and Aviation Partners were involved in discussions for about 5 years before they reached a memorandum of understanding to form a joint venture to design a device for use on Airbus aircraft. However, Airbus then developed the Sharklet, which Aviation Partners says violates its patent.

(d)

If Aviation Partners loses the lawsuit it would have to expense the cost of the lawsuit. It would also have to review the recorded value of its patent to determine whether the loss of the lawsuit has caused the value of the patent to be impaired.

LO 4 BT: S Difficulty: Medium TOT: 45 min. AACSB: Analytic, Technology and Communication AICPA FC: Measurement AICPA BB: Critical Thinking

9-64

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

IFRS CONCEPTS AND APPLICATION IFRS9-1 Component depreciation is a method of allocating the cost of a plant asset into separate parts based on the estimated useful lives of each component. IFRS requires an entity to use component depreciation whenever significant parts of a plant asset have significantly different useful lives. LO 7 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement and Reporting

IFRS9-2 Revaluation is an accounting procedure that adjusts plant assets to fair value at the reporting date. Revaluation must be applied annually to assets that are experiencing rapid price changes. LO 7 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement and Reporting

IFRS9-3 Both types of development expenditures relate to the creation of new products but one is expensed and the other is capitalized. Development costs incurred before a new product achieves technological feasibility are recorded as development expenses and appear as part of operating expenses on the income statement. Costs incurred after technological feasibility are recorded as development costs and appear as an intangible asset on the statement of financial position. LO 7 BT: C Difficulty: Easy TOT: 5 min. AACSB: None AICPA FC: Measurement and Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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9-65

IFRS9-4

(a)

INTERNATIONAL FINANCIAL STATEMENT ANALYSIS

Note 1.13 indicates that “Property, Plant and equipment is depreciated on a straight-line basis over its estimated useful life; the estimated useful lives are as follows: Buildings including investment property Machinery and equipment Leasehold improvements Producing vineyards

20 to 50 years 3 to 25 years 3 to 10 years 18 to 25 years

(b)

Note 5 indicates that “Brands, trade names and other intangible assets with indefinite useful lives as well as goodwill arising from acquisition have been subject to annual impairment testing. No significant impairment expense has been recognized in respect to these items during the course of fiscal year 2014.”

(c)

(1) Per Note 3.1, the balance of Accumulated amortization and impairment as of December 31, 2014 was 3,506 (EUR millions). (2) Per Note 6.1 the balance of Depreciation and impairment as of December 31, 2014 was 7,379 (EUR millions).

LO 7 BT: AN Difficulty: Medium TOT: 20 min. AACSB: Analytic, Technology and Communication AICPA FC: Reporting AICPA PC: Communication

9-66

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CHAPTER 10 Reporting and Analyzing Liabilities Learning Objectives 1. Explain how to account for current liabilities. 2. Describe the major characteristics of bonds. 3. Explain how to account for bond transactions 4. Discuss how liabilities are reported and analyzed. *5. Apply the straight-line method of amortizing bond discount and bond premium. *6. Apply the effective-interest method of amortizing bond discount and bond premium. *7. Describe the accounting for long-term notes payable.

Summary of Questions by Learning Objectives and Bloom’s Taxonomy Item

Item

19. 20. 21. 22. 23. 24.

4 4 4 4 4 4

K C C C C C

25. 26. 27. 28. 29. 30. 31.

4 5* 5* 6* 6* 7* 7*

C C AP C C C C

13. 14. 15. 16.

4 4 4 5*

AP AP AN AP

17. 18. 19.

5* 6* 7*

AP AP AP

16. 17. 18. 19. 20.

4 4 4 4 3, 5

AP AN AN C AP

21. 22. 23. 24. 25.

3, 5 3, 6* 5, 6* 7* 7*

AP AP AP AP AP

11. 12.

3, 4, 6* 4, 7*

AP AP

13.

4, 7*

Questions 1. 2. 3. 4. 5. 6.

1 1 1 1 1 1

C C AP AP K C

7. 8. 9. 10. 11. 12.

1 2 2 2 2 2

K C AN C C K

13. 14. 15. 16. 17. 18.

2, 3 3 3 3 3 4

C C AP AP AP C

Brief Exercises 1. 2. 3. 4.

1 1 1 1

C AP AP AP

5. 6. 7. 8.

1 1 1 3

AP AP AP AP

9. 10. 11. 12.

3 3 3 4

AP AP AP AP

Do It! Exercises 1a. 1b.

1 1

AP AP

2. 3a.

2 3

C AP

3b. 4.

3 4

AP AN

Exercises 1. 2. 3. 4. 5.

1 1 1 1 1

AP AP AP AP AP

6. 7. 8. 9. 10.

1 1 3 3 3

AP AP AP AP AP

11. 12. 13. 14. 15.

3 3 3 3 4

AP AN AP AP AP

Problems: Set A 1.

1, 4

3, 4

3, 4, 5* 3, 4, 5*

2. 1, 4 AP 6. 4 AN 9. AP 3. 3 AP 7. 3, 5 AP 4. 3, 4 AP 10. 3, 6* AP *Continuing Cookie Solutions for this chapter are available online.

Kimmel, Financial Accounting, 8/e, Solutions Manual

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10-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number Description

Difficulty Level

Time Allotted (min.)

*1A

Prepare current liability entries, adjusting entries, and current liabilities section.

Moderate

30–40

*2A

Journalize and post note transactions; show balance sheet presentation.

Moderate

30–40

Prepare journal entries to record interest payments and redemption of bonds.

Moderate

30–40

Prepare journal entries to record issuance of bonds, interest, balance sheet presentation, and bond redemption.

Moderate

30–40

*5A

Prepare journal entries to record issuance of bonds, show balance sheet presentation, and record bond redemption.

Simple

30–40

Calculate and comment on ratios.

Moderate

30–40

*7A

Prepare journal entries to record interest payments, straight-line discount amortization, and redemption of bonds.

Moderate

30–40

**8A

Prepare journal entries to record issuance of bonds, interest, straight-line amortization, and balance sheet presentation.

Simple

30–40

**9A

Prepare journal entries to record issuance of bonds, interest, straight-line amortization, and balance sheet presentation.

Moderate

30–40

**10A

Prepare journal entries to record issuance of bonds, payment of interest, and amortization of bond discount using effective-interest method.

Moderate

30–40

**11A

Prepare journal entries to record issuance of bonds, payment of interest, effective-interest amortization, and balance sheet presentation.

Moderate

30–40

**12A

Prepare installment payments schedule, journal entries, and balance sheet presentation for a mortgage note payable.

Moderate

30–40

*13A

Prepare journal entries to record payments for long-term note payable, and balance sheet presentation.

Moderate

30–40

10-2

Kimmel, Financial Accounting, 8/e, Solutions Manual

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ANSWERS TO QUESTIONS 1.

While this is generally true, more precisely a current liability is a debt that can reasonably be expected to be paid: (a) from existing current assets or through the creation of other current liabilities and (2) within one year or the operating cycle, whichever is longer.

LO 1 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting 2.

In the balance sheet, Notes Payable of $20,000 and Interest Payable of $450 ($20,000 X 9% X 3/12) should be reported as current liabilities. In the income statement, Interest Expense of $450 should be reported under other expenses and losses.

LO 1 BT: AP Difficulty: Medium TOT: 3 min. AACSB: Analytic AICPA FC: Reporting 3.

(a) Disagree. The company only serves as a collection agent for the taxing authority. It does not report sales taxes as an expense; it merely forwards the amount paid by the customer to the government. (b) The entry to record the proceeds is: Cash ........................................................................................ Sales Revenue ................................................................. Sales Taxes Payable ........................................................

8,550 8,000 550

LO 1 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting 4.

(a) The entry when the tickets are sold is: Cash ........................................................................................ Unearned Ticket Revenue ................................................

900,000

(b) The entry after each game is: Unearned Ticket Revenue ........................................................ Ticket Revenue ................................................................

180,000

900,000

180,000

LO 1 BT: AP Difficulty: Medium TOT: 3 min. AACSB: Analytic AICPA FC: Reporting 5.

Three taxes commonly withheld by employers from employees’ gross pay are (1) federal income taxes, (2) state income taxes, and (3) social security (FICA) taxes.

LO 1 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting 6.

(a) Three taxes commonly paid by employers on employees’ salaries and wages are (1) social security (FICA) taxes, (2) state unemployment taxes, and (3) federal unemployment taxes. (b) Taxes withheld from employees’ gross pay and not yet remitted to the appropriate government agency are reported in the balance sheet as current liabilities.

LO 1 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

10-3

The liabilities that Apple identified as current are: Accounts payable, Accrued expenses, Deferred revenue, and Commercial paper.

LO 1 BT: AN Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting 8.

(a) Long-term liabilities are obligations that are expected to be paid after one year. Examples include bonds and long-term notes. (b) Bonds are a form of interest-bearing notes payable used by corporations, universities, and governmental agencies.

LO 2 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting 9.

(a) Secured bonds have specific assets of the issuer pledged as collateral. In contrast, unsecured bonds are issued against the general credit of the borrower. (b) Convertible bonds permit bondholders to convert them into common stock at their option. In contrast, callable bonds are subject to call and redemption at a stated dollar amount prior to maturity at the option of the issuer.

LO 2 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting 10.

(a) Face value is the amount of principal due at the maturity date. (b) The contractual interest rate is the rate used to determine the amount of cash interest the borrower pays and the investor receives. This rate is also called the stated interest rate because it is the rate stated on the bonds. (c)

A bond certificate is a legal document that indicates the name of the issuer, the face value of the bonds, and such other information as the contractual interest rate and maturity date of the bonds.

LO 2 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting 11.

(a) A convertible bond permits bondholders to convert it into common stock at the option of the bondholders. (b) For bondholders, the conversion option gives an opportunity to benefit if the market price of the common stock increases substantially. For the issuer, convertible bonds usually have: (1) a lower rate of interest than other debt securities, (2) a higher selling price.

LO 2 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting 12.

The two major obligations incurred by a company when bonds are issued are the interest payments due on a periodic basis and the principal which must be paid at maturity.

LO 2 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting 13.

Less than. Investors were required to pay more than the face value; therefore, the market interest rate is less than the contractual rate.

LO 3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

10-4

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

14.

No, Lee is not right. The market price on any bond is a function of three factors: (1) the dollar amounts to be received by the investor (interest and principal), (2) the length of time until the amounts are received (interest payment dates and maturity date), and (3) the market interest rate.

LO 3 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting 15.

$48,000. $800,000 X 6% X 1 year = $48,000.

LO 3 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Reporting 16.

$664,000. The balance of the Bonds Payable account minus the balance of the Discount on Bonds Payable account (or plus the balance of the Premium on Bonds Payable account) equals the carrying value of the bonds.

LO 4 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Reporting 17.

Debits: Credits:

Bonds Payable (for the face value) and Premium on Bonds Payable (for the unamortized balance). Cash (for 97% of the face value) and Gain on Bond Redemption (to balance entry).

LO 4 BT: AN Difficulty: Medium TOT: 3 min. AACSB: Analytic AICPA FC: Reporting 18.

Two issues need to be considered. First, by financing a major purchase such as this with shortterm financing the company will reduce its liquidity. In the case of Johnson Inc., its current ratio will decrease from 2.2:1 to a less acceptable level of 1.5:1. However, of equal concern is that by financing a long-term project with short-term financing the company is exposing itself to interest rate risk. The company has the choice of locking in a long-term rate of 8%, or continually refinancing at whatever the short-term rate is when its short-term debt matures. If short-term rates increase substantially the increase in interest expense could significantly reduce the company’s profitability.

LO 4 BT: AN Difficulty: Hard TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

10-5

Questions Chapter 10 (Continued) 19. (a) The nature and the amount of each long-term liability should be presented in the balance sheet or in schedules in the accompanying notes to the financial statements. The notes should also indicate the interest rates, maturity dates, conversion privileges, and assets pledged as collateral. (b) To evaluate liquidity a company may compute working capital and the current ratio. To evaluate long-run solvency a company may compute a debt to assets ratio, and a times interest earned ratio. LO 4 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting 20. No, Ernie is not correct. Liquidity involves measuring the short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash. Solvency involves measuring the ability of a company to survive over a long period of time. LO 4 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting 21. When companies are trying to overcome customer skepticism about the quality of their product they often consider providing a more generous warranty. While this may be effective in increasing sales, it is not without costs. Clearly a longer warranty will usually result in more warranty claims. Warranties are a contingent liability that must be accrued for each year. If the warranty period is extended, the size of this accrual could increase significantly. If the quality of the company’s product is not improved at the same time that the warranty is extended, it is quite possible that the increase in the estimated warranty accrual could exceed the increase in net income from expanded sales from the more generous warranty. LO 4 BT: AN Difficulty: Hard TOT: 5 min. AACSB: Analytic AICPA FC: Reporting 22. One alternative to purchasing the assets is to lease them through an operating lease agreement. In an operating lease, the lease payments are recorded as an expense. This allows the lessee to keep the leased assets and, more importantly, lease liabilities off the balance sheet (referred to as off-balance-sheet financing). Keeping lease liabilities off the balance sheet will have a favorable impact on the lessee’s liquidity and solvency ratios. Another option is to lease the assets through a capital lease agreement. However, in a capital lease the lessee must record the asset and a related liability for the lease payments. This treatment would impact liquidity and solvency ratios the same way the purchase of assets would. LO 4 BT: AN Difficulty: Hard TOT: 5 min. AACSB: Analytic AICPA FC: Reporting 23. Jon is not correct. In order to reduce costs, many companies today keep low amounts of inventory on hand. Consequently, liquidity ratios are generally lower than they used to be. Companies that keep fewer liquid assets on hand frequently rely on a bank line of credit. A line of credit allows a company to borrow money on a short-term basis to meet any cash shortfalls caused by a low amount of liquid assets. LO 4 BT: AN Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

10-6

Kimmel, Financial Accounting, 8/e, Solutions Manual

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24.

If a company has significant operating leases, most analysts would argue that its recorded assets and liabilities understate their true values. These analysts will increase the company’s liabilities and assets for the unrecorded operating leases. LO 4 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

25. Two criteria must be met: (1) the contingency must be probable and (2) the company must be able to arrive at a reasonable estimate. If these criteria are not met, the company should disclose the major facts concerning the contingency in the notes to its financial statements. LO 4 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting *26.

The straight-line method of amortization results in the same amortized amount being assigned to Interest Expense each interest period. This amount is determined by dividing the total bond discount or premium by the number of interest periods the bonds will be outstanding.

LO 5 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA: Reporting *27.

The total amount of interest expense is $10,800. Interest expense is the interest to be paid in cash less the premium amortization for the year. Cash to be paid equals 6% X $200,000 or $12,000. Total premium equals 3% of $200,000 or $6,000. Since this is to be amortized over 5 years (the life of the bonds) in equal amounts, the amortization amount is $6,000 ÷ 5 = $1,200. Thus, $12,000 – $1,200 or $10,800 is the interest expense for 2017.

LO 5 BT: AP Difficulty: Hard TOT: 5 min. AACSB: Analytic AICPA FC: Reporting *28.

Honore is probably indicating that since the borrower has the use of the bond proceeds over the term of the bonds, the borrowing rate in each period should be the same. The effective-interest method results in a varying amount of interest expense but a constant rate of interest on the balance outstanding. Accordingly, it results in a better matching of expenses with revenues than the straight-line method.

LO 6 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting *29.

Decrease. Under the effective-interest method the interest expense per period is determined by multiplying the carrying value of the bonds by the effective-interest rate. When bonds are issued at a premium, the carrying value decreases over the life of the bonds. As a result, the interest expense will also decrease over the life of the bonds because it is determined by multiplying the decreasing carrying value of the bonds at the beginning of the period by the effective-interest rate.

LO 6 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting *30.

The installment note requires equal payments. Each payment will pay any interest that has been incurred during the time that has past since the previous payment. The remaining amount of the payment will pay off part of the principal balance owed. Over time, as the principal is payed down, the amount of interest owed will decline, so that the principal payed off by each payment will increase.

LO 7 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting *31.

No, Tim is not right. Each payment by Tim consists of: (1) interest on the unpaid balance of the loan and (2) a reduction of loan principal. The interest decreases each period while the portion applied to the loan principal increases each period.

LO 7 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

10-7

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 10-1 (a) A note payable due in two years is a long-term liability, not a current liability. (b) $20,000 of the mortgage payable is a current maturity of long-term debt. This amount should be reported as a current liability. (c) Interest payable is a current liability because it will be paid out of current assets in the near future. (d) Accounts payable is a current liability because it will be paid out of current assets in the near future. LO 1 BT: C Difficulty: Easy TOT: 5 min. AACSB: None AICPA FC: Measurement and Reporting

BRIEF EXERCISE 10-2 (a) July 1 (b) Dec. 31

Cash.......................................................... Notes Payable ..................................

90,000

Interest Expense ...................................... Interest Payable ($90,000 X 7% X 6/12) ...................

3,150

90,000

3,150

LO 1 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 10-3 Sales tax payable (1) Sales = ($10,388 ÷ 1.06) = $9,800 (2) Sales taxes payable = ($9,800 X 6%) = $588 or $10,388 – $9,800 = $588 Mar. 16

Cash ................................................................. Sales Revenue.......................................... Sales Taxes Payable ................................

10,388 9,800 588

(Sales revenue = Total receipts ÷ (1 + sales tax rate)) LO 1 BT: AP Difficulty: Medium TOT: 7 min. AACSB: Analytic AICPA FC: Reporting 10-8

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 10-4 (a) Cash (3,500 X $80) .................................................. Unearned Ticket Revenue .............................. (To record sale of 3,500 season tickets)

280,000

(b) Unearned Ticket Revenue ...................................... Ticket Revenue ($280,000 ÷ 10)....................... (To record basketball ticket revenue earned)

28,000

280,000

28,000

LO 1 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 10-5 Gross earnings: Regular pay (40 X $16) ........................................... Overtime pay (7 X $24) ........................................... Gross earnings ............................................................... Less: FICA taxes payable ($808 X 7.65%) .................... Federal income taxes payable ........................... Net pay ............................................................................

$640.00 168.00

$808.00 $808.00

$ 61.81 95.00

156.81 $651.19

LO 1 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 10-6 Jan.

Jan.

Salaries and Wages Expense.................... FICA Taxes Payable ($808 X 7.65%) Federal Income Taxes Payable ........ Salaries and Wages Payable ............

808.00

Salaries and Wages Payable ..................... Cash...................................................

651.19

61.81 95.00 651.19 651.19

LO 1 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 10-7 Jan.

Payroll Tax Expense .................................. FICA Taxes Payable ($808 X 7.65%)

61.81 61.81

LO 1 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

10-9

BRIEF EXERCISE 10-8 Cash ($300,000 X .98)................................. Discount on Bonds Payable ...................... Bonds Payable .................................. (Cash received = Face value of bond X. 98)

294,000 6,000 300,000

LO 3 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 10-9 Cash ($400,000 X 1.01) ................................................... Bonds Payable .................................................. Premium on Bonds Payable............................. (Cash received = Face value of bond X 1.01)

404,000 400,000 4,000

LO 3 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 10-10 2017 (a) Jan. 1

(b) Dec. 31

2018 (c) Jan. 1

Cash ................................................... 3,000,000 Bonds Payable (3,000 X $1,000) ..................... 3,000,000 Interest Expense ....................... 210,000 Interest Payable ($3,000,000 X 7%) ............ 210,000 (Interest expense = Face value of bond X stated interest rate) Interest Payable ........................ Cash .....................................

210,000 210,000

LO 3 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

10-10

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 10-11 Bonds Payable ......................................................... Loss on Bond Redemption ($2,040,000 – $1,955,000) ..................................... Cash ($2,000,000 X 1.02) .................................. Discount on Bonds Payable ............................ (Cash paid = Face value of bond X 1.02)

2,000,000 85,000 2,040,000 45,000

LO 3 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 10-12 Long-term liabilities Bonds payable (due 2021)................................ Less: Discount on bonds payable .................. Notes payable (due 2019) ................................. Total long-term liabilities ..........................

$700,000 28,000

$672,000 80,000 $752,000

LO 4 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 10-13 O’BRIAN INC. Balance Sheet (Partial) December 31, 2017 Current liabilities Notes payable ............................................ Accounts payable ...................................... Unearned rent revenue ............................. Interest payable ......................................... FICA taxes payable.................................... Income taxes payable ............................... Sales taxes payable................................... Total current liabilities .......................... Long-term liabilities Bonds payable (due 2021) ........................ Less: Discount on bonds payable ........... Notes payable (due 2019).......................... Total long-term liabilities .................... Total liabilities ...................................................

$ 20,000 157,000 240,000 40,000 7,800 3,500 1,700 $ 470,000 900,000 41,000

859,000 80,000 939,000 $1,409,000

LO 4 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

10-11

BRIEF EXERCISE 10-14 (a) Working capital = $4,485 – $2,836 = $1,649 (b) Current ratio = $4,485 ÷ $2,836 = 1.58:1 (c) Debt to assets = $5,099 ÷ $8,875 = 57% (d) Times interest earned = ($245 + $113 + $169) ÷ $169 = 3.12 times (Times interest earned = (Net income + Income taxes + Interest expense) ÷ Interest expense) Working capital and the current ratio measure a company’s ability to pay maturing obligations and meet cash needs. adidas’s current assets are 58% larger than the amount of its current liabilities which indicates a relatively high degree of liquidity. Debt to assets and times interest earned measure a company’s ability to survive over a long period of time. adidas’s debt to assets ratio indicates that approximately $.57 of every dollar invested in assets was provided by creditors. adidas’s times interest earned ratio of 3.12 indicates that its earnings are adequate to make interest payments as they come due. LO 4 BT: AP Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Measurement and Reporting

BRIEF EXERCISE 10-15 (a) Debt to assets: Without operating leases

$14,180 = 59% $24,004

With operating leases

$14,180 + $740 = 60% $24,004 + $740

(b) CN does not have significant operating leases, therefore its assets and liabilities reflect its true financial position. By increasing its assets and liabilities for these operating leases we see that its debt to assets ratio increases only slightly from 59% to 60%. LO 4 BT: AN Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Measurement and Reporting

10-12

Kimmel, Financial Accounting, 8/e, Solutions Manual

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*BRIEF EXERCISE 10-16 (a) Jan. 1

Cash (99% X $2,000,000) ................. Discount on Bonds Payable............ Bonds Payable .........................

1,980,000 20,000 2,000,000

(b) Dec. 31

Interest Expense .............................. 142,000 Cash ($2,000,000 X 7%)............ 140,000 Discount on Bonds Payable ($20,000 ÷ 10) ......... 2,000 (Bond discount amortization = Discount ÷ Number of interest periods) LO 5 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

*BRIEF EXERCISE 10-17 (a) Jan. 1

Cash (102% X $4,000,000) ............... Bonds Payable.......................... Premium on Bonds Payable ....

4,080,000 4,000,000 80,000

(b) Dec. 31

Interest Expense ............................. 304,000 Premium on Bonds Payable ($80,000 ÷ 5) ............................. 16,000 Interest Payable ($4,000,000 X 8%)...................... 320,000 (Bond premium amortization = Premium ÷ Number of interest periods) LO 5 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

*BRIEF EXERCISE 10-18 (a) Interest Expense ............................................... Discount on Bonds Payable ..................... Cash ...........................................................

48,070 3,070 45,000

(b) Interest expense is greater than interest paid because the bonds sold at a discount. The bonds sold at a discount because investors demanded a market interest rate higher than the contractual interest rate. Interest expense is calculated using the effective interest rate which is higher than the stated rate used to compute the cash payment.

Kimmel, Financial Accounting, 8/e, Solutions Manual

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10-13

*BRIEF EXERCISE 10-18 (Continued) (c) Interest expense increases each period because the bond carrying value increases each period. As the market interest rate is applied to this bond carrying value, interest expense will increase. LO 6 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

*BRIEF EXERCISE 10-19 (A) Interest Period Issue Date 1 2017 Dec. 31 2018 June 30

Cash Payment

(B) Interest Expense (D) X 10%

$130,196

$80,000

$50,196

(D) Principal Balance (D) – (C) $800,000 749,804

Cash ...................................................... Mortgage Payable .......................

800,000

Interest Expense .................................. Mortgage Payable ................................ Cash .............................................

80,000 50,196

800,000

130,196

(See Illustration 10C-1) LO 7 BT: AP Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Reporting

10-14

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO DO IT! EXERCISES DO IT! 10-1a 1. $60,000 X 10% X 5/12 = $2,500 2. $42,000/1.05 = $40,000; $40,000 X 5% = $2,000 (Sales revenue = Total receipts ÷ (1 + sales tax rate)) 3. $42,000 X 2/6 = $14,000 LO 1 BT: AP Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Reporting

DO IT! 10-1b (a) To determine wages payable, reduce wages expense by the withholdings for FICA, federal income tax, and state income tax. Feb. 28 Salaries and Wages Expense ....................... FICA Taxes Payable .................................. Federal Income Taxes Payable ................ State Income Taxes Payable .................... Salaries and Wages Payable ....................

74,000 5,661 7,100 1,900 59,339

(b) Payroll taxes would be for the company’s share of FICA, as well as for federal and state unemployment tax. Feb. 28 Payroll Tax Expense ..................................... FICA Taxes Payable .................................. Federal Unemployment Taxes Payable ... State Unemployment Taxes Payable .......

5,931 5,661 110 160

LO 1 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

DO IT! 10-2 1. 2. 3. 4.

False. Convertible bonds can be converted into common stock at the bondholder’s option; callable bonds can be redeemed by the issuer at a set amount prior to maturity. True. True. True.

LO 2 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement

Kimmel, Financial Accounting, 8/e, Solutions Manual

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10-15

DO IT! 10-3a (a)

(b)

Cash ..................................................................... Bonds Payable ................................................ Premium on Bonds Payable........................... (To record sale of bonds at a premium)

315,000 300,000 15,000

Long-term liabilities Bonds payable ................................................ Plus: Premium on bonds payable.................

$300,000 15,000 $315,000

LO 3 BT: AP Difficulty: 5 min. AACSB: Analytic AICPA FC: Reporting

DO IT! 10-3b Bonds Payable..................................................... Loss on Bond Redemption ................................. Cash ($400,000 X 99%) ................................... Discount on Bonds Payable........................... (To record redemption of bonds at 99)

400,000 8,000 396,000 12,000

(Carrying value of the bond = Face value of the bond – Bond discount) LO 3 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

DO IT! 10–4 (a) Current ratio $11,500 ÷ $12,000 = .96:1 Working capital $11,500 – $12,000 = ($500) (b) Current ratio $8,500 ÷ $9,000 = .94:1 Working capital $8,500 –$9,000 = ($500) (c) Debt to assets ratio $26,000 ÷$38,000 = .68:1 Times interest earned ratio ($16,000 + $3,200 + $1,300) ÷$1,300 = 15.8 LO 4 BT: AN Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Measurement and Reporting

10-16

Kimmel, Financial Accounting, 8/e, Solutions Manual

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SOLUTIONS TO EXERCISES EXERCISE 10-1 2017 (a) June 1

Cash ........................................................... Notes Payable....................................

15,000 15,000

(b) June 30 Interest Expense ($15,000 X .08 X 1/12) ............................ 100 Interest Payable................................. (Monthly interest = Face value of note X interest rate X 1/12) (c) Interest payable accrued each month ...................... Number of months from borrowing to year end ............................................................. Balance in interest payable account ........................ 2018 (d) Jan. 1

Notes Payable ........................................... Interest Payable ........................................ Cash ...................................................

100

$100 X 7 $700 15,000 700 15,700

LO 1 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 10-2 (a) Principal X .08 X 4/12 = $480 Principal = $480 ÷ (.08 X 4/12) Principal = $18,000 ($480 = Face value of note X .08 X 4/12) (b) $18,500 X Interest Rate X 4/12 = $555 Interest Rate = $555 ÷ ($18,500 X 4/12) Interest Rate = 9 percent ($555 = $18,500 X Interest rate X 4/12) (c) Initial Borrowing: May 15

Cash ......................................................... Notes Payable ..................................

Kimmel, Financial Accounting, 8/e, Solutions Manual

18,000

(For Instructor Use Only)

18,000

10-17

EXERCISE 10-2 (Continued) Repayment: Sept. 15

Notes Payable ......................................... Interest Expense ..................................... Cash .................................................

18,000 480 18,480

LO 1 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 10-3 (a) June 1

Cash ............................................................ 60,000 Notes Payable .....................................

Interest Expense ($60,000 X .08 X 1/12) .... 400 Interest Payable .................................. (Interest expense = Face value of note X interest rate X 1/12)

60,000

(b) June 30

Notes Payable ............................................. 60,000 Interest Payable ($60,000 X .08 X 6/12) ..... 2,400 Cash ..................................................... (Interest payable = Face value of note X interest rate X 6/12)

400

62,400

(d) Interest expense accrued each month ........................ $ 400 Number of months of loan ........................................... X 6 Total interest expense .................................................. $2,400 LO 1 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 10-4 Apr. 10

CERVIQ COMPANY Cash ..................................................................... 23,100 Sales Revenue.............................................. Sales Taxes Payable .................................... QUARTZ COMPANY Cash ..................................................................... 13,780 Sales Revenue ($13,780 ÷ 1.06)................... Sales Taxes Payable ($13,780 – $13,000) ... (Sales revenue = Total receipts ÷ (1 + sales tax rate))

22,000 1,100

13,000 780

LO 1 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting 10-18

Kimmel, Financial Accounting, 8/e, Solutions Manual

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EXERCISE 10-5 (a) Mar. 31

(b) Mar. 31

Salaries and Wages Expense ............... FICA Taxes Payable....................... Federal Income Taxes Payable ..... State Income Taxes Payable ......... Union Dues Payable ...................... Salaries and Wages Payable .........

64,000

Payroll Tax Expense ............................. FICA Taxes Payable....................... State Unemployment Taxes Payable .......................................

5,596

4,896 7,500 3,100 400 48,104 4,896 700

LO 1 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 10-6 (a) $1,728,000 ÷ $320 = 5,400 season tickets sold. (b) $1,728,000 ÷ 16 home games = $108,000 revenue recognized per home game. $1,188,000 ÷ $108,000 = 11 home games already played. (c) Cash......................................................................... 1,728,000 Unearned Ticket Revenue .............................. 1,728,000 (d) Unearned Ticket Revenue ...................................... Ticket Revenue ................................................

108,000 108,000

LO 1 BT: AP Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 10-7 (a) Nov. (b) Dec. 31

Cash (6,300 X $28) ................................. Unearned Subscription Revenue..

176,400

Unearned Subscription Revenue ......... Subscription Revenue ($176,400 X 1/12) .........................

14,700

Kimmel, Financial Accounting, 8/e, Solutions Manual

176,400

14,700

(For Instructor Use Only)

10-19

EXERCISE 10-7 (Continued) (c) Mar. 31

Unearned Subscription Revenue ........ Subscription Revenue ($176,400 X 3/12) ........................

44,100 44,100

LO 1 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 10-8 2017 (a) Aug. 1

Cash ...................................................... Bonds Payable ..............................

600,000 600,000

(b) Dec. 31

Interest Expense ................................... 17,500 Interest Payable ($600,000 X 7% X 5/12) ............... 17,500 (Interest expense = Face value of bond X stated interest rate X 5/12)

2018 (c) Aug. 1

Interest Expense ($600,000 X 7% X 7/12) ...................... 24,500 Interest Payable .................................... 17,500 Cash ($600,000 X 7% X 12/12) ...... 42,000 (Interest expense = Face value of bond X stated interest rate X 7/12)

LO 3 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 10-9 (a) Jan. 1

(b) Dec. 31

Cash....................................................... Bonds Payable ..............................

300,000

Interest Expense ................................... Interest Payable ($300,000 X 8% X 12/12) .............

24,000

Interest Payable .................................... Cash ...............................................

24,000

300,000

24,000

LO 3 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

10-20

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 10-10 Cash ($600,000  1.03) ........................... Bonds Payable ................................ Premium on Bonds Payable ......... (Cash received = Face value of bond  1.03)

(a) Jan. 1

(b) Long-term Liabilities Bonds Payable, due 2027 ............................. Add: Premium on Bonds Payable ................

618,000 600,000 18,000

$600,000 10,800 $610,800

(c) The bonds sold for more than their face amount because the contract interest rate (6%) was higher than the market interest rate. When the contract rate is higher than the market rate, bonds will sell at a premium. LO 3 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 10-11 Cash ($500,000  .96) ........................... Discount on Bonds Payable ................. Bonds Payable ............................... (Cash received = Face value of bond  .96)

(a) Jan.

(b) Long-term Liabilities Bonds Payable, due 2032 .............................. Less: Discount on Bonds Payable ................

480,000 20,000 500,000

$500,000 12,000 $488,000

(c) The bonds sold for less than their face value because the contract interest rate (7%) was lower than the market interest rate. When the contract rate is lower than the market rate, the bonds will sell at a discount. LO 3 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 10-12 (a) The General Electric bonds were issued at a premium and the Boeing bonds were issued at a discount.

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

10-21

EXERCISE 10-12 (Continued) (b) The prices of the two bonds differed because bond price is based on the market rate of interest not the stated rate of interest. Market interest rates must have been different when the two bonds were issued causing the selling prices to differ. (c) Cash (111.12% X $800,000) ................................... Bonds Payable ................................................. Premium on Bonds Payable............................

888,960 800,000 88,960

Cash (99.08% X $800,000) ..................................... 792,640 Discount on Bonds Payable .................................. 7,360 Bonds Payable ................................................. (Cash received = Face value of bond X Issue price)

800,000

LO 3 BT: AN Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 10-13 2017 (a) Jan. 1 (b) Dec. 31

2018 (c) Jan. 1 2037 (d) Jan. 1

Cash....................................................... Bonds Payable ..............................

350,000

Interest Expense ................................... Interest Payable ($350,000 X 8% X 12/12) .............

28,000

Interest Payable .................................... Cash ...............................................

28,000

Bonds Payable ...................................... Cash ...............................................

350,000

28,000

350,000

LO 3 BT: AP Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 10-14 (a) April 30

Bonds Payable ..................................... 140,000 Loss on Bond Redemption ................. 14,900* Cash ($140,000 X 101%)............... 141,400 Discount on Bonds Payable* ($140,000 – $126,500) ............... 13,500 (Loss on redemption = Carrying value of bond – (face value of bond X 1.01)) 10-22

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 10-14 (Continued) (b) June 30

Bonds Payable ..................................... 170,000 Premium on Bonds Payable ............... 14,000 Cash ($170,000 X 98%) ................ 166,600 Gain on Bond Redemption .......... 17,400** (Gain on redemption = Carrying value of bond – (face value of bond X .98)) **$126,500 – (101% X $140,000) **$184,000 – (98% X $170,000) LO 3 BT: AP Difficulty: Hard TOT: 12 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 10-15 (a)

Account

Classification

Accounts payable Accrued pension liability Unearned rent revenue Bonds payable Current portion of mortgage payable Income taxes payable Mortgage payable Operating leases

Current liability Due within one year Long-term liability Relates to pensions. Not due within one year Current liability Due within one year Long-term liability Not due within one year Current liability Due within one year Current liability Due within one year Long-term liability Not due within one year N/A Not a balance sheet item—may be disclosed in notes Long-term liability Not due within one year

Notes payable (due in 2020) Salaries and wages payable Current liability Notes payable (due in 2018) Current liability Unused operating line of N/A credit Warranty liability—current

Reason

Current liability

Due within one year Due within one year Not a balance sheet item as unused—may be disclosed in notes Can be current and/or long-term depending on the length of the warranty. Given as current

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

10-23

EXERCISE 10-15 (Continued) (b)

SANCHEZ INC. Balance Sheet (Partial) December 31, 2017 (in thousands) Current liabilities Notes payable ............................................ Accounts payable ...................................... Current portion of mortgage payable ....... Warranty liability ........................................ Unearned rent revenue .............................. Salaries and wages payable ..................... Income taxes payable ................................ Total current liabilities .......................... Long-term liabilities Mortgage payable ...................................... Bonds payable ........................................... Accrued pension liability .......................... Notes payable ............................................ Total long-term liabilities ..................... Total liabilities ...................................................

$2,563.6 4,263.9 1,992.2 1,417.3 1,058.1 858.1 265.2 $12,418.4 $6,746.7 1,961.2 1,115.2 335.6 10,158.7 $22,577.1

LO 4 BT: AP Difficulty: Hard TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 10-16 Working capital = $3,416.3 – $2,988.7 = $427.6 Current ratio = $3,416.3 ÷ $2,988.7 = 1.14:1 Debt to assets ratio = $16,191.0 ÷ $30,224.9 = 54% Times interest earned = ($4,551.0 + $1,936.0 + $473.2) ÷ $473.2 = 14.71 times (Times interest earned = (Net income + Interest expense + Income taxes) ÷ Interest expense) (a) 1. 2. 3. 4.

A current ratio of 1.14 indicates lower liquidity. The debt to assets ratio indicates that $.54 of each dollar of assets have been financed by creditors. The times interest earned of over 14 times indicates that McDonald’s income is large enough to make required interest payments as they come due.

10-24

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 10-16 (Continued) (b) Debt to assets ratio, adjusted for off-balance-sheet lease obligations. $16,191.0 + $8,800 = 64% $30,224.9 + $8,800 By including these off-balance-sheet obligations the debt to assets ratio increases from 54% to 64%, suggesting that McDonald’s is not as solvent as it first appears. LO 4 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Measurement and Reporting

EXERCISE 10-17 (a) Current ratio 2017 2016

$10,795 ÷ $4,897 = 2.20:1 $9,598 ÷ $5,839 = 1.64:1

(b) Current ratio $10,495 ÷ $4,597 = 2.28:1 It would make its current ratio increase from 2.20 to 2.28. LO 4 BT: AN Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement and Reporting

EXERCISE 10-18 (a) Current ratio 2017 2016

$6,244 ÷ $4,503 = 1.39:1 $3,798 ÷ $2,619 = 1.45:1

(b) Current ratio ($6,244 – $1,500) ÷ ($4,503 – $1,500) = 1.58:1 It would make its current ratio increase (from 1.39:1 to 1.58:1). (c) The liquidity ratios would not change but having access to a line of credit means that cash is available on a short-term basis and therefore the assessment of the company’s short-term liquidity would improve. LO 4 BT: AN Difficulty: EASY TOT: 7 min. AACSB: Analytic AICPA FC: Measurement and Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

10-25

EXERCISE 10-19 (a)

The company does not have to record these contingent liabilities because they have determined that they are not likely to occur and the impact would be immaterial in any event.

(b) For financial statement users it is important to understand the possible implications that the contingent liabilities could have on the financial results of the company. If the contingent liabilities result in material losses for the company it will negatively impact the company’s financial results and affect the decisions made by the users of the financial statements. LO 4 BT: C Difficulty: Medium TOT: 6 min. AACSB: None AICPA FC: Reporting

*EXERCISE 10-20 2017 (a) Jan. 1

Cash ($500,000 X 103%) ...................... Bonds Payable ............................. Premium on Bonds Payable ........ (Cash received = Face value of bond X 1.03)

515,000 500,000 15,000

(b) Dec. 31

Interest Expense .................................. 29,500 Premium on Bonds Payable ($15,000 X 1/30) ................................. 500 Interest Payable ($500,000 X 6%) ......................... 30,000 (Amortization of premium = Premium on bonds payable ÷ Number of interest periods) 2018 (c) Jan. 1

2047 (d) Jan. 1

Interest Payable ................................... Cash ..............................................

30,000

Bonds Payable ..................................... Cash ..............................................

500,000

30,000

500,000

LO 3, 5 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

10-26

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

*EXERCISE 10-21 2016 (a) Dec. 31

Cash ...................................................... Discount on Bonds Payable ................ Bonds Payable ..............................

288,000 12,000 300,000

2017 (b) Dec. 31

Interest Expense ................................... 24,800 Cash ($300,000 X 8%) ................... 24,000 Discount on Bonds Payable ($12,000 X 1/15) .......................... 800 (Amortization of discount = Discount on Bonds Payable ÷ Number of interest periods) 2031 (c) Dec. 31

Bonds Payable ...................................... Cash ...............................................

300,000 300,000

LO 3, 5 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

*EXERCISE 10-22 2017 (a) Jan. 1

Cash ........................................................ Discount on Bonds Payable.................. Bonds Payable ...............................

360,727 39,273 400,000

(b) Dec. 31

Interest Expense (360,727 X 8%) .......... 28,858 Interest Payable ($400,000 X 7%) ........................... 28,000 Discount on Bonds Payable .......... 858 (Interest expense = Carrying value of bond X effective interest rate)

2018 (c) Jan. 1

Interest Payable ..................................... Cash ................................................

28,000 28,000

For explanation of calculations, see the following table.

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

10-27

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

10-28

28,000 28,000

28,858 28,927

(B) Interest Expense to Be Recorded Interest to (8% X Preceding Be Paid Bond Carrying Value) (7% X $400,000) [(E) X .08]

(A)

858 927

Unamortized Discount (D) – (C)

Discount Amortization (B) – (A)

39,273 38,415 37,488

(D)

(C)

LO 3, 6 BT: AP Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Reporting

Issue date 1 2

Interest Periods

(b), (c)

360,727 361,585 362,512

Bond Carrying Value [$400,000 – (D)]

(E)

*EXERCISE 10-22 (Continued)

10-27

*EXERCISE 10-23 2017 (a) Jan. 1

Cash ....................................................... Bonds Payable ............................... Premium on Bonds Payable ..........

407,968 380,000 27,968

(b) Dec. 31

Interest Expense ($407,968 X 6%) ........ 24,478 Premium on Bonds Payable ................. 2,122 Interest Payable ($380,000 X 7%) ........................... 26,600 (Interest expense = Carrying value of bond X effective interest rate)

2018 (c) Jan. 1

Interest Payable ..................................... Cash ................................................

26,600 26,600

For explanation of calculations, see the following table.

10-29

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

Kimmel, Financial Accounting, 8/e, Solutions Manual

26,600 26,600

24,478 24,351

(B) Interest Expense to Be Recorded Interest to (6% X Preceding Be Paid Bond Carrying Value) (7% X $380,000) [(E) X .06]

(A)

27,968 25,846 23,597

Unamortized Premium (D) – (C)

Premium Amortization (A) – (B)

2,122 2,249

(D)

(C)

LO 3, 6 BT: AP Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Reporting

Issue date 1 2

Interest Periods

(b), (c)

407,968 405,846 403,597

Bond Carrying Value [$380,000 + (D)]

(E)

*EXERCISE 10-23 (Continued)

(For Instructor Use Only)

10-29

*EXERCISE 10-24 2017

2018

2019

Dec. 31

Dec 31

Dec. 31

Issuance of Note Cash ................................................. Mortgage Payable ....................

300,000

First Installment Payment Interest Expense ($300,000 X 10%) ......................... Mortgage Payable ........................... Cash..........................................

30,000 20,000 50,000

Second Installment Payment Interest Expense [($300,000 – $20,000) X 10%] ...... Mortgage Payable ........................... Cash.......................................... (A)

Annual Interest Period Issue date 12/31/18 12/31/19

300,000

28,000 22,000 50,000

Cash Payment

(B) Interest Expense (D X 10%)

$50,000 50,000

$30,000 28,000

$20,000 22,000

(D) Principal Balance (D) – (C) $300,000 280,000 258,000

LO 7 BT: AP Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

10-31

*EXERCISE 10-25 (A) Annual Interest Period 1/1/2017 1/1/2018

Cash Payment

(B) Interest Expense (D) X 10%

$8,137

$5,000

$3,137

(D) Principal Balance (D) – (C) $50,000 46,863

WAITE CORPORATION Balance Sheet (Partial) December 31, 2017 Current liabilities Notes payable .............................................................................. Interest payable ...........................................................................

$3,137 5,000

Long-term liabilities Notes payable ..............................................................................

46,863

LO 7 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

10-32

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO PROBLEMS PROBLEM 10-1A

(a) Jan. 1 5

12 14

Cash ........................................................... Notes Payable....................................

18,000

Cash ........................................................... Sales Revenue ($6,254 ÷ 1.06) .......... Sales Taxes Payable ($6,254 – $5,900) ............................

6,254

Unearned Service Revenue ...................... Service Revenue ...............................

10,000

Sales Taxes Payable ................................. Cash ...................................................

6,600

18,000 5,900 354 10,000 6,600

Accounts Receivable ................................ 25,440 Sales Revenue ................................... Sales Taxes Payable (500 X $48 X 6%) ............................ (Sales revenue = Total cash receipts ÷ (1 + sales tax rate)) (b) Jan. 31

Interest Expense ....................................... Interest Payable ($18,000 X 5% X 1/12) ....................

Salaries and Wages Expense................... FICA Taxes Payable .......................... Federal Income Taxes Payable ........ State Income Taxes Payable ............ Salaries and Wages Payable ............

70,000

Payroll Tax Expense ................................. FICA Taxes Payable ..........................

5,355

Kimmel, Financial Accounting, 8/e, Solutions Manual

24,000 1,440

75 5,355 5,000 1,500 58,145

(For Instructor Use Only)

5,355

10-33

PROBLEM 10-1A (Continued) (c) Current liabilities Notes payable ................................................................. Accounts payable........................................................... Salaries and wages payable .......................................... FICA taxes payable ($5,355 X 2) .................................... Unearned service revenue ($19,000 – $10,000) ............ Federal income taxes payable ....................................... Sales taxes payable ....................................................... State income taxes payable........................................... Interest payable .............................................................. Total current liabilities............................................

$ 18,000* 42,500* 58,145* 10,710* 9,000* 5,000* 1,794* 1,500* 75 $146,724*

*($6,600 + $354 – $6,600 + $1,440) LO 1, 4 BT: AP Difficulty: Medium TOT: 40 min. AACSB: Analytic AICPA FC: Reporting

10-34

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 10-2A

(a) Sept. 1 30

Oct.

1 31

Nov.

Dec.

Inventory .................................................... Notes Payable .................................... Interest Expense ($12,000 X .06 X 1/12) ............................ Interest Payable ................................. Equipment.................................................. Notes Payable .................................... Interest Expense [($16,500 X .08 X 1/12) + $60] ................ Interest Payable ................................. Equipment.................................................. Notes Payable .................................... Cash.................................................... Interest Expense [($26,000 X .06 X 1/12) + $110 + $60] .... Interest Payable ................................. Notes Payable............................................ Interest Payable ......................................... Cash....................................................

12,000 12,000 60 60 16,500 16,500 170 170 34,000 26,000 8,000 300 300 12,000 180 12,180

Interest Expense ($110 + $130) ................ 240 Interest Payable ................................. 240 (Nov. 30 Interest expense = ($12,000 X .06 X 1/12) + ($16,500 X .08 X 1/12) + ($26,000 X .06 X 1/12)) (b) 12/1

Notes Payable 12,000 9/1 10/1 11/1

12,000 16,500 26,000

12/31 Bal. 42,500

12/1

Interest Payable 180 9/30 10/31 11/30 12/31 12/31 Bal.

Kimmel, Financial Accounting, 8/e, Solutions Manual

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60 170 300 240 590

10-35

PROBLEM 10-2A (Continued) Interest Expense 9/30 60 10/31 170 11/30 300 12/31 240 12/31 Bal. 770 (c) Current liabilities Notes payable ..................................................................... Interest payable ..................................................................

42,500 590

(d) Total interest expense is $770. See (b) above. LO 1, 4 BT: AP Difficulty: Medium TOT: 40 min. AACSB: Analytic AICPA FC: Reporting

10-36

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 10-3A

(a) Jan. 1

Interest Payable ................................ Cash ...........................................

40,000

Bonds Payable .................................. Loss on Bond Redemption .............. Cash ($200,000 X 103%) ........... (Cash received = Face value of bond X 1.03)

200,000 6,000

(b) Jan. 1

Interest Expense ............................... Interest Payable ($300,000 X 8%) ......................

40,000**

206,000 24,000 24,000

LO 3 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

10-37

PROBLEM 10-4A

2016 (a) Oct. 1

Cash................................................... Bonds Payable ..........................

700,000 700,000

(b) Dec. 31

Interest Expense ............................... 8,750 Interest Payable ($700,000 X 5% X 3/12) ........... (Interest expense = Face value of bond X Interest rate X 3/12)

(c) Current Liabilities Interest Payable ............................................ Long-term Liabilities Bonds Payable ..............................................

8,750

8,750 700,000

2017 (d) Oct. 1

Interest Expense ($700,000 X 5% X 9/12)................... 26,250 Interest Payable ................................ 8,750 Cash ($700,000 X 5%) ............... (Interest expense = Face value of bond X Interest rate X 9/12)

(e) Dec. 31

(f)

2018 Jan. 1

Interest Expense ............................... Interest Payable.........................

8,750

Interest Payable ................................ Cash ...........................................

8,750

35,000

8,750

Bonds Payable .................................. 700,000 Loss on Bond Redemption .............. 28,000 Cash ($700,000 X 104%)............ 728,000 Loss on redemption = Carrying value of bond – (Face value of bond X 1.04)) LO 3, 4 BT: AP Difficulty: Medium TOT: 30 min. AACSB: Analytic AICPA FC: Reporting

10-38

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 10-5A

2017 (a) Jan. 1

Cash ($6,000,000 X 98%) ............... Discount on Bonds Payable ......... Bonds Payable ....................... (Cash received = Face value of bond X .98)

5,880,000 120,000 6,000,000*

(b) Long-term Liabilities Bonds Payable, due 2032 ....................... Less: Discount on bonds payable ........

$6,000,000 112,000 $5,888,000*

2019 (c) Jan. 1

6,000,000

Bonds Payable ............................... Loss on Bond Redemption ($6,120,000 – $5,896,000) .......... Cash ($6,000,000 X 102%) ..... Discount on Bonds Payable ...............................

224,000 6,120,000* 104,000*

*$6,000,000 – $5,896,000 (Loss on redemption = Carrying value of bond – (Face value of bond X 1.02)) LO 3, 4 BT: AP Difficulty: Medium TOT: 30 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

10-39

PROBLEM 10-6A

(a) 1. Current ratio 2. Free cash flow 3. Debt to assets ratio 4. Times interest earned

2017 $2,893 ÷ $2,806 = 1.03:1 ($1,521) – $923 – $13 = ($2,457) $9,355 ÷ $14,308 = 65% $4081 ÷ $130 = 3.14 times

2016 $4,443 ÷ $4,836 = .92:1 $2,845 – $1,331 – $14 = $1,500 $9,831 ÷ $16,772 = 59% $1,1772 ÷ $119 = 9.89 times

1$178 + $100 + $130 = $408 2$645 + $413 + $119 = $1,177

(b) The company’s position as measured through all ratios except the current ratio has deteriorated. Southwest appears to be much less liquid and solvent when comparing 2017 to 2016. (c) Southwest’s use of operating leases (vs. capital leases) would reduce its solvency. If the leases were capital rather than operating, the balance sheet would include higher total assets and higher liabilities. Using the $1,600 as an estimate of the increase in liabilities and assets that would result if the operating leases were capital leases, the revised debt to assets ratio would be [($9,355 + $1,600) ÷ ($14,308 + $1,600)] = 69%. LO 4 BT: AN Difficulty: Medium TOT: 40 min. AACSB: Analytic AICPA FC: Measurement and Reporting

10-40

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

*PROBLEM 10-7A

2017 (a) Jan. 1

Interest Payable ................................ Cash ...........................................

96,000 96,000

(b) Dec. 31

Interest Expense ............................... 98,400 Interest Payable ($2,400,000 X 4%) .................. 96,000 Discount on Bonds Payable ($24,000 ÷ 10)......................... 2,400 (Amortization of discount = Discount on bonds payable ÷ Number of interest periods) 2018 (c) Jan. 1

Bonds Payable .................................. Loss on Bond Redemption .............. Cash ($400,000 X 102%) ........... Discount on Bonds Payable .....

400,000 11,600 408,000** 3,600**

*($24,000 – $2,400) X $400,000/ * $2,400,000 = $3,600 (Loss on redemption = Carrying value of bond – (Face value of bond X 1.02)) (d) Dec. 31

Interest Expense ............................... 82,000 Interest Payable ........................ 80,000** Discount on Bonds Payable ..... 2,000** (Amortization of discount = Remaining discount balance ÷ Remaining number of interest periods) **$24,000 – $2,400 – $3,600 = $18,000; **$18,000 ÷ 9 = $2,000 or **$2,400 X $2,000,000/$2,400,000 = $2,000 **($2,400,000 – $400,000 = $2,000,000; **($2,000,000 X 4% = $80,000) LO 3, 5 BT: AP Difficulty: Medium TOT: 40 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

10-41

*PROBLEM 10-8A

(a) Jan. 1

Cash ($2,000,000 X 102%) .............. Bonds Payable ........................ Premium on Bonds Payable ...

2,040,000 2,000,000 40,000

Dec. 31

Interest Expense ............................. 132,000 Premium on Bonds Payable ($40,000 ÷ 5) ............................... 8,000 Interest Payable ($2,000,000 X 7%) ................ 140,000 (Amortization of Premium = (Cash received – Face value of bond) ÷ Number of interest periods) (b) Jan. 1

Cash ($2,000,000 X 97%) ................ Discount on Bonds Payable .......... Bonds Payable ........................

1,940,000 60,000 2,000,000

Dec. 31

Interest Expense ............................. 152,000 Interest Payable....................... 140,000 Discount on Bonds Payable ($60,000 ÷ 5) .......... 12,000 (Amortization of discount = (Cash received – Face value of bond) ÷ Number of interest periods) (c) Premium Current Liabilities Interest payable ........................................ Long-term Liabilities Bonds payable, due 2022......................... Add: Premium on bonds payable ...........

$ 140,000 $2,000,000 32,000

2,032,000

Discount Current Liabilities Interest payable ........................................ Long-term Liabilities Bonds payable, due 2022......................... Less: Discount on bonds payable .........

$ 140,000 $2,000,000 48,000

1,952,000

LO 3 - 5 BT: AP Difficulty: Medium TOT: 40 min. AACSB: Analytic AICPA FC: Reporting 10-42

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

*PROBLEM 10-9A

(a) 1.

1/1/17

Cash ($3,000,000 X 103%) ....... Bonds Payable ................. Premium on Bonds Payable .........................

3,090,000 3,000,000 90,000

1/1/17

Cash ($3,000,000 X 98%) ......... 2,940,000 Discount on Bonds Payable................................. 60,000 Bonds Payable ................. 3,000,000 (Premium/discount = (Face value of bond X issue price) – Face value of bond) (b) See amortization tables on following page. (c) 1.

12/31/17

Interest Expense ...................... Premium on Bonds Payable................................. Interest Payable ...............

231,000 9,000 240,000

Interest Expense ...................... 246,000 Interest Payable ............... 240,000 Discount on Bonds Payable ......................... 6,000 (Amortization of premium/discount = (Cash received – Face value of bond) ÷ Number of interest periods) (d) 1.

12/31/17

Long-term Liabilities: Bonds Payable .................................... Plus: Unamortized Bond Premium ................................... Long-term Liabilities: Bonds Payable .................................... Less: Unamortized Bond Discount ..................................

Kimmel, Financial Accounting, 8/e, Solutions Manual

$3,000,000 81,000 $3,081,000 $3,000,000 54,000 $2,946,000

(For Instructor Use Only)

10-43

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

10-43

10-44

Issue date 1 2 3

$240,000 240,000 240,000

$246,000 246,000 246,000

(B) Interest Expense to Be Recorded (A) + (C)

$231,000 231,000 231,000

(B) Interest Expense to Be Recorded (A) – (C)

$6,000 6,000 6,000

$9,000 9,000 9,000

LO 3 - 5 BT: AP Difficulty: Hard TOT: 40 min. AACSB: Analytic AICPA FC: Reporting

Issue date 1 2 3

Annual Interest Periods

(A) Interest to Be Paid (8% X $3,000,000)

$240,000 240,000 240,000

Annual Interest Periods

(2)

(A) Interest to Be Paid (8% X $3,000,000)

(b), (1)

$3,090,000 3,081,000 3,072,000 3,063,000

$60,000 54,000 48,000 42,000

$2,940,000 2,946,000 2,952,000 2,958,000

(D) (E) Unamortized Bond Discount Carrying Value (D) – (C) [$3,000,000 – (D)]

$90,000 81,000 72,000 63,000

(D) (E) Unamortized Bond Premium Carrying Value (D) – (C) [$3,000,000 + (D)]

*PROBLEM 10-9A (Continued)

*PROBLEM 10-10A

2017 (a) Jan. 1

(b)

Cash ................................................. Discount on Bonds Payable ........... Bonds Payable .........................

1,667,518 132,482 1,800,000

LACHTE CORP. Bond Discount Amortization Effective-Interest Method—Annual Interest Payments 5% Bonds Issued at 6% (A)

Annual Interest Periods

(B) (C) (D) (E) Interest Discount UnamorBond Interest Expense Amortized Carrying to Be to Be tization Discount Value Paid Recorded (B) – (A) (D) – (C) ($1,800,000 – D)

Issue date 1 $90,000 2 90,000 3 90,000

$100,051 100,654 101,293

$10,051 10,654 11,293

$132,482 122,431 111,777 100,484

$1,667,518 1,677,569 1,688,223 1,699,516

Interest Expense ($1,667,518 X 6%) .................................. 100,051 Interest Payable ($1,800,000 X 5%) .......................... 90,000 Discount on Bonds Payable ............. 10,051 (Interest expense = Carrying value of bond X effective interest rate)

2018 (d) Jan. 1

(e) Dec. 31

Interest Payable ........................................ Cash ................................................... Interest Expense [($1,667,518 + $10,051) X 6%] .............. Interest Payable ................................ Discount on Bonds Payable .............

90,000 90,000

100,654 90,000 10,654

LO 3, 6 BT: AP Difficulty: Medium TOT: 40 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

10-45

*PROBLEM 10-11A

(a) 1.

3. 4.

Jan. 1

Dec. 31

Jan. 1

2017 Cash ............................................ 2,147,202 Bonds Payable ................... Premium on Bonds Payable............................ Interest Expense ($2,147,202 X 6%) ................... Premium on Bonds Payable ................................... Interest Payable ($2,000,000 X 7%) ........... 2018 Interest Payable ......................... Cash ....................................

2,000,000 147,202

128,832 11,168 140,000 140,000 140,000

Dec. 31

Interest Expense ........................ 128,162 [($2,147,202 – $11,168) X 6%] Premium on Bonds Payable ................................... 11,838 Interest Payable .................. 140,000 (Interest expense = Carrying value of bond X effective interest rate) (b) Bonds payable .................................................... 2,000,000 Add: Premium on bonds payable ..................... 124,196*

2,124,196

*($147,202 – $11,168 – $11,838) (c) 1. 2.

Total bond interest expense—2018, $128,162. The effective-interest method will result in more interest expense reported than the straight-line method in 2018 when the bonds are sold at a premium. Straight-line interest expense for 2018 is $125,280 [$140,000 – ($147,202 ÷ 10)].

LO 3, 4, 6 BT: AP Difficulty: Medium TOT: 40 min. AACSB: Analytic AICPA FC: Reporting

10-46

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

*PROBLEM 10-12A

(a)

(A) Annual Interest Period

Cash Payment

(B) Interest Expense (D) X 8%

Issue Date 1 $80,146 $25,600 $54,546 2 80,146 21,236 58,910 3 80,146 16,524 63,622 4 80,146 11,434 68,712 5 80,146 5,936* 74,210 (See Illustration 10C-1) * Rounded to make principal element equal to balance. (b) Dec. 31

Mortgage Payable ................................. Interest Expense ................................... Cash ...............................................

(D) Principal Balance (D) – (C) $320,000 265,454 206,544 142,922 74,210 0

54,546 25,600 80,146

$ 58,910*

Long-term liabilities Mortgage payable............................................ Total liabilities ..................................

206,544 $265,454

LO 4, 7 BT: AP Difficulty: Medium TOT: 30 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

10-47

*PROBLEM 10-13A

(a) Period July 1, 2016 June 30, 2017 June 30, 2018 June 30, 2019 June 30, 2020 June 30, 2021 Total

Cash Payment (A) $ 36,584 36,584 36,584 36,584 36,584 $182,920

Interest Principal Expense Reduction Balance (B) = (D) X 7% (C) = (A) – (B) (D) = (D) – (C) $150,000 $10,500 $ 26,084 123,916 8,674 27,910 96,006 6,720 29,864 66,142 4,630 31,954 34,188 2,396* 34,188 0 $32,920 $150,000

*Rounded to make principal element equal to balance. (See Illustration 10C-1) (b) July

2016 Cash .................................................. Notes Payable .............................

150,000

June 2017 Notes Payable .................................. Interest Expense .............................. Cash .............................................

26,084 10,500

June 2018 Notes Payable .................................. Interest Expense .............................. Cash .............................................

27,910 8,674

150,000

36,584

$29,864 $66,142

LO 4, 7 BT: AP Difficulty: Medium TOT: 40 min. AACSB: Analytic AICPA FC: Reporting

10-48

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

ACR 10

(a)

ACCOUNTING CYCLE REVIEW

1. Interest Payable .............................................. Cash .........................................................

2,500

2. Inventory ......................................................... Accounts Payable ...................................

241,100

3. Cash................................................................. Sales Revenue......................................... Sales Taxes Payable ...............................

508,800

Cost of Goods Sold ........................................ Inventory ..................................................

265,000

4. Account Payable ............................................. Cash .........................................................

230,000

5. Interest Expense ............................................. Cash .........................................................

2,500

6. Insurance Expense ......................................... Prepaid Insurance ...................................

5,600

7. Prepaid Insurance .......................................... Cash .........................................................

10,200

8. Sales Taxes Payable....................................... Cash .........................................................

17,000

9. Other Operating Expenses............................. Cash .........................................................

91,000

10. Interest Expense ............................................. Cash .........................................................

2,500

Bonds Payable ................................................ Cash ......................................................... Gain on Bond Redemption .....................

50,000

Kimmel, Financial Accounting, 8/e, Solutions Manual

2,500 241,100 480,000 28,800 265,000 230,000 2,500 5,600 10,200 17,000 91,000 2,500 48,000 2,000

(For Instructor Use Only)

10-49

ACR 10 (Continued) 11. Cash (90,000 X 103%) ..................................... Bonds Payable ........................................ Premium on Bonds Payable ...................

92,700 90,000 2,700

Adjusting Entries

(b)

1. Insurance Expense ($10,200 X 5/12) .............. Prepaid Insurance ...................................

4,250

2. Depreciation Expense ($38,000 – $3,000) ÷ 5 .... Accumulated Depreciation— Equipment.............................................

7,000

3. Income Tax Expense ...................................... Income Taxes Payable ............................

31,245

7,000 31,245

AIMES CORPORATION Trial Balance 12/31/2017 Account Cash ............................................................ Inventory ..................................................... Prepaid Insurance ...................................... Equipment .................................................. Accumulated Depreciation—Equipment .. Accounts Payable ...................................... Sales Taxes Payable .................................. Income Taxes Payable ............................... Bonds Payable ........................................... Premium on Bonds Payable ...................... Common Stock ........................................... Retained Earnings...................................... Sales Revenue............................................ Cost of Goods Sold.................................... Depreciation Expense ................................ Insurance Expense .................................... Other Operating Expenses ........................ Interest Expense ........................................ Gain on Bond Redemption ........................ Income Tax Expense..................................

10-50

4,250

Debit $227,800 6,850 5,950 38,000

Credit

7,000 24,850 11,800 31,245 90,000 2,700 25,000 13,100 480,000

265,000 7,000 9,850 91,000 5,000 2,000 31,245 $687,695

Kimmel, Financial Accounting, 8/e, Solutions Manual

$687,695 (For Instructor Use Only)

ACR 10 (Continued) (a) and (b) Optional T accounts

Bal.

Bal. Bal.

Cash 30,000 508,800 92,700

2,500 230,000 2,500 10,200 17,000 91,000 2,500 48,000

227,800 Inventory 30,750 241,100 6,850

265,000

Interest Payable 2,500 Bal. Bal.

2,500 0

Sales Taxes Payable 17,000 28,800 Bal. 11,800 Income Taxes Payable 31,245

Bonds Payable 50,000 Bal.

50,000 90,000 90,000

Bal.

Prepaid Insurance 5,600 10,200 5,950

Bal.

Equipment 38,000

Bal.

5,600 4,250

Common Stock Bal.

Accumulated Depreciation—Equipment 7,000

Premium on Bonds Payable 2,700

25,000

Retained Earnings Bal. 13,100

Sales Revenue

Kimmel, Financial Accounting, 8/e, Solutions Manual

480,000

(For Instructor Use Only)

10-51

ACR 10 (Continued) (a) and (b) (Continued) Cost of Goods Sold 265,000 Bal. Depreciation Expense 7,000

Bal.

Insurance Expense 5,600 4,250 9,850

Interest Expense 2,500 2,500 5,000 Income Tax Expense 31,245

Gain on Bond Redemption 2,000

Other Operating Expenses 91,000

(c)

AIMES CORPORATION Income Statement For the Year Ending 12/31/17 Sales revenue ............................................. Cost of goods sold..................................... Gross profit ................................................ Operating expenses Insurance expense ............................. Depreciation expense ........................ Other operating expenses ................. Total operating expenses .......................... Income from operations ............................ Other revenues and expenses Gain on bond redemption .................. Interest expense ................................. Income before taxes .................................. Income tax expense ........................... Net income..................................................

10-52

$480,000 265,000 215,000 $ 9,850 7,000 91,000

Kimmel, Financial Accounting, 8/e, Solutions Manual

107,850 107,150 2,000 5,000 104,150 31,245 $ 72,905 (For Instructor Use Only)

ACR 10 (Continued) AIMES CORPORATION Retained Earnings Statement For the Year Ending 12/31/17 Retained earnings, 1/1/17 ............................................................ $13,100 Add: Net income .......................................................................... 72,905 Retained earnings, 12/31/17 ........................................................ $86,005 AIMES CORPORATION Balance Sheet 12/31/2017 Current Assets Cash .................................................... Inventory ............................................. Prepaid insurance .............................. Total current assets ......................

$227,800 6,850 5,950 $240,600

Property, Plant, and Equipment Equipment ........................................... Accumulated depreciation— equipment ........................................ Total plant assets ......................... Total assets

38,000 7,000 31,000 $271,600

Current Liabilities Accounts payable ............................... Income taxes payable ........................ Sales taxes payable............................ Total current liabilities ..................

$24,850 31,245 11,800

Long-term liabilities Bonds payable .................................... Premium on bonds payable ............... Total long-term liabilities ............. Total liabilities ...............................

90,000 2,700

Stockholders’ Equity Common stock ................................... Retained earnings .............................. Total stockholders’ equity............ Total liabilities and stockholders’ equity .......................................................

$ 67,895

92,700 160,595 25,000 86,005 111,005 $271,600

Kimmel, Financial Accounting, 8/e, Solutions Manual

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10-53

CT 10-1

FINANCIAL REPORTING PROBLEM

(a) Total current liabilities at September 27, 2014, $63,448 millions. Apple's total current liabilities increased by $19,790 millions ($63,448 – $43,658) relative to the prior year. (b) Apple's accounts payable at September 27, 2014, $30,196 millions. (c) The other components of current liabilities are: Accrued expenses ....................................................... Deferred revenue ......................................................... Commercial paper........................................................ LO 4 BT: AN Difficulty: Medium TOT: 10 min. Reporting AICPA PC: Communication

10-54

$18,453 millions 8,491 6,308

AACSB: Analytic and Communication

Kimmel, Financial Accounting, 8/e, Solutions Manual

AICPA FC:

(For Instructor Use Only)

CT 10-2

COMPARATIVE ANALYSIS PROBLEM

(a) (1) Current ratio

Columbia Sportswear

VF Corporation

$1,266,041 = 3.39:1 $373,120

$4,185,854 = 2.58 $1,620,241

Based on the current ratio, Columbia is more liquid than VFC. Columbia’s current ratio is 31% larger than VFC. Columbia appears much more able to meet its current obligations. (b)

VF Corporation

Columbia Sportswear (1) Debt to assets

$436,975 $1,792,209

(2) Times interest earned

$4,349,258 *

= 24.4%

$141,859 + $56,662 + $1,053 $1,053 189.5 times

$9,980,190 =

= 43.6%

$1,047,505 + $304,861 + $86,725 $86,725 = 16.6 times

*$1,620,241 + $1,423,581 + $1,305,436

The higher the percentage of debt to assets, the greater the risk that a company may be unable to meet its maturing obligations. Columbia 2014 debt to assets ratio was considerably less than VFC’s; thus, Columbia would be considered significantly better able to meet its obligations. The times interest earned provides an indication of a company’s ability to meet interest payments. Since Columbia’s times interest earned is approximately 11.4 times as large as VFC’s, Columbia had a much greater ability to meet its interest payments in 2014 than VFC. Columbia appears to be significantly more solvent. LO 4 BT: AN Difficulty: Medium TOT: 20 min. AACSB: Analytic and Communication Measurement and Reporting AICPA PC: Communication

Kimmel, Financial Accounting, 8/e, Solutions Manual

AICPA FC:

(For Instructor Use Only)

10-55

CT 10-3

COMPARATIVE ANALYSIS PROBLEM

(a) (1) Current ratio

Amazon .com

Wal-Mart

$31,327 = 1.12:1 $28,089

$63,278 = 0.97:1 $65,272

Based on the current ratio, Amazon is more liquid than Wal-Mart. Amazon’s current ratio is 15% larger than Wal-Mart. Amazon appears more able to meet its current obligations. (b)

Amazon .com (1) Debt to assets

$43,764 * $54,505

(2) Times interest earned

= 80.3%

($241) + $167 + $210 $210

= 0.65 times

Wal-Mart

$203,706 - $85,937 $203,706

= 57.8%

$16,363 + $7,985 + $2,461 $2,461 = 10.9 times

*$28,089 + $8,265 + $7,410

The higher the percentage of debt to assets, the greater the risk that a company may be unable to meet its maturing obligations. Wal-Mart’s 2014 debt to assets ratio was considerably less than Amazon’s; thus, Wal-Mart would be considered significantly better able to meet its obligations. The times interest earned provides an indication of a company’s ability to meet interest payments. Since Wal-Mart’s times interest earned is approximately 16.8 times as large as Amazon’s, WalMart had a much greater ability to meet its interest payments in 2014 than Amazon. Wal-Mart appears to be significantly more solvent.

LO 4 BT: AN Difficulty: Medium TOT: 20 min. AACSB: Analytic and Communication Measurement and Reporting AICPA PC: Communication

10-56

Kimmel, Financial Accounting, 8/e, Solutions Manual

AICPA FC:

(For Instructor Use Only)

CT 10-4

INTERPRETING FINANCIAL STATEMENTS

(a)

Hechinger

Home Depot

Working capital

$1,153 – $938 = $215

$4,933 – $2,857 = $2,076

Current ratio

$1,153 ÷ $938 = 1.23:1

$4,933 ÷ $2,857 = 1.73:1

On both measurements Hechinger’s liquidity is low and Home Depot’s is strong. $1, 339

(b) Debt to assets ratio Times interest earned

$1, 577 –$93 + $67 + $3 $67

$4, 716

= 85%

$13, 465

= –.34 times

= 35%

$1,614 + $37 + $1,040 $37

= 72.7 times

Hechinger relied heavily on debt financing—85% of every dollar of assets was financed with debt versus only 35% by Home Depot. Hechinger’s times interest earned ratio was negative, suggesting it did not have the ability to service its debt. In contrast, Home Depot’s times interest earned ratio is exceptionally high, suggesting it could handle even more debt. (c) Return on

–$93

assets

($1, 577 + $1, 668)  2

Profit margin

–$93 $3, 444

= –5.7%

$1, 614 ($13, 465 + $11, 229)  2

= –2.7%

$1, 614 $30, 219

= 13.1%

= 5.3%

Hechinger reported negative profitability ratios because it reported a loss for the year. If you combine its low liquidity and low solvency with its inability to generate a profit, it was clearly headed for trouble.

Kimmel, Financial Accounting, 8/e, Solutions Manual

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10-57

CT 10-4 (Continued) (d) Debt to assets

Original

Restated

$4,716 = 35% $13,465

$4,716 + $2,347 = 45% $13,465 + $2,347

After treating Home Depot’s operating leases as purchases, its debt to assets ratio increases from 35% to 45%. While this suggests that its reliance on debt is actually higher than the balance sheet indicates, its reliance on debt is still quite reasonable and not cause for concern. LO 4 BT: AN Difficulty: Medium TOT: 30 min. AACSB: Analytic and Communication Measurement and Reporting AICPA PC: Communication

10-58

Kimmel, Financial Accounting, 8/e, Solutions Manual

AICPA FC:

(For Instructor Use Only)

CT 10-5

INTERPRETING FINANCIAL STATEMENTS

Borders

Barnes and Noble

(a)

Current ratio

$978.7 ÷ $918.1 = 1.07 : 1

$1, 719.5 ÷ $1, 724.4 = 1.00 : 1

(b)

Debt to assets ratio

$1,257.3 ÷ $1,415.6 = 89%

$2,802.3 ÷ $3,705.7 = 76%

Times interest earned

$(109.4) + $24.1 + $(31.3)

= (4.84)times

$36.7 + $28.2 + $8.4

$24.1

= 2.60times

$28.2

(c) Neither Borders nor Barnes and Noble were very liquid since their respective current ratio were only 1.07:1 and 1.0:1. Both companies had very high debt to assets ratios and their times interest earned were negative or relatively low. The bankruptcy of Borders did seem likely considering they had a very high debt to assets ratio and a negative times interest earned. In addition, its current ratio was fairly low. LO 4 BT: AN Difficulty: Medium TOT: 20 min. AACSB: Analytic and Communication AICPA FC: Measurement and Reporting AICPA PC: Communication

Kimmel, Financial Accounting, 8/e, Solutions Manual

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10-59

CT 10-6

REAL-WORLD FOCUS

(a) An ‘A’ rating means that the company has a strong capacity to meet financial commitments, but is somewhat susceptible to adverse economic conditions and changes in circumstances. A ‘C’ rating means that a company is currently highly vulnerable due to obligations and other defined circumstances. (b) Some factors that can change a company’s credit rating are new competition, changes in technology, increases or decreases in debt burdens, changes in the economy or business environment, or in the case of states or municipalities, shifts in populations or changes in taxpayer incomes. (c) To determine whether an investment has merit really depends on particular issues of importance to an individual. For example, a risky investment might have merit to a wealthy investor that can afford to take a chance in order to have the chance of a large gain. That same investment might not have merit to somebody with limited wealth who cannot afford to take large risks. Therefore, credit ratings provide important inputs in determining whether an investment would be of interest to an investor. But a high (or low) credit rating does not necessary mean that a particular investment would be a good or bad investment. LO 2, 3 BT: S Difficulty: Medium TOT: 30 min. AACSB: Analytic, Technology, and Communication AICPA FC: Measurement and Reporting AICPA PC: Communication

10-60

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 10-7

REAL-WORLD FOCUS

(a) If a company can determine a reasonable estimate of the expected loss and if it is probable it will lose the suit, then the company should accrue for the loss. It should debit a loss account and credit a liability account. If it cannot arrive at a reasonable estimate, or if the loss is only possible (not probable) then it should disclose the item in the notes to the financial statements. (b) The article suggests that many of these companies are paying out amounts each year, but that their liability account remains roughly the same. This would suggest that rather than accruing for the full amount of their expected costs in the year that these costs become evident, they are simply expensing costs as they pay for them. This is not consistent with the approach described in part (a) because they are not accruing for the estimated costs up front. (c) The article suggests that if a company cannot come up with a reasonable estimate of costs, but instead can only estimate a range of possible costs, then financial reporting rules say that they should accrue for the low end of the range. For example, if you thought you would lose between $1,000 and $10,000, you would accrue for $1,000. However, for insurance purposes they often report the higher number. The problem for the perspective of investors is that if they rely on the numbers reported in the financial statements they may not be well informed about the potential loss that the company may well incur. (d) International accounting rules differ from U.S. rules with regard to dealing with estimated ranges. They require in a situation where a company estimates a range of possible losses, the company should accrue for the midpoint. LO 4 BT: S Difficulty: Medium TOT: 40 min. AACSB: Analytic, Technology, and Communication AICPA FC: Reporting AICPA PC: Communication

Kimmel, Financial Accounting, 8/e, Solutions Manual

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10-61

CT 10-8

(a) 1.

DECISION MAKING ACROSS THE ORGANIZATION

Bonds Payable .......................................... Cash ................................................... Discount on Bonds Payable ............. Gain on Bond Redemption ($2,946,000 – $2,500,000) .............. (To record redemption of 8% bonds)

3,000,000 2,500,000 54,000* 446,000

*($3,000,000 – $2,946,000) 2.

Cash ........................................................... Bonds Payable ................................... (To record sale of 10-year, 12% bonds at par)

2,500,000 2,500,000

(b) Dear President Marquis: The early redemption of the 8%, 5-year bonds results in recognizing a gain of $446,000 that increases current year net income by the after-tax effect of the gain. The amount of the liabilities on the balance sheet will be lowered by the issuance of the new bonds and redemption of the 5-year bonds. 1.

The cash flow of the company as it relates to bonds payable will be adversely affected as follows: Annual interest payments on the new issue ($2,500,000 X .12) ....................................................... Annual interest payments on the 5-year bonds ($3,000,000 X .08) ....................................................... Additional cash outflows per year ................................

10-62

Kimmel, Financial Accounting, 8/e, Solutions Manual

$300,000 ( 240,000) $ 60,000

(For Instructor Use Only)

CT 10-8 (Continued) 2.

The amount of interest expense shown on the income statement will be higher as a result of the decision to issue new bonds: Annual interest expense on new bonds .......... Annual interest expense on 8% bonds: Interest payment ........................................ Discount amortization ($54,000 ÷ 3 yrs.) ... Additional interest expense per year...............

$300,000 $240,000 18,000 (258,000) $ 42,000

These comparisons hold for only the 3-year remaining life of the 8%, 5-year bonds. The company must acknowledge either redemption of the 8% bonds at maturity, January 1, 2020, or refinancing of that issue at that time and consider what interest rates will be in 2020 in evaluating a redemption and issuance in 2017. Sincerely, LO 3 BT: AN Difficulty: Medium TOT: 45 min. AACSB: Analytic and Communication Reporting AICPA PC: Interaction, Leadership, and Communication

Kimmel, Financial Accounting, 8/e, Solutions Manual

AICPA FC:

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10-63

CT 10-9

COMMUNICATION ACTIVITY

To:

Jerry Hogan

From:

I. M. Student

Subject:

Bond Financing

The advantages of bond financing over common stock financing include: 1.

Stockholder control is not affected.

Tax savings result.

Income to common stockholders may increase.

Earnings per share of common stock may be higher.

The types of bonds that may be issued are: 1.

Secured or unsecured bonds. Secured bonds have specific assets of the issuer pledged as collateral while unsecured bonds do not.

Convertible bonds, which can be converted by the bondholder into common stock.

Callable bonds, which are subject to early redemption by the issuer at a stated amount.

State laws grant corporations the power to issue bonds after formal approval by the board of directors and stockholders. The terms of the bond issue are set forth in a legal document called a bond indenture. After the bond indenture is prepared, bond certificates are printed. LO 2 BT: C Difficulty: Easy TOT: 20 min. AACSB: None AICPA FC: Reporting AICPA PC: Communication

10-64

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 10-10

ETHICS CASE

(a) The stakeholders in this situation include: Stockholders Creditors Employees Government inspectors Customers flying in airplanes (b) The possible courses of action and their consequences include: 1.

The CEO could inform the auditors. The auditors would then require that this information be disclosed in the annual report. When the lenders learn about this potential problem, they may decide to call their loans, and the company’s suppliers may decide to quit sending it goods. This could result in the bankruptcy of the company, even if the company was not at fault for the engine failures. However, this would be in compliance with the accounting requirement to disclose all material facts. By not disclosing, the CEO is misinforming a large number of important stakeholders.

The CEO could conceal the information from the auditors. If the company is not ultimately found at fault, then the company will not have sustained any financial hardship. However, if the company is found to be at fault for the engine failures, then not only is it likely the company will go bankrupt, but the CEO could face prosecution for failing to disclose the existence of this problem to auditors.

(c) Answer will vary according to student. (d) If the CEO conceals the information, and the company is subsequently found to be at fault, a number of stakeholders will suffer. First, the company’s creditors will lose money because it is likely the company won’t be able to repay its loans in full. The stockholders will lose because the value of their shares will plummet. The employees may well lose their jobs because the company is likely to go bankrupt. Also, it is possible that other engines might fail in the interim, possibly resulting in a crash. Answers as to whether the CEO should be punished for concealing this information will vary by student. LO 4 BT: E Difficulty: Hard TOT: 30 min. AACSB: Analytic, Ethics, and Communication AICPA FC: Reporting AICPA PC: Communication and Personal Demeanor Copyright © 2016 John Wiley & Sons, Inc.

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10-65

CT 10-11

ETHICS CASE

(a) The stakeholders include: 1. Enron management 2. Citigroup management 3. Enron investors 4. Enron creditors (b) Yes. Although the primary responsibility for proper accounting rests with company management, other knowledgable parties have secondary responsibilities. Auditors are expected to attest to full disclosure. Lenders, with access to information that is generally unavailable to others, are expected to provide full and accurate disclosure of transactions with borrowers. (c) The auditor may have been unable to detect the inappropriate accounting treatment because “secret” agreements between Enron and Citigroup were not made available for review. (d) A company may wish to conceal financing arrangements in order to appear more solvent to investors and creditors. GAAP requires full disclosure of all information that would make a difference to financial statement users. Intentionally understating liabilities is a violation of GAAP and thus inappropriate. It is unethical for lenders to market deals that circumvent GAAP. (e) The Citigroup deal was more harmful than other off-balance-sheet transactions because it was not fully explained in the financial statement notes. (The auditors didn’t even know the details.) This lack of explanation made it impossible for users of Enron's financial statements to incorporate such off-balance-sheet information into their evaluation of Enron’s performance. LO 4 BT: S Difficulty: Hard TOT: 30 min. AACSB: Analytic, Ethics, and Communication AICPA FC: Reporting AICPA PC: Communication and Personal Demeanor

10-66

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CT 10-12

ALL ABOUT YOU

The answer to these questions depends on the state in which the student resides. It also will be depend on the year chosen, although we expect that the results will be much the same whether they pick any rates between 2015 and 2017. We provide a solution for this problem using the state of Wisconsin as an example. It should be pointed out that certain taxes can be deducted for computing federal income tax but are ignored in our computation. (a) Wisconsin state income tax for a single person with a taxable income of $60,000 is $3,710.80. The tax rate between $17,680 and $132,580 is $950.30 plus 6.5 percent over $17,680. Therefore the computation is as follows: ($60,000 – $17,680) X 6.5% = $2,751 Base rate 950 Total state income tax $3,701 (b) The property tax on a $200,000 home at 2.1% is $4,200. (c) The state gasoline tax in Wisconsin is 32.9 cents per gallon and the federal gasoline tax is 18.4 cents per gallon. Your total taxes on gasoline are computed as follows: 300 gallons X ($0.329 + $0.184) = $154 (d) In Wisconsin the state sales tax rate is 5% and excludes food and prescription drug purchases. Therefore the sales tax is $200 ($4,000 X 5%). (e) The social security rate is 7.65% on income of $60,000 or $4,590. (f) Federal income tax for a single person with a taxable income of $60,000 is $11,538. The tax rate between $30,650 and $74,200 is $4,220 plus 25% over $30,650. Therefore the computation is as follows: ($60,000 – $30,650) X 25% = $ 7,338 Base amount 4,220 Total tax $11,558

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10-67

CT 10-12 (Continued) The total taxes paid therefore are computed as follows, based on a $60,000 income amount: State income tax .................................................................. Property tax on home .......................................................... Gasoline tax ......................................................................... Sales tax............................................................................... Social security tax ............................................................... Federal income tax .............................................................. Total tax ...............................................................................

$ 3,701 4,200 154 200 4,590 11,558 $24,403

The percentage of total taxes to income is therefore 41% ($24,403/$60,000), given the information above. LO 1 BT: AP Difficulty: Medium TOT: 60 min. AACSB: Analytic AICPA FC: Reporting

10-68

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CT 10-13

FASB CODIFICATION ACTIVITY

(a) Current liabilities is used principally to designate obligations whose liquidation is reasonably expected to require the use of existing resources properly classifiable as current assets, or the creation of other current liabilities. See paragraphs 210-10-45-5 through 45-12. (b) Long-term obligations are those scheduled to mature beyond one year (or the operating cycle, if applicable) from the date of an entity’s balance sheet. (c) The Codification provides the following guidance for disclosure of longterm obligations: Bonds, mortgages and other long-term debt, including capitalized leases. (1)

State separately, in the balance sheet or in a note thereto, each issue or type of obligation and such information as will indicate (see §210.4–06): (i)

The general character of each type of debt including the rate of interest; (ii) the date of maturity, or, if maturing serially, a brief indication of the serial maturities, such as “maturing serially from 1980 to 1990”; (iii) if the payment of principal or interest is contingent, an appropriate indication of such contingency; (iv) a brief indication of priority; and (v) if convertible, the basis. (2)

The amount and terms (including commitment fees and the conditions under which commitments may be withdrawn) of unused commitments for long-term financing arrangements that would be disclosed under this rule if used shall be disclosed in the notes to the financial statements if significant.

LO 1, 4 BT: S Difficulty: Medium TOT: 60 min. AACSB: Analytic, Technology, and Communication AICPA FC: Measurement AICPA PC: Communication

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10-69

CT 10-14

CONSIDERING PEOPLE, PLANET AND PROFIT

(a) The monthly rates paid by borrowers on loans from these microfinance organizations is 5% to 10%. This would convert to roughly 60% (5% × 12) to 120% (10% × 12) per year. (b) These rates are incredibly high. Under most circumstances they would be considered usurious. However, the borrowers benefit because they also receive very high interest on their savings at the institution. The structure helps to smooth the ups and downs of a families cash inflows and outflows during the course of a year so that they can weather financial distruptions. (c) The organizations are structured as savings and loans. (Savings and loans used to be quite common in the U.S. until a financial crisis in the 1980s caused many of them to go bankrupt.) The organizations in the article typically only involve a small group of people (15 to 30) who pool their savings. Each buys a share in a fund from which they can borrow. All must also contribute a small sum to a social fund, which acts as micro-insurance for misfortunes suffered by members. The organizations have a limited life cycle – typically one year. At the end of the cycle all of the money accumulated by the fund is shared out to members based on their contributions. Then a new cycle begins. LO - BT: S Difficulty: Medium TOT: 60 min. AACSB: Analytic, Technology, and Communication AICPA FC: Measurement AICPA PC: Communication

10-70

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IFRS EXERCISES

IFRS 10-1 The similarities between GAAP and IFRS include: (1) the basic definition of a liability and (2) liabilities are normally reported in the order of their liquidity. Differences between GAAP and IFRS include: (1) GAAP allows straight line amortization of bond discounts and premiums, but IFRS requires the effective-interest method in all cases, (2) IFRS does not isolate unamortized bond discount or premium in a separate account, and (3) IFRS splits the proceeds from convertible bonds into debt and equity components. LO 8 BT: C Difficulty: Easy TOT: 10 min. AACSB: None AICPA FC: Measurement and Reporting

IFRS 10-2 (a) Jan.

Cash (€2,000,000 X .97) ......................... 1,940,000 Bonds Payable ............................... 1,940,000

(b) Jan.

Cash (€2,000,000 X 1.04) ....................... 2,080,000 Bonds Payable ............................... 2,080,000

LO 3, 8 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

IFRS 10-3 Cash (£4,000,000 X .99) .................................................. 3,960,000 Bonds Payable ........................................................ 3,800,000 Share Premium—Conversion Equity .................... 160,000 LO 3, 8 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

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10-71

IFRS10-4

INTERNATIONAL FINANCIAL REPORTING PROBLEM

(a) Total current liabilities for the Louis Vuitton at December 31, 2014 were €12,175 million, including provisions of €332 million. (b) Gross long-term borrowings total €5,054 million, consisting of bonds and medium term notes of €4,794, finance leases of €116 and bank borrowings of €144. (c) The borrowings are measured at amortized cost. (d) The gross amount of fixed-rate borrowings is €7,689. The gross amount of adjustable-rate (floating) borrowings is €1,554. LO 4, 8 BT: AN Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

10-72

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CHAPTER 11 Reporting and Analyzing Stockholders’ Equity Learning Objectives 1. Discuss the major characteristics of a corporation. 2. Explain how to account for the issuance of common and preferred stock, and the purchase of treasury stock. 3. Explain how to account for cash dividends and describe the effect of stock dividends and stock splits. 4. Discuss how stockholders’ equity is reported and analyzed. *5. Prepare entries for stock dividends.

Summary of Questions by Learning Objectives and Bloom’s Taxonomy Item LO 1. 2. 3. 4. 5. 6. 1. 2. 3. 1. 2a. 1. 2. 3. 4.

1 1 1 1 1 2 1 2 2 1 2 2 2 2, 4 2, 4

BT C C C K K K K AP AP C AP AP AP AP C

Item 7. 8. 9. 10. 11.

4. 5. 6. 2b.

5. 6. 7. 8.

LO 2 2 2 2 3

2 3 3 2

2 3 3 4

Item

AP C C C C

Questions 12. 4 C 13. 4 C 14. 3 K 15. 3 C 16. 3 C

17. 18. 19. 20. 21.

3 3 3 4 4

C C C K C

22. 23. 24. 25. 26.

4 4 4 4 4

C C C C C

Brief Exercises 7. 3 K 8. 4 AP

9. 10.

4 4

C AP

11. 12.

4 5*

AP AP

Do It! Exercises 3a. 3 AP

3b.

4a. 4b.

4 4

AP AP

AN AP AP AP

Exercises 9. 4 AP 10. 4 AP 11. 4 AP 12. 4 AP

13. 14. 15. 16.

4 4 4 5*

AN AN AN AP

4 3, 4, 5*

AP AP

AP AP AP

Problems: Set A 1. 2, 4, AP 3. 2, 3, 4 AP 5. 2, 4, AP 7. 2. 2, 3, 4 AP 4. 3, 4 AP 6. 2, 3, 4 AP 8. *Continuing Cookie Solutions for this chapter are available online.

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11-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Journalize stock transactions, post, and prepare paid-in capital section.

Simple

30–40

Journalize transactions, post, and prepare a stockholders’ equity section; calculate ratios.

Moderate

40–50

Prepare a stockholders’ equity section.

Moderate

20–30

Reproduce Retained Earnings account, and prepare a stockholders’ equity section.

Moderate

30–40

Prepare entries for stock transactions, and prepare a stockholders’ equity section.

Moderate

20–30

Prepare a stockholders’ equity section.

Simple

20–30

Evaluate a company’s profitability and solvency.

Moderate

20–30

*8A

Prepare dividend entries, prepare a stockholders’ equity section, and calculate ratios.

Moderate

40–50

11-2

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ANSWERS TO QUESTIONS 1.

(a)

Separate legal existence. A corporation is separate and distinct from its owners and it acts in its own name rather than in the name of its stockholders. In contrast to a partnership, the acts of the owners (stockholders) do not bind the corporation unless the owners are agents of the corporation.

(b)

Limited liability of stockholders. Because of its separate legal existence, creditors of a corporation ordinarily have recourse only to corporate assets to satisfy their claims. Thus, the liability of stockholders is normally limited to their investment in the corporation.

(c)

Transferable ownership rights. Ownership of a corporation is shown in shares of capital stock. The shares are transferable units. Stockholders may dispose of part or all of their interest by simply selling their stock. The transfer of ownership to another party is entirely at the discretion of the stockholder.

LO 1 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting AICPA BB: Legal/Regulatory Perspective 2.

(a)

Corporate management is an advantage to a corporation because it can hire professional managers to run the company. Corporate management is a disadvantage to a corporation because it prevents owners from having an active role in directly managing the company.

(b)

Two other disadvantages of a corporation are government regulations and additional taxes. A corporation is subject to numerous state and federal regulations. For example, state laws prescribe the requirements for issuing stock, and federal securities laws govern the sale of stock to the general public. Corporations must pay both federal and state income taxes. These taxes are substantial. In addition, stockholders must pay income taxes on cash dividends received.

LO 1 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting 3.

Nona is incorrect. A corporation must be incorporated in only one state. It is to the company’s advantage to incorporate in a state whose laws are favorable to the corporate form of business organization. A corporation may incorporate in a state in which it does not have a headquarters’ office or major operating facilities.

LO 1 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting AICPA BB: Legal/Regulatory Perspective 4.

In the absence of restrictive provisions, the basic ownership rights of common stockholders are the rights to: (1) (2) (3) (4)

vote in the election of the board of directors and in corporate actions that require stockholders’ approval. share in corporate earnings. maintain the same percentage ownership when additional shares of common stock are issued (the preemptive right). share in assets upon liquidation.

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11-3

Legally, a corporation is an entity, separate and distinct from its owners. As a legal entity, a corporation possesses most of the privileges and is subject to the same duties and responsibilities as a natural person. The corporation acts under its own name rather than under the names of its stockholders. A corporation may buy, own, and sell property, borrow money, enter into legally binding contracts, and sue or be sued.

LO 1 BT: K Difficulty: Easy TOT: 3 min. Legal/Regulatory Perspective 6.

AACSB: None AICPA FC: reporting AICPA BB:

The principal components of stockholders’ equity for a corporation are paid-in capital and retained earnings.

LO 1 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting 7.

The maximum number of shares that a corporation is legally allowed to issue is the number authorized. Gage Corporation is authorized to sell 100,000 shares. Of these shares, 70,000 shares have been issued. Outstanding shares are those issued shares which have not been reacquired by the corporation; in other words, issued shares less treasury shares. Gage has 66,000 shares outstanding (70,000 issued less 4,000 treasury).

LO 2 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting 8.

The relative par values should have no effect on the investment decision. The par value of common stock has no effect on its market value. Par value used to be a legal amount per share which usually indicated the minimum amount at which a share of stock can be issued. Therefore, either stock mentioned in the question could be the better investment.

LO 2 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting 9.

A corporation may acquire treasury stock (1) to reissue the shares to officers and employees under bonus and stock compensation plans, (2) to increase trading of the company’s stock in the securities market in the hopes of enhancing its market value, (3) to have additional shares available for use in the acquisition of other companies, (4) to reduce the number of shares outstanding and, thereby, increase earnings per share, or (5) to avoid a takeover of the company by investors that are hostile to management.

LO 2 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting 10.

When treasury stock is purchased, Treasury Stock is debited and Cash is credited at cost ($11,000 in this example). Treasury stock is a contra stockholders’ equity account and cash is an asset. Thus, this transaction has (a) no effect on net income, (b) decreases total assets, (c) has no effect on total paid-in capital, and (d) decreases total stockholders’ equity.

LO 2 BT: AN Difficulty: Hard TOT: 5 min. AACSB: Analytic AICPA FC: Reporting 11.

11-4

(a)

Common stock and preferred stock both represent ownership of the corporation. Common stock signifies the basic residual ownership; preferred stock is ownership with certain privileges or preferences. Preferred stockholders typically have a preference as to dividends and as to assets in the event of liquidation. However, preferred stockholders generally do not have voting rights.

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(b)

Some preferred stocks possess the additional feature of being cumulative. Cumulative preferred stock means that preferred stockholders must be paid both current year dividends and unpaid prior year dividends before common stockholders receive any dividends.

(c)

Dividends in arrears are disclosed in the notes to the financial statements.

LO 3 BT: C Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Reporting 12.

The debits and credits to retained earnings are:

1. 2.

Debits Net loss Cash and stock dividends

Credits Net income

LO 4 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

13.

The answers are summarized in the table below:

(a) (b) (c) (d)

Account Common Stock Paid-in Capital in Excess of Par Value Retained Earnings Treasury Stock

(e) (f)

Paid-in Capital in Excess of Stated Value Preferred Stock

Classification Paid-in capital—capital stock Paid-in capital—additional paid-in capital Retained earnings Deducted from total paid-in capital and retained earnings Paid-in capital—additional paid-in capital Paid-in capital—capital stock

LO 4 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting 14.

For a cash dividend to be paid, a corporation must have retained earnings, adequate cash, and a dividend declared by the board of directors.

LO 3 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting 15.

May 1 is the date on which the board of directors formally declares (authorizes) and announces the cash dividend. May 15 is the record date which marks the time when ownership of outstanding shares is determined for dividend purposes from the stockholders’ records. May 31 is the date when the dividend checks are mailed to stockholders. Accounting entries are made on May 1 (debit Cash Dividends and credit Dividends Payable), and on May 31 (debit Dividends Payable and credit Cash).

LO 3 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting 16.

A cash dividend decreases assets, retained earnings, and total stockholders’ equity. A stock dividend decreases retained earnings, increases paid-in capital, and has no effect on total assets and total stockholders’ equity.

LO 3 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting

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11-5

17.

Doris is incorrect. A corporation generally issues stock dividends for one of the following reasons: (1) (2)

(3)

To satisfy stockholders’ dividend expectations without spending cash. To increase the marketability of its stock by increasing the number of shares outstanding and thereby decreasing the market price per share. Decreasing the market price of the stock makes it easier for small investors to purchase shares. To emphasize that a portion of stockholders’ equity that had been reported as retained earnings has been permanently reinvested in the business and therefore is unavailable for cash dividends.

LO 3 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting 18.

In a stock split, the number of shares is increased in the same proportion that par value is decreased. Thus, in Jayne Corporation the number of shares will increase to 30,000 (10,000 X 3) and the par value will decrease to $5 ($15 ÷ 3). The effect of a split on market value is generally inversely proportional to the size of the split. In this case, the market price would fall to approximately $40 per share ($120 ÷ 3).

LO 3 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting 19.

The different effects of a stock split versus a stock dividend are: Item Total paid-in capital Total retained earnings Total par value (common stock) Par value per share

Stock Split No change No change No change Decrease

Stock Dividend Increase Decrease Increase No change

LO 3 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting

20.

The cost of Apple’s treasury stock at September 27,2014 was $45,000 million. It declared cash dividends of $11,215 million. The stock split declared in 2014 was 7 to 1.

LO 3 BT: AN Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting 21.

(a)

The purpose of a retained earnings restriction is to indicate that a portion of retained earnings is currently unavailable for dividends.

(b)

Restrictions may result from the following causes: legal, contractual, or voluntary.

LO 4 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting 22.

Par value is a legal amount per share, often set at an arbitrarily selected amount, which usually indicates the minimum amount at which a share of stock can be issued. Market value is generally unrelated to par value. A stock’s market value will reflect many factors, including the company’s anticipated future earnings, its expected dividend rate per share, its current financial position, the current state of the economy, and the current state of the securities markets.

LO 1 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting

11-6

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23.

The payout ratio is computed by dividing cash dividends declared on common stock by net income. The payout ratio indicates the percentage of earnings distributed as cash dividends to common stockholders.

LO 4 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting 24.

Debt financing will increase the return on common stockholders’ equity when the return on assets exceeds the interest rate paid on debt.

LO 4 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting 25.

The return on assets will equal the return on common stockholders’ equity when a company has no preferred dividends or debt.

LO 4 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting 26.

The issuance of bonds combined with a reduction in outstanding shares increases the company’s reliance on debt financing which will be reflected in an increase of the debt to assets ratio. The return on common stockholders’ equity should increase because the company’s return on assets exceeds the interest rate on the new debt and because the amount of stockholders’ equity in the denominator of the ratio has been reduced.

LO 4 BT: AN Difficulty: Hard TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

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11-7

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 11-1 The advantages and disadvantages of a corporation are as follows: Advantages Separate legal existence Limited liability of stockholders Transferable ownership rights Ability to acquire capital Continuous life Corporate management— professional managers

Disadvantages Corporate management— separation of ownership and management Government regulations Additional taxes

LO 1 BT: K Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement

BRIEF EXERCISE 11-2 May 10 Cash (2,500 X $13) ....................................... Common Stock (2,500 X $5) ................. Paid-in Capital in Excess of Par Value—Common Stock (2,500 X $8) .........................................

32,500 12,500 20,000

(Common stock = Number of shares issued × per value per share) LO 2 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 11-3 June 1 Cash (3,000 X $7) ......................................... Common Stock .....................................

21,000 21,000

LO 2 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Reporting

11-8

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BRIEF EXERCISE 11-4 Cash (8,000 X $106) .................................................... Preferred Stock (8,000 X $100) ........................... Paid-in Capital in Excess of Par Value— Preferred Stock (8,000 X $6) ............................

848,000 800,000 48,000

(Preferred stock = Number of shares used × per value per share) LO 2 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 11-5 Nov.

Dec. 31

Cash Dividends (7,000 X $1) .................... Dividends Payable ............................

7,000

Dividends Payable .................................... Cash ...................................................

7,000

7,000 7,000

LO 3 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 11-6

(a) Stockholders’ equity Paid-in capital Common stock, $8 par Paid in capital in excess of par value—common stock Total paid-in capital Retained earnings Total stockholders’ equity

Before Dividend

After Dividend

$1,000,000

$1,100,000

– 1,000,000 300,000 $1,300,000

137,500 1,237,500 62,500 $1,300,000

(A stock dividend reduces retained earnings by the number of shares issued × Market price per share.

(b) Outstanding shares

125,000

137,500

LO 3 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

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11-9

BRIEF EXERCISE 11-7 Total Total Total Stockholders’ Transaction Assets Liabilities Equity (a) Declared cash dividend N/A + – (b) Paid cash dividend declared in (a) – – N/A (c) Declared stock dividend N/A N/A N/A (d) Distributed stock dividend declared in (c) N/A N/A N/A (e) Split stock three-for-one N/A N/A N/A LO 3 BT: K Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Reporting

BRIEF EXERCISE 11-8 Stockholders’ equity Paid-in capital Capital stock Common stock, $10 par value, 5,000 shares issued and 4,500 shares outstanding ................... $ 50,000 Additional paid-in capital Paid-in capital in excess of par value— common stock ................................ ....................... 22,000 Total paid-in capital ............................................. 72,000 Retained earnings ..................................................................... 42,000 Total paid-in capital and retained earnings ....... 114,000 Less: Treasury stock (500 shares) .......................................... (11,000) Total stockholders’ equity .................................. $103,000 LO 4 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

11-10

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BRIEF EXERCISE 11-9 Payout ratio—last year =

$120,000 = 20% $600,000

Dividends paid this year = $1,600,000 X .20 = $320,000 (assuming the same payout ratio) Maintaining a constant payout ratio may be considered a sign of stability from the stockholders’ perspective. However, maintaining a constant payout ratio may have a negative impact on the company’s cash flow and its ability to grow. LO 4 BT: C Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Measurement and Reporting

BRIEF EXERCISE 11-10 Return on stockholders’ equity =

Net income–Preferred dividends Average common stockholders’ equity $393 – $0 = 14.37% ($2,581+ $2,887) ÷ 2

Supervalu’s 14.37% return on stockholders’ equity indicates that about 14 cents of net income was earned for each dollar invested by common stockholders. LO 4 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Measurement and Reporting

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11-11

BRIEF EXERCISE 11-11 Income before interest and taxes Interest ($2,000,000 X 6%) Income before income taxes Income tax expense (30%) Net Income (a) Outstanding shares (b) Earnings per share (a) ÷ (b)

Issue Stock $1,500,000 0 1,500,000 450,000 $1,050,000

Issue Bond $1,500,000 120,000 1,380,000 414,000 $ 966,000

900,000 $1.17

700,000 $1.38

Net income is higher if stock is used. However, earnings per share is lower than earnings per share if bonds are used because of the additional shares of stock that are outstanding. Issuance of bonds is preferable since earnings per share is higher under this alternative. LO 4 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

*BRIEF EXERCISE 11-12 Dec. 1

Stock Dividends (24,000 X $17) ..................... Common Stock Dividends Distributable (24,000 X $10) ......................................... Paid-in Capital in Excess of Par Value—Common Stock (24,000 X $7) ...........................................

408,000

Common Stock Dividends Distributable ...... Common Stock .........................................

240,000

240,000 168,000 240,000

(Stock Dividends = Number of shares issued × Market price per share) LO 5 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

11-12

Kimmel, Financial Accounting, 8/e, Solutions Manual

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SOLUTIONS TO DO IT! EXERCISES DO IT! 11-1 1. 2. 3. 4. 5.

True. True. False. Additional government regulation is a disadvantage of the corporate form of business. True. False. No-par value stock is quite common today.

LO 1 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement

DO IT! 11-2a Apr. 1

Cash (55,000 × $13) ........................................ Common Stock (55,000 × $5) ................... Paid-in Capital in Excess of Par Value—Common Stock ...................

715,000

Cash (1,000 × $6) ............................................ Preferred Stock (1,000 × $1) ..................... Paid-in Capital in Excess of Par Value—Preferred Stock ..................

6,000

275,000 440,000 1,000 5,000

LO 2 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Reporting

DO IT! 11-2b Aug. 1

Treasury Stock .............................................. Cash...........................................................

76,000 76,000

(Treasury stock is recorded at cost) LO 2 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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11-13

DO IT! 11-3a (1) The company has not missed past dividends and the preferred stock is noncumulative; thus, the preferred stockholders are paid only this year’s dividend. The dividend paid to preferred stockholders would be $24,000 (3,000 X .08 X $100). The dividend paid to common stockholders would be $81,000 ($105,000 – $24,000). (2) The preferred stock is noncumulative; thus, past unpaid dividends do not have to be paid. The dividend paid to preferred stockholders would be $24,000 (3,000 X .08 X $100). The dividend paid to common stockholders would be $81,000 ($105,000 – $24,000). (3) The preferred stock is cumulative; thus, dividends that have been missed in the past (dividends in arrears) must be paid. The dividend paid to preferred stockholders would be $72,000 (3 X 3,000 X .08 X $100). The dividend paid to common stockholders would be $33,000 ($105,000 – $72,000). LO 3 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

DO IT! 11-3b (a) 1.

The stock dividend amount is $3,000,000 [(400,000 X 15%) X $50]. The new balance in retained earnings is $9,000,000 ($12,000,000 – $3,000,000).

The retained earnings after the stock split would be the same as it was before the split: $12,000,000.

(A stock dividend reduces retained earnings by the number of shares used × market price per share)

11-14

Kimmel, Financial Accounting, 8/e, Solutions Manual

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DO IT! 11-3b (Continued) (b) (1) and (2) The effects on the stockholders’ equity accounts are as follows:

Paid-in capital Retained earnings Total stockholder’s equity Shares outstanding

Original Balance $ 2,400,000 12,000,000 $14,400,000 400,000

After Dividend $ 5,400,000 9,000,000 $14,400,000 460,000

After Split $ 2,400,000 12,000,000 $14,400,000 800,000

Total stockholders’ equity remains the same under both options. (Paid in capital is increased by the total amount of the stock dividend)

(c) 1. The stock dividend will not affect the par value per share. It remains at $2. 2. The 2-for-1 stock split will cut the par value per share in half. It will be $1($2 × 1/2). LO 3 BT: AP Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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11-15

DO IT! 11-4a HOYLE CORPORATION Balance Sheet (Partial) Stockholders’ equity Paid-in capital Capital Stock 9% preferred stock, $100 par value, 10,000 shares authorized, 2,000 shares issued and outstanding ....... Common stock, $5 par value, 500,000 shares authorized, 100,000 shares issued, and 93,000 shares outstanding .............. Total capital stock ....................... 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 additional paid-in capital ... Total paid-in capital ..................... Retained earnings ............................................. Total paid-in capital and retained earnings ...................... Accumulated other comprehensive income .... Less: Treasury stock (7,000 shares) (at cost) .................................................. Total stockholders’ equity ..........

$200,000

500,000 $ 700,000 23,000 263,000 286,000 986,000 372,000 1,358,000 67,000 46,000 $1,379,000

LO 4 BT: AP Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Reporting

11-16

Kimmel, Financial Accounting, 8/e, Solutions Manual

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DO IT! 11-4b 2016

(a)

($100,000– $30,000) Return on common = 10.4% stockholders’ equity ($600,000 + $750,000) /2

2017 ($110,000–$30,000)

= 10.1%

($750,000 + $830,000)/2

(b) Between 2016 and 2017, return on common stockholders’ equity decreased from 10.4% to 10.1%. It is important to note that even though net income increased during this period average common stockholders’ equity increased more causing the return percentage to slightly decrease. LO 4 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Measurement

Kimmel, Financial Accounting, 8/e, Solutions Manual

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11-17

SOLUTIONS TO EXERCISES EXERCISE 11-1 (a) Jan. 10 July 1

Cash (30,000 X $5) ................................ Common Stock ..............................

150,000

Cash (60,000 X $7) ................................ Common Stock (60,000 X $5) ....... Paid-in Capital in Excess of Par Value—Common Stock (60,000 X $2) ...............................

420,000

150,000 300,000 120,000

(Common stock = Number of shares issued × Par value per share)

(b) Jan. 10

July 1

Cash (30,000 X $5) ................................ Common Stock (30,000 X $1) ....... Paid-in Capital in Excess of Stated Value—Common Stock (30,000 X $4) ...............................

150,000

Cash (60,000 X $7) ................................ Common Stock (60,000 X $1) ....... Paid-in Capital in Excess of Stated Value—Common Stock (60,000 X $6) ...............................

420,000

30,000 120,000 60,000 360,000

(Common stock = Number of shares issued × Par value per share) LO 2 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

11-18

Kimmel, Financial Accounting, 8/e, Solutions Manual

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EXERCISE 11-2 June

July

Nov.

Cash .......................................................... Common Stock (80,000 X $1) ........... Paid-in Capital in Excess of Par Value—Common Stock .................

300,000

Cash (3,000 X $106) ................................. Preferred Stock (3,000 X $100) ........ Paid-in Capital in Excess of Par Value—Preferred Stock (3,000 X $6) .....................................

318,000

Treasury Stock ........................................ Cash...................................................

9,000

80,000 220,000 300,000 18,000 9,000

(Preferred stock = Number of shares issued × Par value per share) LO 2 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 11-3 (a) Feb. 1

July 1

Cash (40,000 X $51) .............................. Preferred Stock (40,000 X $50) ..... Paid-in Capital in Excess of Par Value—Preferred Stock (40,000 X $1) ................................

2,040,000

Cash (60,000 X $56) .............................. Preferred Stock (60,000 X $50) ..... Paid-in Capital in Excess of Par Value—Preferred Stock (60,000 X $6) ................................

3,360,000

2,000,000 40,000 3,000,000 360,000

(Preferred stock = Number of shares issued × Par value per share)

(b) Preferred Stock 2/1 2,000,000 7/1 3,000,000 5,000,000

Paid-in Capital in Excess of Par Value—Preferred Stock 2/1 40,000 7/1 360,000 400,000

Kimmel, Financial Accounting, 8/e, Solutions Manual

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11-19

EXERCISE 11-3 (Continued) (c) Preferred Stock—listed first in paid-in capital under capital stock. Paid in Capital in Excess of Par Value—Preferred Stock—listed first under additional paid-in capital. LO 2, 4 BT: AP Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 11-4 (a) Common stock outstanding is 574,000 shares. (Issued shares 580,000 less treasury shares 6,000.) (b) The stated value of the common stock is $5 per share. (Common stock issued $2,900,000 ÷ 580,000 shares.) (c) The par value of the preferred stock is $100 per share. (Preferred stock $600,000 ÷ 6,000 shares.) (d) The dividend rate is 6% ($36,000 ÷ $600,000). (e) The Retained Earnings balance is still $1,158,000. Cumulative dividends in arrears are only disclosed in the notes to the financial statements. LO 2, 4 BT: C Difficulty: Hard TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 11-5 May

Cash (8,000 X $13) .................................... Common Stock (8,000 X $10) ........... Paid-in Capital in Excess of Par Value—Common Stock (8,000 X $3) .....................................

104,000

Cash (10,000 X $53) .................................. Preferred Stock (10,000 X $20) ......... Paid-in Capital in Excess of Par Value—Preferred Stock (10,000 X $33) .................................

530,000

Treasury Stock (600 X $12) ...................... Cash ...................................................

7,200

80,000 24,000 200,000 330,000 7,200

LO 2 BT: AN Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting 11-20

Kimmel, Financial Accounting, 8/e, Solutions Manual

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EXERCISE 11-6 (a) June 15

Cash Dividends (69,000* X $1.50)..... Dividends Payable .....................

103,500 103,500

*60,000 shares + 9,000 shares July 10 Dec. 15

Dividends Payable ............................ Cash ............................................

103,500

Cash Dividends (73,000** X $1.60) ... Dividends Payable .....................

116,800

103,500 116,800

**69,000 shares + 4,000 shares (Cash dividends = Number of shares outstanding × dividend per share)

(b) In the retained earnings statement, dividends of $220,300 will be deducted. In the balance sheet, Dividends Payable of $116,800 will be reported as a current liability. LO 3 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 11-7

Stockholders’ equity Paid-in capital Retained earnings Total stockholders’ equity Outstanding shares

Before Action

After Stock Dividend

After Stock Split

$ 648,000 400,000

$ 716,850 331,150

$ 648,000 400,000

$1,048,000 81,000

$1,048,000 85,050

$1,048,000 162,000

(A stock dividend reduces retained earnings by the number of shares issued × market price per share) LO 3 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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11-21

EXERCISE 11-8 WELLS FARGO & COMPANY Partial Balance Sheet December 31, 2017 (in millions) Stockholders’ equity Paid-in capital Capital stock Preferred stock................................................. Common stock, $12 3 par value, 6 billion shares authorized, 5,245,971,422 shares issued, and 5,178,624,593 shares outstanding .............. Total capital stock ...................................... Additional paid-in capital Paid-in capital in excess of par value— common stock.............................................. Total paid-in capital .................................... Retained earnings ................................................. Total paid-in capital and retained earnings ................................................. Accumulated other comprehensive income ......... Less: Treasury stock (67,346,829 shares) ............ Total stockholders’ equity .........................

$8,485

8,743 $ 17,228 52,878 70,106 41,563 111,669 8,327 2,450 $117,546

LO 4 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

11-22

Kimmel, Financial Accounting, 8/e, Solutions Manual

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EXERCISE 11-9 RYDER CORPORATION Partial Balance Sheet December 31, 2017 Stockholders’ equity Paid-in capital Capital stock 8% Preferred stock, $100 par value, noncumulative, 6,000 shares issued ........................... $ 600,000 Common stock, no par, $2 stated value, 800,000 shares issued, and 788,000 shares outstanding ........................................ 1,600,000 Total capital stock ......................... $2,200,000 Additional paid-in capital Paid-in capital in excess of par value—preferred stock ..................... 45,000 Paid-in capital in excess of stated value—common stock ...................... 1,050,000 Total additional paid-in capital ..... 1,095,000 Total paid-in capital ....................... 3,295,000 Retained earnings ............................................... 1,334,000 Total paid-in capital and retained earnings ........................ 4,629,000 Less: Treasury stock (12,000 common shares) ......................... 72,000 Total stockholders’ equity ............ $4,557,000 LO 4 BT: AP Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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11-23

EXERCISE 11-10 PAISAN INC. Partial Balance Sheet December 31, 2017 Stockholders’ equity Paid-in capital Capital stock 8% Preferred stock, $50 par value, 40,000 shares authorized, 14,000 shares issued ....................... Common stock, no-par, $1 stated value, 400,000 shares authorized, 250,000 shares issued and 241,000 outstanding ...................................... Total capital stock ....................... Additional paid-in capital Paid-in capital in excess of par value—preferred stock .................... Paid-in capital in excess of stated value—common stock ..................... Total additional paid-in capital ... Total paid-in capital ..................... Retained earnings (See Note R) ....................... Total paid-in capital and retained earnings ...................... Accumulated other comprehensive loss......... Less: Treasury stock (9,000 common shares) ........................ Total stockholders’ equity ..........

$ 700,000

250,000 $ 950,000 24,000 1,200,000 1,224,000 2,174,000 920,000 3,094,000 31,000 64,000 $2,999,000

Note R: Retained earnings restricted for plant expansion, $100,000. LO 4 BT: AP Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Reporting

11-24

Kimmel, Financial Accounting, 8/e, Solutions Manual

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EXERCISE 11-11 Payout ratio

Return on common stockholders’ equity

2017 $298 = 59.1% $504

2016 $611 = 110.1% $555

$504 – $40 =18.3% $2,532

$555 – $40 =19.9% $2,591

Flintlock Corporation’s dividends decreased over 51% even though its net income decreased only 9% and return on stockholders’ equity decreased 8%. The company’s dividend policies should be reviewed for an explanation of these inconsistencies. (Return on common stockholders’ equity = (Net income – preferred dividends ÷ Average common stockholders’ equity) LO 4 BT: AP Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Measurement

EXERCISE 11-12 Payout ratio Return on common stockholders’ equity

2017 $471 = 23.5% $2,006

2016 394 = 18.3% $2,157

$2,006 – $0 = 14.7% $13,622.5

$2,157 – $0 = 18% $11,986.5

Walgreen’s payout ratio increased 28% even though its return on common stockholders’ equity and net income decreased by 18% and 7% respectively. The company’s dividend policies should be reviewed for an explanation. (Payout ratio = Common dividends ÷ Net income) LO 4 BT: AP Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Measurement

Kimmel, Financial Accounting, 8/e, Solutions Manual

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11-25

EXERCISE 11-13 (a) 2017:

$182,000– $8,000 = 17.4% $1,000,000

2016:

$150,000 – $8,000 = 20.3% $700,000

(Return on common stockholders’ equity = (Net income – preferred dividends) ÷ Average common stockholders’ equity)

(b) Kojak Corporation’s net income increased in part because it retired bonds and eliminated the interest expense associated with the bonds. Such an increase in income would produce an increase in return on common equity if stockholders’ equity had remained constant. In this example, common stockholders’ equity increased by 43% [($1,000,000 – $700,000) ÷ $700,000] while income increased by only 21%. (c) 2017:

$200,000 = 16.7% $1,200,000

2016:

$500,000 = 41.7% $1,200,000

Kojak Corporation retired all of its long term debt on January 1, 2017. This decreased its debt to assets ratio from 41.7% to 16.7%. Kojak Corporation would be considered to be very solvent. (Debt to assets ratio = Total liabilities ÷ Total assets) LO 4 BT: AN Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Measurement

11-26

Kimmel, Financial Accounting, 8/e, Solutions Manual

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EXERCISE 11-14

Income before interest and taxes ......... Interest ($2,000,000 X 12%) ................... Income before taxes .............................. Income tax expense (30%) .................... Net income ............................................. Outstanding shares ............................... Earnings per share ................................

(a) Plan One Issue Stock $800,000

(b) Plan Two Issue Bonds $800,000 240,000 560,000 168,000 $392,000 90,000 $4.36

800,000 240,000 $560,000 140,000 $4.00

(Earnings per share = Net income ÷ Number of shares outstanding) LO 4 BT: AN Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 11-15 (a) Pre-debt net income .............................. Adjustment for interest expense ($400,000 X .04) ................................... Net income ............................................. Outstanding shares ............................... Earnings per share ................................

2016 $100,000

2017 $100,000

0 $100,000 40,000 $ 2.50

16,000 $ 84,000 20,000 $ 4.20

(Interest expense = Face value of debt × interest rate)

(b) Net income Average common stockholders’ equity

2016 $ 100,000 = 10% $1,000,000

2017 $ 84,000 = 14% $600,000

0 =0 $1,000,000

$ 400,000 = 40% $1,000,000

Kimmel, Financial Accounting, 8/e, Solutions Manual

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11-27

EXERCISE 11-15 (Continued) (d) The issuance of debt reduced the company’s net income because of the interest cost that was incurred. However, the debt significantly increased the company’s earnings per share because it was used to acquire treasury stock. This reduced the number of outstanding shares, thus increasing earnings per share. The issuance of debt also increased the company’s leverage. Because the interest rate paid on the debt was only 4% but the company’s return on assets was 10%, the company was able to earn much more on each dollar invested in assets than it was paying on the debt. Thus, it was able to significantly increase its return on common stockholders’ equity. This was especially true because it used the debt to repurchase shares of stock. The issuance of the debt did, however, reduce the company’s solvency. Prior to the debt, the company had no liabilities. After issuing the debt, it had a debt to total assets ratio of 40%. Investors might be concerned that the increased reliance on debt has made the company too risky. The determination as to whether this was a good decision depends on one’s opinion regarding the tradeoff between the increased risk versus the increased return. LO 4 BT: AN Difficulty: Hard TOT: 15 min. AACSB: Analytic AICPA FC: Measurement and Reporting

11-28

Kimmel, Financial Accounting, 8/e, Solutions Manual

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*EXERCISE 11-16 (a) Stock Dividends (22,500* X $15) ........................ Common Stock Dividends Distributable (22,500 X $10)...................... Paid-in Capital in Excess of Par Value— Common Stock (22,500 X $5) ...................

337,500 225,000 112,500

*[($1,200,000 ÷ $10) + 30,000] X 15% (Stock dividends = Number of shares to be issued × Market price per share)

(b) Stock Dividends (40,500* X $8) .......................... Common Stock Dividends Distributable (40,500 X $5)........................ Paid-in Capital in Excess of Par Value— Common Stock (40,500 X $3) ...................

324,000 202,500 121,500

*[($1,200,000 ÷ $5) + 30,000] X 15% (Stock dividends = Number of shares to be issued × Market price per shares) LO 5 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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11-29

SOLUTIONS TO PROBLEMS PROBLEM 11-1A (a) Jan. 10

Mar. 1

May

Sept. 1

Nov. 1

Cash (70,000 X $4) ............................. Common Stock (70,000 X $1) .... Paid-in Capital in Excess of Stated Value—Common Stock (70,000 X $3)..................

280,000

Cash (12,000 X $53) ........................... Preferred Stock (12,000 X $50) .... Paid-in Capital in Excess of Par Value—Preferred Stock (12,000 X $3) ............................

636,000

Cash (120,000 X $6) ........................... Common Stock (120,000 X $1) .. Paid-in Capital in Excess of Stated Value—Common Stock (120,000 X $5) ................

720,000

Cash (5,000 X $5) ............................... Common Stock (5,000 X $1) ...... Paid-in Capital in Excess of Stated Value—Common Stock (5,000 X $4)....................

25,000

Cash (3,000 X $56) ............................. Preferred Stock (3,000 X $50) .... Paid-in Capital in Excess of Par Value—Preferred Stock (3,000 X $6) ..............................

168,000

70,000 210,000 600,000 36,000 120,000 600,000 5,000 20,000 150,000 18,000

(Paid-in capital in excess of par or stated value = Number of shares issued × (Market price per share – Par or stated value per share))

(b) Preferred Stock 3/1 600,000 11/1 150,000 12/31 Bal. 750,000 11-30

Paid-in Capital in Excess of Par Value—Preferred Stock 3/1 36,000 11/1 18,000 12/31 Bal. 54,000

Kimmel, Financial Accounting, 8/e, Solutions Manual

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PROBLEM 11-1A (Continued) Common Stock 1/10 70,000 5/1 120,000 9/1 5,000 12/31 Bal. 195,000

(c)

Paid-in Capital in Excess of Stated Value—Common Stock 1/10 210,000 5/1 600,000 9/1 20,000 12/31 Bal. 830,000

TIDAL CORPORATION Partial Balance Sheet December 31, 2017 Stockholders’ equity Paid-in capital Capital stock 6% Preferred stock, $50 par value, 20,000 shares authorized and 15,000 shares issued.............................. Common stock, no-par, $1 stated value, 500,000 shares authorized, 195,000 shares issued .......................................... Total capital stock .................. Additional paid-in capital Paid-in capital in excess of par value—preferred stock ............... Paid-in capital in excess of stated value—common stock ................ Total additional paid-in capital ................................... Total paid-in capital ................

$750,000

195,000 $ 945,000 54,000 830,000 884,000 $1,829,000

LO 2, 4 BT: AP Difficulty: Medium TOT: 40 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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11-31

PROBLEM 11-2A (a) Feb.

Mar. 20 Oct. Nov. Dec.

1 1 1

Cash .......................................................... Common Stock (5,000 X $4) ............. Paid-in Capital in Excess of Stated Value—Common Stock ......

30,000

Treasury Stock (1,000 X $7) ..................... Cash ...................................................

7,000

Cash Dividends ($300,000 X .07) ............. Dividends Payable ............................

21,000

Dividends Payable ................................... Cash ...................................................

21,000

Cash Dividends ........................................

124,500

20,000 10,000 7,000 21,000 21,000

[250,000* + 5,000 – (5,000 + 1,000)] X $.50

Dividends Payable ............................ Dec. 31 31

124,500

Income Summary ..................................... Retained Earnings.............................

280,000

Retained Earnings .................................... Cash Dividends ($21,000 + $124,500) ........................

145,500

Dividends Payable ................................... Cash ...................................................

124,500

280,000

145,500 124,500

*$1,000,000 ÷ $4 (Cash dividends = Number of shares outstanding × dividend per share)

(b)

300,000 300,000

Paid-in Capital in Excess of Par Value—Preferred Stock 1/1 Bal. 15,000 12/31 Bal. 15,000

Common Stock 1/1 Bal. 1,000,000 2/1 20,000 12/31 Bal. 1,020,000

Paid-in Capital in Excess of Stated Value—Common Stock 1/1 Bal. 480,000 2/1 10,000 12/31 Bal. 490,000

Preferred Stock 1/1 Bal. 12/31 Bal.

11-32

Kimmel, Financial Accounting, 8/e, Solutions Manual

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PROBLEM 11-2A (Continued) 12/31

Retained Earnings 145,500 1/1 Bal. 688,000 12/31 280,000 12/31 Bal. 822,500

Cash Dividends 10/1 21,000 12/1 124,500 12/31 12/31 Bal. –0– (c)

Treasury Stock 1/1 Bal. 40,000 3/20 7,000 12/31 Bal. 47,000

145,500

CYRUS CORPORATION Partial Balance Sheet December 31, 2017 Stockholders’ equity Paid-in capital Capital stock 7% Preferred stock, $100 par value, noncumulative, 5,000 shares authorized, 3,000 shares issued and outstanding ................................. Common stock, no-par, $4 stated value, 300,000 shares authorized, 255,000 shares issued and 249,000 shares outstanding ................................. Total capital stock .................. Additional paid-in capital Paid-in capital in excess of par value—preferred stock .............. Paid-in capital in excess of stated value—common stock ............... Total additional paid-in capital ................................... Total paid-in capital ................ Retained earnings ........................................ Total paid-in capital and retained earnings................. Less: Treasury stock (6,000 common shares)............................................... Total stockholders’ equity .....

Kimmel, Financial Accounting, 8/e, Solutions Manual

$ 300,000

1,020,000 $1,320,000 15,000 490,000 505,000 1,825,000 822,500 2,647,500 47,000 $2,600,500 (For Instructor Use Only)

11-33

PROBLEM 11-2A (Continued) (d) Payout ratio =

$124,500 = 44.5% $280,000

Earnings per share =

*250,000 – 5,000

$280,000 – $21,000 $259,000 = = $1.05 (245,000 * + 249,000 * *) ÷ 2 247,000

**255,000 – 6,000

Return on common stockholders’ equity = $280,000 – $21,000 $259,000 = = 11.7% a b ($2,128,000 + $2,285,500 ) ÷ 2 $2,206,750 a

Beginning common stockholders’ equity: $1,000,000 + $480,000 + $688,000 – $40,000

Ending common stockholders’ equity: $1,020,000 + $490,000 + $822,500 – $47,000

(Earnings per share = (Net income – preferred dividends) ÷ Average number of common shares outstanding) LO 2 - 4 BT: AP Difficulty: Medium TOT: 50 min. AACSB: Analytic AICPA FC: Measurement and Reporting

11-34

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 11-3A JONS COMPANY Partial Balance Sheet December 31, 2017 Stockholders’ equity Paid-in capital Capital stock 9% Preferred stock, $100 par value, cumulative, 120,000 shares issued and outstanding ............................... $12,000,000 Common stock, $5 par value, 1,300,000 shares issued and 1,285,000 shares outstanding ......... 6,500,000 Total capital stock ....................... $18,500,000 Additional paid-in capital Paid-in capital in excess of par value—preferred stock .................... 840,000 Paid-in capital in excess of par value—common stock ..................... 1,800,000 Total additional paid-in capital ... 2,640,000 Total paid-in capital ..................... 21,140,000 Retained earnings ............................................. 2,178,000* Total paid-in capital and retained earnings ...................... 23,318,000 Less: Treasury stock (15,000 shares) ............ 165,000 Total stockholders’ equity .......... $23,153,000 *$1,200,000 + $3,600,000 – $1,542,000a – $1,080,000 a

1,300,000 shares issued less 15,000 shares in treasury = 1,285,000 shares; outstanding; 1,285,000 X $1.20 = $1,542,000.

(Ending retained earnings = Beginning retained earnings + Net income – dividends declared) LO 2 - 4 BT: AP Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

11-35

PROBLEM 11-4A (a)

Retained Earnings Dec. 31

(b)

400,000 Jan. 1 Balance Dec. 31 Dec. 31 Balance

2,380,000 880,000 2,860,000

WAITE CORPORATION Partial Balance Sheet December 31, 2017

Stockholders’ equity Paid-in capital Capital stock 8% Preferred stock, $100 par value, noncumulative, 20,000 shares authorized, 10,000 shares issued and outstanding ........................................ $1,000,000 Common stock, no-par, $5 stated value, 600,000 shares authorized, 300,000 shares issued and outstanding ..................... 1,500,000 Total capital stock .................. $2,500,000 Additional paid-in capital Paid-in capital in excess of par value—preferred stock ..................... 200,000 Paid-in capital in excess of stated value—common stock ...................... 1,600,000 Total additional paid-in capital ..... 1,800,000 Total paid-in capital ....................... 4,300,000 Retained earnings (See Note A) ......................... 2,860,000 Total stockholders’ equity ............ $7,160,000 Note A: Retained earnings restricted for plant expansion, $160,000. LO 3, 4 BT: AP Difficulty: Medium TOT: 30 min. AACSB: Analytic AICPA FC: Reporting

11-36

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 11-5A

(a) 1.

Cash .............................................................. Preferred Stock (1,500 X $100)............. Paid-in Capital in Excess of Par Value—Preferred Stock .....................

170,000

Cash .............................................................. Common Stock (400,000 X $5) ............. Paid-in Capital in Excess of Stated Value—Common Stock .....................

3,520,000

Treasury Stock (4,000 X $9) ........................ Cash .......................................................

36,000

150,000 20,000 2,000,000 1,520,000 36,000

(Paid in capital in excess of par or stated value = Number of shares issued × (Market price per share – par or stated value per share

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

11-37

PROBLEM 11-5A (Continued) (b)

LAYES CORPORATION Partial Balance Sheet December 31, 2017 Stockholders’ equity Paid-in capital Capital stock 7% Preferred stock, $100 par value, noncumulative, 20,000 shares authorized, 1,500 shares issued and outstanding ................................. $ 150,000 Common stock, no-par, $5 stated value, 1,000,000 shares authorized, 400,000 shares issued, and 396,000 shares outstanding..................... 2,000,000 Total capital stock .................. $2,150,000 Additional paid-in capital Paid-in capital in excess of par value—preferred stock ............... 20,000 Paid-in capital in excess of stated value—common stock ................ 1,520,000 Total additional paid-in capital ................................... 1,540,000 Total paid-in capital ................ 3,690,000 Retained earnings ................................. 82,000 Total paid-in capital and retained earnings................. 3,772,000 Accumulated other comprehensive income 51,000 Less: Treasury stock (4,000 shares) ............................ 36,000 Total stockholders’ equity ..... $3,787,000

LO 2, 4 BT: AP Difficulty: Medium TOT: 30 min. AACSB: Analytic AICPA FC: Reporting

11-38

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 11-6A

KIMBEL INC. Partial Balance Sheet December 31, 2017 Stockholders’ equity Paid-in capital Common stock, $1 par value, 2,000,000 shares authorized, 710,000* shares issued, and 690,000 shares outstanding .................................... Additional paid-in capital Paid-in capital in excess of par value— common stock ................................................ Total paid-in capital ..................................... Retained earnings ............................................................. Total paid-in capital and retained earnings .................................................... Accumulated other comprehensive income ($60,000 + $17,000) ......................................................... Less: Treasury stock—common (20,000 shares) .......... Total stockholders’ equity ..........................

$ 710,000 1,780,000** 2,490,000 903,000*** 3,393,000 77,000 76,000 $3,394,000

***600,000 + 50,000 + 60,000 = 710,000 shares ***$1,500,000 + (50,000 X $2) + (60,000 X $3) = $1,780,000 ***$700,000 – $207,000 + $410,000 = $903,000 (Ending retained earnings = Beginning retained earnings + Net income – Dividends declared) LO 2 - 4 BT: AP Difficulty: Easy TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

11-39

PROBLEM 11-7A (a)

2017

(1)

$2,240,000

Return on assets

$15,687,500 (2)

Return on common stockholders’ equity

(3)

Payout ratio

(4)

Debt to assets ratio

2016 = 14.3%

$2,240,000 – $300,000 $9,400,000

$890,000 $2,240,000

$6,000,000

= 20.6%

= 39.7%

$17,763,000

= 14.1%

$2,500,000 – $300,000 $14,100,000

$1,026,000 $2,500,000 $3,000,000

= 41.4%

$14,500,000

(5)

$2,500,000

$16,875,000

= 15.6%

= 41.0%

= 17.8%

($2,240,000 + $500,000 + $670,000)

($2,500,000 + $140,000 + $750,000)

$500,000 = 6.8 times

$140,000

Times interest earned

= 24.2 times

(b) Spahn’s net income declined from $2,500,000 to $2,240,000. Its return on assets increased slightly, but its return on common stockholders’ equity increased 32%. Based on these two measures, profitability improved. The payout ratio declined about 3%. (c) Spahn’s debt to assets ratio increased from 17.8% to 41.4% and its times interest earned decreased from 24.2 to 6.8 times. These changes indicate that Spahn is less solvent in 2017 than 2016. (d) It appears that the decision to issue debt to purchase common stock was wise. Spahn’s 10% interest rate was less than its return on assets of 14.3%. This resulted in the 32% increase in return on common stockholders’ equity. Although the solvency ratios declined, Spahn does not appear to be in trouble covering the extra debt. Its times interest earned ratio of 6.8 times is probably good coverage. If Spahn’s earnings start to drop, it could consider reissuing the treasury stock and paying off debt. LO 4 BT: AP Difficulty: Medium TOT: 30 min. AACSB: Analytic AICPA FC: Measurement and Reporting

11-40

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

*PROBLEM 11-8A

(a) Jan. 15 Feb. 15 Apr. 15

May 15

Dec.

1 31 31 31

Cash Dividends (70,000 X $0.50) ...... Dividends Payable .....................

35,000

Dividends Payable ............................ Cash ............................................

35,000

Stock Dividends (7,000 X $14) .......... Common Stock Dividends Distributable (7,000 X $10)...... Paid-in Capital in Excess of Par Value—Common Stock (7,000 X $4) ..............................

98,000

Common Stock Dividends Distributable ................................... Common Stock (7,000 X $10) ....

35,000 35,000

70,000 28,000 70,000 70,000

Cash Dividends (77,000 X $0.60) ...... Dividends Payable .....................

46,200

Income Summary .............................. Retained Earnings......................

400,000

Retained Earnings ............................. Stock Dividends .........................

98,000

Retained Earnings ............................. Cash Dividends ..........................

81,200

46,200 400,000 98,000 81,200

(Common stock dividends distributable = (Number of shares outstanding × 10%) × par value per share))

(b) Common Stock 1/1 Bal. 700,000 5/15 70,000 12/31 Bal. 770,000

12/31 12/31

Retained Earnings 98,000 1/1 Bal. 620,000 81,200 12/31 400,000 12/31 Bal. 840,800

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

11-41

*PROBLEM 11-8A (Continued) Paid-in Capital in Excess of Par Value 1/1 Bal. 500,000 4/15 28,000 12/31 Bal. 528,000 Cash Dividends 1/15 35,000 12/1 46,200 12/31 12/31 Bal. –0–

81,200

Common Stock Dividends Distributable 5/15 70,000 4/15 70,000 12/31 Bal. –0–

Stock Dividends 4/15 98,000 12/31 12/31 Bal. –0–

98,000

(Ending returned earnings = Beginning retained earnings + Net income – (stock dividends + Cash dividends))

(c)

TACOMA CORPORATION Partial Balance Sheet December 31, 2017 Stockholders’ equity Paid-in capital Capital stock Common stock, $10 par value, 77,000 shares issued and outstanding ........................................ Additional paid-in capital Paid-in capital in excess of par value . Total paid-in capital ....................... Retained earnings ............................................... Total stockholders’ equity ............

11-42

Kimmel, Financial Accounting, 8/e, Solutions Manual

$ 770,000 528,000 1,298,000 840,800 $2,138,800

(For Instructor Use Only)

*PROBLEM 11-8A (Continued) (d) Payout ratio =

$81,200 = 20.3% $400,000

Return on common stockholders’ equity = $400,000 – 0 $400,000 = = 20.2% ($1,820,000*+$2,138,800**) ÷ 2 $1,979,400

*$700,000 + $500,000 + $620,000

**from req. (c)

(Return common stockholders’ equity = (Net income – preferred dividends) ÷ Average common stockholders’ equity)) LO 3 - 5 BT: AP Difficulty: Medium TOT: 40 min. AACSB: Analytic AICPA FC: Measurement and Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

11-43

ACR 11-1

(a)

ACCOUNTING CYCLE REVIEW

1. Cash ................................................................ Preferred Stock ....................................... Paid-in Capital in Excess of Par Value—Preferred Stock ...........

49,200

2. Cash ................................................................ Common Stock ....................................... Paid-in Capital in Excess of Par Value—Common Stock ............

21,000

3. Accounts Receivable ..................................... Service Revenue .....................................

320,000

4. Cash ................................................................ Unearned Service Revenue ....................

36,000

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

276,000

6. Supplies .......................................................... Accounts Payable ...................................

35,100

7. Accounts Payable .......................................... Cash .........................................................

32,200

8. Treasury Stock .............................................. Cash .........................................................

11,200

9. Other Operating Expenses ............................ Cash .........................................................

188,200

10. Cash Dividends ($3,360 + $10,200*) .............. Dividends Payable ..................................

13,560

11. Allowance for Doubtful Accounts ................. Accounts Receivable ..............................

1,700

48,000 1,200 9,000 12,000 320,000 36,000 276,000 35,100 32,200 11,200 188,200 13,560 1,700

*[($80,000 ÷ $10) + 900 – 400] X $1.20

11-44

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

ACR 11-1 (Continued) Adjusting Entries 1. Supplies Expense ($4,400 + $35,100 – $5,900).. Supplies ......................................................

33,600

2. Unearned Service Revenue ............................... Service Revenue ($36,000 X 9/12) ............

27,000

3. Bad Debts Expense [$3,500 – ($1,500 – $1,700)].... Allowance for Doubtful Accounts ............

3,700

4. Depreciation Expense........................................ Accumulated Depreciation—Buildings ($142,000 – $10,000) ÷ 30 .......................

4,400

5. Income Tax Expense.......................................... Income Taxes Payable ...............................

35,130*

33,600 27,000 3,700

4,400 35,130

*[($347,000 – $188,200 – $33,600 – $4,400 – $3,700) × .30] (b)

HAWKEYE CORPORATION Adjusted Trial Balance 12/31/17 Account Debit Cash ...................................................................... $175,200 Accounts Receivable ........................................... 87,800 Allowance for Doubtful Accounts ....................... Supplies ................................................................ 5,900 Land ...................................................................... 40,000 Buildings .............................................................. 142,000 Accumulated Depreciation—Buildings .............. Accounts Payable ................................................ Income Taxes Payable ......................................... Unearned Service Revenue ................................. Dividends Payable ............................................... Preferred Stock .................................................... Paid-in Capital in Excess of Par Value—P.S. ..... Common Stock .................................................... Paid-in Capital in Excess of Par Value—C.S. ..... Retained Earnings ............................................... Cash Dividends .................................................... 13,560 Treasury Stock .................................................... 11,200 Service Revenue .................................................. Bad Debt Expense ............................................... 3,700 Depreciation Expense ......................................... 4,400 Supplies Expense ................................................ 33,600 Other Operating Expenses .................................. 188,200 Income Tax Expense ........................................... 35,130 Total .................................................................. $740,690

Kimmel, Financial Accounting, 8/e, Solutions Manual

Credit $

3,500

26,400 28,500 35,130 9,000 13,560 48,000 1,200 89,000 12,000 127,400 347,000

$740,690

(For Instructor Use Only)

11-45

ACR 11-1 (Continued) (c) Optional T Accounts

Bal.

Bal. Bal.

Cash 24,600 49,200 21,000 36,000 276,000 175,200

32,200 11,200 188,200

Accounts Receivable 45,500 276,000 320,000 1,700 87,800

Allowance for Doubtful Accounts 1,700 Bal. 1,500 3,700 Bal. 3,500

Accum. Depreciation—Buildings Bal. 22,000 4,400 Bal. 26,400 Accounts Payable 32,200 Bal. 25,600 35,100 Bal. 28,500 Income Taxes Payable 35,130 Unearned Service Revenue 27,000 36,000 Bal. 9,000 Dividends Payable

Bal. Bal.

Supplies 4,400 35,100 5,900

13,560 33,600 Preferred Stock 48,000

Bal.

Land 40,000

Bal.

Buildings 142,000

11-46

Paid-in Capital in Excess of Par Value—P.S. 1,200

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

ACR 11-1 (Continued) (c) (Continued) Common Stock Bal. Bal.

80,000 9,000 89,000

Paid-in Capital in Excess of Par Value—C.S. 12,000 Retained Earnings Bal. 127,400

Bad Debt Expense 3,700 Depreciation Expense 4,400 Supplies Expense 33,600 Other Operating Expenses 188,200 Income Tax Expense 35,130

Cash Dividends 13,560 Treasury Stock 11,200 Service Revenue

Bal.

320,000 27,000 347,000

Kimmel, Financial Accounting, 7/e, Solutions Manual

(For Instructor Use Only)

11-47

ACR 11-1 (Continued) (c)

HAWKEYE CORPORATION Income Statement For the Year ending December 31, 2017 Service revenue ............................................ Operating expenses Other operating expenses .................... Supplies expense .................................. Depreciation expense ........................... Bad debt expense .................................. Total operating expenses ............................. Income before taxes ..................................... Income tax expense .............................. Net income ....................................................

$347,000 $188,200 33,600 4,400 3,700 229,900 117,100 35,130 $ 81,970

HAWKEYE CORPORATION Statement of Retained Earnings For the Year ending December 31, 2017 Retained earnings, 1/1/17 ............................................ Add: Net income ........................................................ Less: Dividends .......................................................... Retained earnings, 12/31/17 ........................................

11-48

Kimmel, Financial Accounting, 8/e, Solutions Manual

$127,400 81,970 209,370 13,560 $195,810

(For Instructor Use Only)

ACR 11-1 (Continued) HAWKEYE CORPORATION Balance Sheet At December 31, 2017 Assets Current assets Cash .............................................................. Accounts receivable .................................... Less: Allowance for doubtful accounts ............. Supplies ........................................................ Total current assets ...............................

$175,200 $ 87,800 3,500

Property, plant, and equipment Land............................................................... Buildings ....................................................... $142,000 Less: Accumulated depreciation Bldg. .............. 26,400 Total assets ..........................................................

84,300 5,900 265,400

40,000 115,600

155,600 $421,000

Liabilities and Stockholders’ Equity Current liabilities Accounts payable ........................................ Income taxes payable .................................. Dividends payable........................................ Unearned service revenue .......................... Total current liabilities ......................................... Stockholders’ equity Paid-in capital Capital stock Preferred stock..................................$48,000 Common stock .................................. 89,000 Total capital stock ......................... Additional paid-in capital Paid-in capital in excess of par value—preferred stock ........... 1,200 Paid-in capital in excess of par value—common stock ............ 12,000 Total additional paid-in capital ........... Total paid-in capital .......................... Retained earnings ........................................ Total paid-in capital and retained earnings ........................... Less: Treasury stock (400 shares) ...................................... Total stockholders’ equity ............... Total liabilities and stockholders’ equity ...............

$ 28,500 35,130 13,560 9,000 $ 86,190

137,000

13,200 150,200 195,810 346,010 11,200 334,810 $421,000

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

11-49

ACR 11-2

ACCOUNTING CYCLE REVIEW

(a) 2017 Feb. 1

13,000

Cash ..................................................................... Note Payable ..................................................

8,000

Equipment ........................................................... Cash................................................................

9,020

Utilities Expense ................................................. Cash................................................................

220

Supplies............................................................... Accounts Payable .........................................

980

7,500 5,500

8000

9,020

220

980

No entry ...............................................................

Prepaid Insurance .............................................. Cash................................................................

2,460

Cash ..................................................................... Loss on Disposal of Plant Assets .................... Equipment ......................................................

3,950 250

Accounts Receivable ......................................... Service Revenue ...........................................

3,900

Cash ..................................................................... Unearned Service Revenue ..........................

540

Accounts Payable .............................................. Cash................................................................

300

Treasury Stock ................................................... Cash................................................................

900

Accounts Receivable ......................................... Service Revenue ...........................................

4,300

Salaries and Wages Expense ............................ Cash................................................................

3,840

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

2,500

Prepaid Expenses .............................................. Cash................................................................

220

Dividends ............................................................ Cash................................................................

940

11-50

Cash .................................................................... Common Stock .............................................. Paid in Capital in Excess of Par ..................

2,460

4,200

3,900

540

300

900

4,300

3,840

2,500

220

Kimmel, Financial Accounting, 8/e, Solutions Manual

940

(For Instructor Use Only)

ACR 11-2 (Continued) (d) Debit Credit Feb. 28 1. Accounts Receivable ............................................. Service Revenue ................................................ 2.

10.

3,800 3,800

Allowance for Doubtful Accounts ........................ Accounts Receivable .........................................

200

Bad Debt Expense ................................................. Allowance for Doubtful Accounts ....................

479

Depreciation Expense ........................................... Accumulated Depreciation-Equipment ............

Insurance Expense ................................................ Prepaid Insurance ..............................................

820

Supplies Expense .................................................. Supplies ..............................................................

580

Unearned Service Revenue................................... Service Revenue ................................................

135

Salaries and Wages Expense ............................... Salaries and Wages Payable ............................

1,920

Interest Expense .................................................... Interest Payable .................................................

Income Tax Expense ............................................. Income Taxes Payable.......................................

779

Kimmel, Financial Accounting, 8/e, Solutions Manual

200

479

820

580

135

1,920

779

(For Instructor Use Only)

11-51

ACR 11-2 (Continued) (c) and (f)

Accounts

Trial Balance Debit Credit $10,090 5,700

Cash Accounts Receivable Allowance for Doubtful Accounts Prepaid Expenses 220 Prepaid Insurance 2,460 Supplies 980 Equipment 4,820 Accumulated DepreciationEquipment Accounts Payable $680 Unearned Service Revenue 540 Salaries and Wages Payable Interest Payable Note Payable 8,000 Common Stock 7,500 Paid-in Capital in Excess of Par 5,500 Retained Earnings Dividends 940 Treasury Stock 900 Service Revenue 8,200 Utilities Expense 220 Salaries and Wages Expense 3,840 Loss on Disposal of Plant Assets 250 Bad Debt Expense Depreciation Expense Insurance Expense Supplies Expense Interest Expense Income Tax Expense Income Taxes Payable Total $30,420 $30,420

11-52

Adjusted Trial Balance Debit Credit $10,090 9,300 $279 220 1,640 400 4,820 90 680 405 1,920 40 8,000 7,500 5,500 940 900 12,135 220 5,760 250 479 90 820 580 40 779 779 $37,328 $37,328

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

ACR 11-2 (Continued) (h) Debit Feb. 28

Service Revenue ..................................... Income Summary ................................

12,135

Income Summary .................................... Bad Debt Expense .............................. Depreciation Expense ........................ Insurance Expense ............................. Supplies Expense ............................... Salaries and Wages Expense ............ Interest Expense ................................. Utilities Expense ................................. Loss on Disposal of Plant Assets ..... Income Tax Expense ..........................

9,018

Income Summary .................................... Retained Earnings ..............................

3,117

Retained Earnings .................................. Dividends .............................................

940

Credit

12,135

479 90 820 580 5,760 40 220 250 779

3,117

Kimmel, Financial Accounting, 8/e, Solutions Manual

940

(For Instructor Use Only)

11-53

ACR 11-2 (Continued)

(b), (e), and (h) Cash 2/1 13,000 2/1 2/1 8,000 2/1 2/5 3,950 2/5 2/17 540 2/18 2/25 2,500 2/20 2/24 2/27 2/28 2/28 Bal. 10,090

9,020 220 2,460 300 900 3,840 220 940

Accounts Receivable 2/16 3,900 2/25 2,500 2/23 4,300 2/28 200 2/28 3,800 2/28 Bal. 9,300 2/3 2/28 Bal.

Supplies 980 2/28 400

580

Prepaid Insurance 2/5 2,460 2/28 2/28 Bal. 1,640

820

2/18

Accounts Payable 300 2/3 2/28 Bal.

980 680

Notes Payable 2/1 2/28 Bal.

8,000 8,000

Salaries and Wages Payable 2/28 1,920 2/28 Bal. 1,920 Interest Payable 2/28

2/28 Bal.

Income Taxes Payable 2/28 2/28 Bal.

779 779

Unearned Service Revenue 2/28 135 2/17 540 2/28 Bal. 405

Prepaid Expenses 2/27 220 2/28 Bal. 220 Allowance for Doubtful Accounts 2/28 200 2/28 479 2/28 Bal. 279

2/1 2/28 Bal.

Equipment 9,020 2/5 4,820

4,200

Accumulated Depr.—Equipment 2/28 90 2/28 Bal. 90 11-54

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

ACR 11-2 (Continued)

Common Stock 2/1 2/28 Bal.

7,500 7,500

Paid in Cap. In Excess of Par 2/1 5,500 2/28 Bal. 5,500

2/28 2/28 Bal.

Dividends 940 2/28 0

940

Treasury Stock 2/20 900 2/28 Bal. 900

2/28

Retained Earnings 940 2/28 3,117 2/28 Bal. 2,177

2/28 2/28

Income Summary 9,018 2/28 12,135 3,117 2/28 Bal. 0

Service Revenue 2/28 12,135 2/16 2/23 2/28 2/28 2/28 Bal.

3,900 4,300 3,800 135 0

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

11-55

ACR 11-2 (Continued)

Utilities Expense 2/1 220 2/28 2/28 Bal. 0

220

Salaries and Wages Expense 2/24 3,840 2/28 5,760 2/28 1,920 2/28 Bal. 0 Insurance Expense 2/28 820 2/28 2/28 Bal. 0

820

Depreciation Expense 2/28 90 2/28 2/28 Bal. 0

Bad Debt Expense 2/28 479 2/28 479 2/28 Bal. 0 Supplies Expense 2/28 580 2/28 2/28 Bal. 0

580

Interest Expense 2/28 40 2/28 2/28 Bal. 0

Loss on Disposal of Plant Assets 2/5 2/28 Bal.

250 2/28 0

250

Income Tax Expense 2/28 779 2/28 779 2/28 Bal. 0

11-56

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

ACR 11-2 (Continued) (g) Clean Sweep Income Statement For the Month Ending February 28, 2017 Service revenue..................................... Operating expenses: Salaries and wages expense ............ Utilities expense ................................ Bad debt expense .............................. Depreciation expense ....................... Insurance expense ............................ Supplies expense .............................. Income from operations ....................... Loss on disposal of plants assets ...... Interest expense .................................... Income before income taxes ................ Income tax expense (20%) ................... Net income .............................................

$12,135 $5,760 220 479 90 820 580 250 40

7,949 4,186 290 3,896 779 $3,117

Clean Sweep Retained Earnings Statement For the Month Ending February 28, 2017 Retained earnings, 2/1/17 ..................... Add: Net income.................................... Less: Dividends.................................... Retained earnings, 2/28/17 ...................

– 3,117 940 $2,177

(For Instructor Use Only)

Kimmel, Financial Accounting, 8/e, Solutions Manual

11-57

ACR 11-2 (Continued) Clean Sweep Balance Sheet February 28, 2017 Assets Current assets Cash ...........................................................

$10,090

Accounts receivable ...................................

$9,300

Less: Allowance for doubt. accounts .........

279

9,021

Prepaid expenses ......................................

220

Prepaid insurance ......................................

1,640

Supplies .....................................................

400

Total current assets ........................................

21,371

Property, plant and equipment Equipment ..................................................

4,820

Less: Accum depreciation-equipment ........

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

4,730 $26,101

Liabilities and Stockholders Equity Current liabilities .............................................. Accounts payable ........................................

$680

Unearned service revenue ..........................

405

Salaries and wages payable .......................

1,920

Income tax payable .....................................

779

Interest payable ...........................................

Total current liabilities ......................................

$3,824

Note payable, 6% due 2/1/2019 ......................

8,000

Total Liabilities .................................................

11,824

Stockholders' Equity Common stock, $1.50 par ..........................

$7,500

Paid-in capital in excess of par ..................

5,500

Retained earnings ...................................... Less: Treasury stock at cost ......................

13,000 2,177

15,177 900

Total stockholders' equity ...........................

14,277

Total Liabilities and Stockholders' equity ..

$26,101

11-58

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

CT 11-1

FINANCIAL REPORTING PROBLEM

(a) The common stock has a par value of $0.00001 per share. (b) There are 12,600,000 thousand shares authorized of which 5,866,161 thousand are issued. The percentage is 47% (5,866,161 ÷ 12,600,000). (c) The shares outstanding were (Thousands)

(d) Payout ratio =

2014

2013

5,866,161

6,294,494

$11,126 = 28.2% $39,510

Basic earnings per share = $6.49

Return on common stockholders’ equity =

$39,510 – 0 = 33.6% $117,548*

*($111,547 + $123,549) ÷ 2 LO 4 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Measurement and Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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11-59

CT 11-2

COMPARATIVE ANALYSIS PROBLEM

(a)

Columbia Sportswear Company Return on common stockholders’ equity

$141,859 ÷ $1,304,049* = 10.9%

*($1,355,234 + $1,252,864) ÷ 2

Debt to assets

VF Corporation

$1,047,505 ÷ $5,853,960** = 17.9%

**($5,630,882 + $6,077,038) ÷ 2

$436,975 ÷ $1,792,209 = 24.4%

$4,349,258** ÷ $9,980,140 = 43.6%

**($1,620,241 + $1,423,581 + $1,305,436) Return on assets

$141,859 ÷ $1,698,898.5* = 8.4%

*($1,792,209 + $1,605,588) ÷ 2

$1,047,505 ÷ $10,147,791.5** = 10.3%

**($9,980,140 + $10,315,443) ÷ 2

(b) VFC’s return on assets, 10.3%, is larger than Columbia Sportswear’s 8.4% indicating that it is more profitable. Comparing the return on common stockholders’ equity indicates that VFC is 64% more profitable because its shareholders earned 17.9% on each dollar invested while Columbia’s investors earned only 10.9%. These differences in profitability can be better understood by looking at the debt to assets ratios. VFC relies much more on debt to provide a return to its investors. VFC’s return to stockholders is higher than Columbia Sportswear’s because it uses leverage to boost its return to shareholders. VFC’s interest rate on borrowing is less than the rate it earns on its assets, therefore by borrowing it can increase its return. However, its reliance on debt increases its risk of default and decreases its solvency.

11-60

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 11-2 (Continued)

Columbia Sportswear Company

VF Corporation

$39,836 = 28.1% $141,859

$478,933 = 45.7% $1,047,505

VFC pays out a higher portion of its earnings as dividends. LO 4 BT: AN Difficulty: Medium TOT: 30 min. AACSB: Analytic AICPA FC: Measurement and Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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11-61

CT 11-3

COMPARATIVE ANALYSIS PROBLEM

(a) Return on common stockholders’ equity

Amazon.com

Wal-Mart Stores

$(241) ÷ $10,243.5* = (2.4%)

$16,363 ÷ $78,824.5 * = 20.8%

*($10,741 + $9,746) ÷ 2

Debt to assets

Return on assets

*($81,394 + $76,255) ÷ 2

$43,764 ÷ $54,505 = 80.3%

$117,769* ÷ $203,706 = 57.8%

*($28,089 + $8,265 + $7,410)

($65,272 + $41,086 +$2,606+ $8,805)

$(241) ÷ $47,332* = (0.5%)

*($54,505 + $40,159) ÷ 2

$16,363 ÷ $204,228.5* = 8.0% *($203,706 + $204,751) ÷ 2

(b) Wal-Mart is profitable with net income and positive returns on common stockholder’s equity and assets while Amazon had a net loss for 2014. Both companies have significant amounts of debt as indicated by the debt to assets ratios of 80.3% for Amazon and 57.8% for Wal-Mart. WalMart is able to use this debt to generate returns for its shareholders but Amazon is not. (c) Payout ratio

Amazon.com $0 = 0% $(241)

Wal-Mart Stores $6,185 = 37.8% $16,363

Wal-Mart pays a higher portion of its earnings as dividends since Amazon neither paid any dividends nor generated any earnings in 2014. LO 4 BT: AN Difficulty: Medium TOT: 30 min. AACSB: Analytic AICPA FC: Measurement and Reporting

11-62

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 11-4

INTERPRETING FINANCIAL STATEMENTS

(a) This is a dividend transaction—a property dividend. (b) Debt to assets ratio (c) Return on assets Return on common stockholders’ equity

Host Marriott $3,112 = 81.4% $3,822

Marriott International $2,440 = 76.1% $3,207

$(25) = (.7%) $3,822

$200 = 6.2% $3,207

$(25) = (3.5%) $710

$200 = 26.1% $767

(d) The debtholders were concerned that by splitting the company and leaving most of the debt with only one half of the original company the likelihood that the debtholders would be repaid was reduced—that is, the probability that Marriott would default on the debt increased. This reduces the value of the debt investment. LO 4 BT: AN Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Measurement and Reporting

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11-63

CT 11-5

REAL-WORLD FOCUS

Answers will vary depending on the company chosen by the student. LO 4 BT: AN Difficulty: Medium TOT: 20 min. AACSB: Analytic and Technology AICPA FC: Reporting

11-64

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 11-6

DECISION MAKING ACROSS THE ORGANIZATION

Year ended After Purchase of Before Purchase of Treasury Stock Treasury Stock $193.6 - 0 $123.4 - 0 = $1.76 = $1.03 109.7 119.9

(a) Earnings per share

Return on common stockholders’ equity

$193.6 = 18% $1,078

$123.4 = 11% $1,126.2

Return on assets

$193.6 = 9.6% $2,016.9

$123.4 = 6.5% $1,889.8

All three measures indicate a significant increase in profitability. (b) Payout ratio

Average cash dividend paid per share

$26.8 = 13.8% $193.6

$31.0 = 25.1% $123.4

$26.8 = $.24 109.7

$31.0 = $.26 119.9

Wendy’s paid less of its earnings as dividends after the purchase of treasury shares than the year before. Wendy’s appeared to be retaining more of its earnings to invest in its operations. (c) Debt to assets ratio

Times interest earned ratio

$1,046.3 = 50.4% $2,076.0

$769.9 = 41.9% $1,837.9

($193.6 + $30.2 + $113.7) ($123.4 + $19.8 + $84.3) $19.8 $30.2 = 11.5 times = 11.2 times

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11-65

CT 11-6 (Continued) Wendy’s debt to assets ratio increased from 41.9% to 50.4% indicating a decrease in its solvency. This increase may not be cause for concern since Wendy’s times interest earned decreased only slightly. (d) Since Wendy’s return on assets and its return on common stockholders’ equity both increased it can be concluded that the improvement was due partially to increased reliance on debt financing and partially to improved profitability in use of assets. (e) It appears that Wendy’s International acted wisely in purchasing treasury stock and taking on more debt. Its profitability improved significantly and it appears to be handling its debt payments comfortably. Wendy’s has been able to increase its earnings per share and return to its stockholders. LO 4 BT: E Difficulty: Medium TOT: 40 min. AACSB: Analytic, Technology and Communication AICPA FC: Measurement and Reporting AICPA PC: Communication

11-66

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 11-7

COMMUNICATION ACTIVITY

Dear Uncle Earl: Thanks for your recent letter and for asking me to explain four terms. Here are my explanations: (1) Authorized stock is the total amount of stock that a corporation is given permission to sell as indicated in its charter. If all authorized stock is sold, a corporation must obtain the consent of the state to amend its charter before it can issue additional shares. (2) Issued stock is the amount of stock that has been sold either directly to investors or indirectly through an investment banking firm. (3) Outstanding stock is capital stock that has been issued and is being held by stockholders. It represents the difference between the stock issued by the company and the stock repurchased by the company. (4) Preferred stock is capital stock that has contractual preferences over common stock in certain areas. I really enjoy my accounting classes and especially like the accounting instructors. I hope your corporation does well, and I wish you continued success with your inventions. Regards, LO 1 BT: C Difficulty: Easy TOT: 6 min. AACSB: Analytic and Communication AICPA FC: Measurement AICPA PC: Communication

Kimmel, Financial Accounting, 8/e, Solutions Manual

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11-67

CT 11-8

ETHICS CASE

(a) The stakeholders in this situation are: The director of Pele’s R&D division. The president of Pele. The shareholders of Pele. Those who live in the environment to be sprayed by the new (untested) chemical. (b) The president is risking the environment and everything and everybody in it that is exposed to this new chemical in order to enhance his company’s sales and to preserve his job. Presidents and entrepreneurs frequently take risks in performing their leadership functions, but this action appears to be irresponsible and unethical. (c) A parent company may protect itself against loss and most reasonable business risks by establishing separate subsidiary corporations, but whether it can insulate itself against this type of action is a matter of state corporate law and criminal law. LO - BT: E Difficulty: Medium TOT: 10 min. AACSB: Analytic, Ethics and Communication AICPA FC: Reporting AICPA PC: Personal Demeanor

11-68

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 11-9

ETHICS CASE

(a) The stakeholders in this situation are: Mr. Boyd, president of Cooper Corporation. Dana Marks, financial vice-president. The stockholders of Cooper Corporation. (b) There is nothing unethical in issuing a stock dividend. But the president’s order to write a press release convincing the stockholders that the stock dividend is just as good as a cash dividend is unethical. A stock dividend is not a cash dividend and does not necessarily place the stockholder in the same position. A stock dividend is a “paper” dividend—the issuance of a certificate, not a check (cash). (c) The stock dividend results in a decrease in retained earnings and an increase of the same amount in paid-in capital with no change in total stockholders’ equity. There is no change in total assets and no change in total liabilities and stockholders’ equity. As a stockholder, preference for a cash dividend versus stock dividend is dependent upon one’s investment objective—income (cash flow) or growth (reinvestment). LO 3 BT: AN Difficulty: Medium TOT: 10 min. AACSB: Analytic, Ethics and Communication AICPA FC: Reporting AICPA PC: Personal Demeanor

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11-69

CT 11-10

ALL ABOUT YOU

Student responses will vary depending on the organization chosen by the student. LO - BT: AN Difficulty: Medium TOT: 30 min. AACSB: Analytic, Ethics and Communication AICPA FC: Reporting AICPA PC: Personal Demeanor

11-70

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 11-11

FASB CODIFICATION ACTIVITY

(a)

Stock Dividend: An issuance by a corporation of its own common shares to its common shareholders without consideration and under conditions indicating that such action is prompted mainly by a desire to give the recipient shareholders some ostensibly separate evidence of a part of their respective interests in accumulated corporate earnings without distribution of cash or other property that the board of directors deems necessary or desirable to retain in the business.

(b)

Stock Split: An issuance by a corporation of its own common shares to its common shareholders without consideration and under conditions indicating that such action is prompted mainly by a desire to increase the number of outstanding shares for the purpose of effecting a reduction in their unit market price and, thereby, of obtaining wider distribution and improved marketability of the shares. It is sometimes called a stock split-up.

(c)

Except for a few instances, the issuance of additional shares of less than 20 or 25 percent of the number of previously outstanding shares would call for treatment as a stock dividend as described in paragraph 505-20-30-3.

LO 3 BT: C Difficulty: Easy TOT: 20 min. AACSB: None AICPA FC: Measurement AICPA PC: Communication

Kimmel, Financial Accounting, 8/e, Solutions Manual

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11-71

CT 11-12

CONSIDERING PEOPLE, PLANET AND PROFIT

(a)

The new law allows a company to incorporate under a new charter which classifies a company as a “benefit company.” A benefit company’s governing board is allowed to consider social or environmental objectives ahead of profits. The purpose of the law is to shield the board from lawsuits from investors who feel that the purpose of the company should be to maximize profits and shareholder value.

(b)

The article says that some people say the biggest benefit of the law would occur when the company is being considered for either a sale or break-up. Currently, if shareholder value would be maximized by selling the company or breaking it into pieces, board members can be sued if they do not agree to sell or breakup the company. Under this law, the board would be allowed to consider other factors, such as the impact of a sale on the employees or the community. The article suggests that if Ben and Jerry’s had been structured as a benefit corporation the board would not have allowed the company to be sold to Unilever.

(c)

Critics of the new law say that it reduces the accountability of the company to its shareholders. They say that if management makes a bad decision which hurts the value of the company, management can say that it made the decision for reasons other than to maximize profits.

(d)

Previously companies could apply for “B Corp” certification. Under this program, companies are evaluated by a private entity that created and administers the certification. Companies choose to obtain this certification in order to demonstrate their commitment to social and environmental causes. The difference is that this certification does not shield a company from investor lawsuits which claim that the company’s social or environment programs are causing it to not maximize profits.

11-72

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 11-12 (Continued) (e)

The companies that the article cites as either having adopted benefit corporation standing, or are considering it are: Patagonia Ben and Jerry’s Homemade Emerge Workplace Solutions Greyston Bakery Comet Skateboards

LO 1 BT: C Difficulty: Medium TOT: 40 min. AACSB: None AICPA FC: Measurement AICPA PC: Communication

Kimmel, Financial Accounting, 8/e, Solutions Manual

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11-73

IFRS CONCEPTS AND APPLICATION IFRS 11-1 May 10

Cash (1,000 X $18) ...................................... Share Capital—Ordinary (1,000 X $10) ..................................... Share Premium—Ordinary (1,000 X $8) .......................................

18,000 10,000 8,000

LO 6 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Reporting

IFRS 11-2 MEENEN CORPORATION Partial Statement of Financial Position December 31, 2017 Equity Share capital—ordinary, €10 par value, 5,000 shares issued and 4,500 shares outstanding ....................................................... Share premium—ordinary................................... Retained earnings ............................................... Less: Treasury shares (500 shares) ................... Total equity ...............................................

€50,000 10,000 45,000 11,000 €94,000

LO 6 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

11-74

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IFRS 11-3 Mar. 2

June 12

July 11

Nov. 28

Organization Expense ............................. Share Capital—Ordinary (5,000 X $1)..................................... Share Premium—Ordinary ................

30,000

Cash .......................................................... Share Capital—Ordinary (60,000 X $1)................................... Share Premium—Ordinary ................

375,000

Cash (1,000 X $110).................................. Share Capital—Preference (1,000 X $100) .................................. Share Premium—Preference (1,000 X $10)....................................

110,000

Treasury Shares ....................................... Cash ...................................................

80,000

5,000 25,000

60,000 315,000

100,000 10,000 80,000

LO 6 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

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11-75

IFRS 11-4 INTERNATIONAL FINANCIAL REPORTING PROBLEM

(a) The company’s total equity is €23,003 million at year-end 2014, including revaluation reserves of €1,019 million. The number of treasury shares held is 5,851,370. (see Note 15.2) (b)

(1) Share capital (2) Share premium (3) Net profit group share

Common stock Paid-in capital in excess of par Controlling interest in net income

(c) The company declared and paid a dividend for 2014 of €8,434 million. This information is determined from Note 15.3 to the financial statements. (d) The company has a 22.2% return on ordinary shareholders’ equity. The computation is as follows: €5,648 (€23,003 + €27,907) ÷ 2 (e) Earnings per share is €11.27 per share for basic and a €11.21 for fully diluted. LO 6 BT: AN Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Measurement and Reporting

11-76

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CHAPTER 12 Statement of Cash Flows Learning Objectives 1. 2. 3. *4.

Discuss the usefulness and format of the statement of cash flows. Prepare a statement of cash flows using the indirect method. Use the statement of cash flows to evaluate a company. Prepare a statement of cash flows using the direct method.

Summary of Questions by Learning Objectives and Bloom’s Taxonomy Item

Item

Questions 1.

11.

16.

21.

12.

17.

22.

13.

18.

14.

19.

10.

15.

20.

Brief Exercises 1.

10.

13.

11.

14.

12.

15.

Do It! Exercises 1.

2a.

2b.

Exercises 1.

10.

13.

1, 2

11.

14.

12.

15.

Problems: Set A 1.

1, 2

2, 3

11.

10.

12.

Continuing Cookie Solutions for this chapter are available online.

Kimmel, Financial Accounting, 8/e, Solutions Manual

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12-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Distinguish among operating, investing, and financing activities.

Simple

10–15

Determine cash flow effects of changes in equity accounts.

Simple

10–15

Prepare the operating activities section—indirect method.

Simple

20–30

*4A

Prepare the operating activities section—direct method.

Simple

20–30

Prepare the operating activities section—indirect method.

Simple

20–30

*6A

Prepare the operating activities section—direct method.

Simple

20–30

Prepare a statement of cash flows—indirect method, and compute free cash flow.

Moderate

40–50

*8A

Prepare a statement of cash flows—direct method, and compute free cash flow.

Moderate

40–50

Prepare a statement of cash flows—indirect method.

Moderate

40–50

*10A

Prepare a statement of cash flows—direct method.

Moderate

40–50

11A

Prepare a statement of cash flows—indirect method.

Moderate

40–50

12A

Identify the impact of transactions on free cash flow.

Simple

10–15

12-2

Kimmel, Financial Accounting, 8/e, Solutions Manual

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ANSWERS TO QUESTIONS 1.

(a) The statement of cash flows reports the cash receipts and cash payments from operating, investing, and financing activities during a period in a format that reconciles the beginning and ending cash balances. (b) Disagree. The statement of cash flows is required. It is the fourth basic financial statement.

LO 1 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting 2.

The statement of cash flows answers the following questions about cash: (a) Where did the cash come from during the period? (b) What was the cash used for during the period? and (c) What was the change in the cash balance during the period? LO 1 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

The three activities are: Operating activities include the cash effects of transactions that create revenues and expenses and thus enter into the determination of net income. Investing activities include: (a) purchasing and disposing of investments and productive longlived assets and (b) lending money and collecting loans. Financing activities include: (a) obtaining cash from issuing debt and repaying amounts borrowed and (b) obtaining cash from stockholders, repurchasing shares, and paying them dividends. LO 1 BT: K Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting

(a) The sources of cash (inflows) in the statement of cash flows come from: (1)

Operating activities i. Sale of goods or services ii. Interest and dividends received

(2)

Investing activities i. Sale of property, plant, and equipment ii. Sale of investments in other entities’ securities iii. Collection of principal on loans to other entities

(3)

Financing activities i. Sale of common stock ii. Issuance of debt (bonds and notes)

(b) The uses of cash (outflows) in the statement of cash flows come from: (1)

Operating activities i. Payments to suppliers for inventory ii. Payments to employees for services iii. Payments to government for taxes iv. Payments to lenders for interest v. Payments to others for expenses

(2)

Investing activities

Kimmel, Financial Accounting, 8/e, Solutions Manual

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12-3

i. Purchase of property, plant, and equipment ii. Purchase of investments in other entities’ securities iii. Making loans to other entities

12-4

Kimmel, Financial Accounting, 8/e, Solutions Manual

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Questions Chapter 12 (Continued) (3)

Financing activities i. Payment of cash dividends to stockholders ii. Redeeming principal of long-term debt iii. Payment to reacquire capital stock (treasury stock)

LO 1 BT: K Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Reporting 5.

The statement of cash flows presents investing and financing activities so that even noncash transactions of an investing and financing nature are disclosed in the financial statements. If they affect financial conditions significantly, the FASB requires that they be disclosed in either a separate schedule at the bottom of the statement of cash flows or in a separate note or supplementary schedule to the financial statements.

LO 1 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting 6.

Examples of significant noncash activities are: (1) issuance of stock for assets, (2) conversion of bonds into common stock, (3) issuance of bonds or notes for assets, and (4) noncash exchanges of property, plant, and equipment.

LO 1 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting 7.

Comparative balance sheets, a current income statement, and certain transaction data all provide information necessary for preparation of the statement of cash flows. Comparative balance sheets indicate how assets, liabilities, and equities have changed during the period. A current income statement provides information about the amount of cash provided or used by operations. Certain transactions provide additional detailed information needed to determine how cash was provided or used during the period.

LO 2 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting 8.

The advantage of the direct method is that it presents the major categories of cash receipts and cash payments in a format that is similar to the income statement and familiar to statement users. Its principal disadvantage is that the necessary data can be expensive and time-consuming to accumulate. The advantage of the indirect method is it is often considered easier to prepare, and it provides a reconciliation of net income to net cash provided by operating activities. It also tends to reveal less company information to competitors. Its primary disadvantage is the difficulty in understanding the adjustments that comprise the reconciliation. Both methods are acceptable but the FASB expressed a preference for the direct method. However, the indirect method is the overwhelming favorite of companies.

LO 2 BT: C Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Reporting 9.

When total cash inflows exceed total cash outflows, the excess is identified as a “net increase in cash” near the bottom of the statement of cash flows.

LO 2 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting 10. The indirect method involves converting accrual net income to net cash provided (used) by operating activities. This is done by starting with accrual net income and adjusting for items that do not affect cash. Examples of adjustments include depreciation and other noncash expenses, Copyright © 2016 John Wiley & Sons, Inc.

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12-5

gains and losses on the sale of noncurrent assets, and changes in the balances of current asset and current liability accounts from one period to the next. LO 2 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting 11.

It is necessary to convert accrual basis net income to cash basis income because the unadjusted net income includes items that do not provide or use cash. An example would be an increase in accounts receivable. If accounts receivable increased during the period, revenues reported on the accrual basis would be higher than the actual cash revenues received. Thus, accrual basis net income must be adjusted to reflect the net cash provided by operating activities.

LO 2 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting

12-6

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Questions Chapter 12 (Continued) 12.

A number of factors could have caused an increase in cash despite the net loss. These are (1) high cash revenues relative to low cash expenses; (2) sales of property, plant, and equipment; (3) sales of investments; (4) issuance of debt or capital stock, and (5) differences between cash and accrual accounting, e.g. depreciation.

LO 2 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting 13.

Student answers will vary, however the five items selected should come from the following list: Depreciation/amortization/depletion expense. Gain or loss on disposal of a noncurrent asset. Increase/decrease in specific current assets. Increase/decrease in specific current liabilities.

LO 2 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting 14.

Under the indirect method, depreciation is added back to net income to reconcile net income to net cash provided (used) by operating activities because depreciation is an expense but not a cash payment.

LO 2 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting 15. The statement of cash flows is useful because it provides information to the investors, creditors, and other users about: (1) the company’s ability to generate future cash flows, (2) the company’s ability to pay dividends and meet obligations, (3) the reasons for the difference between net income and net cash provided by operating activities, and (4) the cash and noncash financing and investing transactions during the period. LO 1 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting 16. This transaction is reported in the note or schedule entitled “Noncash investing and financing activities” as follows: “Acquired land through issuance of common stock, $1,700,000.” LO 1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting 17.

(a) The phases of the corporate life cycle are the introductory phase, growth phase, maturity phase, and decline phase. (b) During the introductory phase, net cash provided by operating and investing activities would be expected to be negative, and cash from financing would be positive. During the growth phase, a company would be expected to show some small amounts of cash from operations while continuing to show negative cash from investing and positive cash from financing. During the maturity phase, net cash provided by operating, investing, and financing activities would all be expected to be positive while in the decline phase, net cash provided by operating and investing activities would continue to be positive while cash from financing would be negative.

LO 3 BT: C Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Reporting

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12-7

18.

Apple has positive net cash provided by operating activities that exceeds its net income. Net cash provided by operating exceeded its investing needs and it bought back shares of stock and paid dividends. Apple Roll appears to be in the middle to late maturity phase.

LO 3 BT: AN Difficulty: Medium TOT: 3 min. AACSB: Analytic AICPA FC: Reporting *19. Net cash provided (used) by operating activities under the direct approach is the difference between cash revenues and cash expenses. The direct approach adjusts the revenues and expenses directly to reflect the cash basis. This results in cash net income, which is equal to “net cash provided by operating activities.” LO 4 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

*20. (a) Cash receipts from customers = Revenues from sales

(b) Purchases = Cost of goods sold

+ Decrease in accounts receivable – Increase in accounts receivable

+ Increase in inventory – Decrease in inventory

Cash payments to suppliers = Purchases

+ Decrease in accounts payable – Increase in accounts payable

LO 4 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting *21. Sales revenue........................................................................................................ Add: Decrease in accounts receivable .................................................................. Cash receipts from customers ...............................................................................

$2,000,000 150,000 $2,150,000

LO 4 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Reporting *22. Depreciation expense is not listed in the direct method operating activities section because it is not a cash flow item—it does not affect cash. LO 4 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

12-8

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 12-1 (a) (b) (c) (d)

Cash inflow from financing activity, $200,000. Cash outflow from investing activity, $180,000. Cash inflow from investing activity, $20,000. Cash outflow from financing activity, $50,000.

LO 1 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

BRIEF EXERCISE 12-2 (a) Investing activity. (b) Investing activity. (c) Financing activity.

(d) Operating activity. (e) Financing activity. (f) Financing activity.

LO 1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

BRIEF EXERCISE 12-3 Cash flows from financing activities Proceeds from issuance of bonds payable ....................... Payment of dividends .......................................................... Net cash provided by financing activities ..................

$300,000) (40,000) $260,000)

(Financing activity cash flows = Issuance/repayment of L-T debt, Issuance/repurchase of stock, and payment of cash dividends) LO 1 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

12-9

BRIEF EXERCISE 12-4 Net cash provided by operating activities is $2,730,000. Using the indirect approach, the solution is: Net income ................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense .......................... Decrease in accounts receivable ........ Decrease in accounts payable ............ Net cash provided by operating activities ............................................

$2,500,000

$160,000) 350,000) (280,000)

230,000 $2,730,000

(Adjustments to net income include depreciation (+); decrease in non-cash current assets (+); and decrease in current liabilities (−)) LO 2 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 12-5 Cash flows from operating activities Net income ................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense .......................... Loss on disposal of plant assets ........ Net cash provided by operating activities ............................................

$280,000

$70,000 28,000

98,000 $378,000

(Adjustments to net income include depreciation (+); loss (−)) LO 2 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

12-10

Kimmel, Financial Accounting, 8/e, Solutions Manual

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BRIEF EXERCISE 12-6 Net income ........................................................... Adjustments to reconcile net income to net cash provided by operating activities: Decrease in accounts receivable................ Increase in prepaid expenses ..................... Increase in inventories ................................ Net cash provided by operating activities ...................................................

$186,000 $80,000) (28,000) (40,000)

12,000 $198,000

(Adjustments to net income include decrease in non-cash current assets (+); and increase in non-cash current assets (−)) LO 2 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 12-7 Original cost of equipment sold ................................................. Less: Accumulated depreciation .............................................. Book value of equipment sold ................................................... Less: Loss on disposal of equipment....................................... Cash flow from sale of equipment .............................................

$22,000 5,100 16,900 3,500 $13,400

(Loss on disposal = book value of disposal equipment – cash proceeds) LO 2 BT: AN Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 12-8 (a) Net cash provided by operating activities would be lower than net income during the growth phase because inventory must be purchased for future projected sales. Since sales during the growth phase are projected to be increasing, inventory purchases must increase and inventory expensed on an accrual basis would be less than inventory purchased on a cash basis. Also, collections on accounts receivable would lag behind sales; thus, accrual sales would exceed cash collections during the period. (b) Cash from investing is often positive during the late maturity phase and the decline phase because the firm may sell off excess long-term assets that are no longer needed for productive purposes. LO 3 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Measurement and Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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12-11

BRIEF EXERCISE 12-9 Free cash flow = $89,303,000 – $25,823,000 – $0 = $63,480,000 LO 3 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Measurement

BRIEF EXERCISE 12-10 Free cash flow = $412,000 – $200,000 – $0 = $212,000 LO 3 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Measurement

BRIEF EXERCISE 12-11 Free cash flow = ($104,539,000) – $79,330,000 – $0 = ($183,869,000) LO 3 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Measurement

BRIEF EXERCISE 12-12 Free cash flow is net cash provided by operating activities less capital expenditures and cash dividends paid. For Uhuru Inc. this would be $332,000 ($734,000 – $310,000 – $92,000). Since it has positive free cash flow that far exceeds its dividend, an increase in the dividend might be possible. However, other factors should be considered. For example, it must have adequate retained earnings, and it should be convinced that a larger dividend can be sustained over future years. It should also use the free cash flow to expand its operations or pay down its debt. LO 3 BT: AN Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Measurement and Reporting

*BRIEF EXERCISE 12-13 Receipts from Sales = customers revenue

+ Decrease in accounts receivable – Increase in accounts receivable

$1,317,060,000 = $1,244,023,000 + $73,037,000 (Decrease in accounts receivable) LO 4 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Reporting

12-12

Kimmel, Financial Accounting, 8/e, Solutions Manual

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*BRIEF EXERCISE 12-14 + Decrease in income taxes payable

Cash payment Income Tax = for income taxes Expense

– Increase in income taxes payable

$119,000,000 = $370,000,000 – $251,000,000* *$528,000,000 – $277,000,000 = $251,000,000 (Increase in income taxes payable) LO 4 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

*BRIEF EXERCISE 12-15 Cash Operating payments for expenses, = operating excluding expenses depreciation

+ Increase in prepaid expenses – Decrease in prepaid expenses and + Decrease in accrued expenses payable – Increase in accrued expenses payable

$78,400 = $90,000 – $7,200 – $4,400 LO 4 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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12-13

SOLUTIONS TO DO IT! EXERCISES DO IT! 12-1 (1) (2) (3) (4) (5)

Financing activity Operating activity Financing activity Investing activity Investing activity

LO 1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement and Reporting

DO IT! 12-2a Cash flows from operating activities Net income ................................................................. Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense .......................................... Patent amortization expense ............................... Gain on disposal of plant assets......................... Decrease in accounts receivable ........................ Increase in accounts payable .............................. Net cash provided by operating activities ....

$100,000 $6,300 4,000 (3,600) 6,000 3,200

15,900 $115,900

LO 2 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

12-14

Kimmel, Financial Accounting, 8/e, Solutions Manual

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DO IT! 12-2b ALEX COMPANY Statement of Cash Flows—Indirect Method For the Year Ended December 31, 2017 Cash flows from operating activities Net income .................................................................. $156,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ........................................... 40,000 Loss on disposal of equipment............................ 2,000 Increase in accounts receivable .......................... (40,000) Increase in inventory ............................................ (44,000) Increase in prepaid expenses .............................. (2,000) Increase in accounts payable............................... 3,000 Decrease in accrued expenses payable .............. (10,000) (51,000) Net cash provided by operating activities ..... 105,000 Cash flows from investing activities Sale of land ................................................................. 15,000 Sale of equipment ...................................................... 34,000 Purchase of equipment .............................................. (166,000) Net cash used by investing activities ............ (117,000) Cash flows from financing activities Redemption of bonds................................................. (50,000) Sale of common stock ............................................... 170,000 Payment of dividends ................................................ (85,000) Net cash provided by financing activities ..... 35,000 Net increase in cash.......................................................... 23,000 Cash at beginning of period ............................................. 36,000 Cash at end of period ........................................................ $59,000 (See Illustration 12-13) LO 2 BT: AP Difficulty: Hard TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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12-15

DO IT! 12-3 (a) Free cash flow = $73,700 – $24,200 – $13,000 = $36,500 (b) Net cash provided by operating activities fails to take into account that a company must invest in new plant assets just to maintain the current level of operations. Companies must also maintain dividends at current levels to satisfy investors. The measurement of free cash flow provides additional insight regarding a company’s cash-generating ability. LO 3 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

12-16

Kimmel, Financial Accounting, 8/e, Solutions Manual

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SOLUTIONS TO EXERCISES EXERCISE 12-1 (a) (b) (c) (d) (e) (f) (g)

Noncash investing and financing activities. Financing activities. Noncash investing and financing activities. Financing activities. Investing activities. Operating activities. Operating activities.

LO 1 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement and Reporting

EXERCISE 12-2 (a) Operating activity. (b) Noncash investing and financing activity. (c) Investing activity. (d) Financing activity. (e) Operating activity. (f) Noncash investing and financing activity. (g) Operating activity.

(h) Financing activity. (i) Operating activity. (j) Noncash investing and financing activity. (k) Investing activity. (l) Operating activity. (m) Operating activity (loss); investing activity (cash proceeds from sale). (n) Financing activity.

LO 1 BT: C Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Measurement and Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

12-17

EXERCISE 12-3 SOSA COMPANY Partial Statement of Cash Flows For the Year Ended December 31, 2017 Cash flows from operating activities Net income ....................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense .............................. Loss on disposal of plant assets ............ Increase in accounts receivable.............. Increase in prepaid expenses ................. Increase in accounts payable .................. Net cash provided by operating activities ................................................

$190,000 $35,000 5,000 (15,000) (4,000) 17,000

38,000 $228,000

(See Illustration 12-13) LO 2 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 12-4 SUNN INC. Partial Statement of Cash Flows For the Year Ended December 31, 2017 Cash flows from operating activities Net income ....................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense .............................. Decrease in accounts receivable ............ Decrease in inventory .............................. Increase in prepaid expenses ................. Increase in accrued expenses payable... Decrease in accounts payable ................ Net cash provided by operating activities ................................................

$153,000 $27,000) 9,000 4,000 (5,000) 10,000) (7,000)

38,000 $191,000

(See Illustration 12-13) LO 2 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting 12-18

Kimmel, Financial Accounting, 8/e, Solutions Manual

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EXERCISE 12-5 STAMOS CORPORATION Statement of Cash Flows—Indirect Method For the Year Ended December 31, 2017 Cash flows from operating activities Net income .................................................................. Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ......................................... Increase in accounts receivable ........................ Increase in inventory .......................................... Increase in income taxes payable ..................... Decrease in accounts payable ........................... Net cash provided by operating activities ...

$284,100 $162,000 (8,200) (11,000) 4,700 (3,700)

Cash flows from investing activities Sale of land .......................................................... Purchase of building........................................... Net cash used by investing activities ..........

35,000 (289,000)

Cash flows from financing activities Issuance of bonds .............................................. Payment of dividend ........................................... Purchase of treasury stock ................................ Net cash provided by financing activities ...

200,000 (12,000) (26,000)

143,800 427,900

(254,000)

162,000

Net increase in cash................................................... Cash at beginning of period ...................................... Cash at end of period .................................................

335,900 45,000 $380,900

(See Illustration 12-13) LO 2 BT: AP Difficulty: Hard TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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12-19

EXERCISE 12-6 BEIBER CORP Partial Statement of Cash Flows For the Year Ended December 31, 2017 Cash flows from operating activities Net income ....................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense .............................. Loss on disposal of plant assets ............ Net cash provided by operating activities ................................................ Cash flows from investing activities Sale of equipment ............................................ Purchase of equipment ................................... Construction of equipment ............................. Net cash used by investing activities .....

$ 72,000)

$28,000) 8,000)

36,000) 108,000)

25,000* (70,000) (53,000) (98,000)

Cash flows from financing activities Payment of cash dividends ............................. *Cost of equipment sold .................................. *Accumulated depreciation ............................. *Book value ...................................................... *Loss on sale of equipment ............................ *Cash proceeds ................................................

(14,000) $49,000) (16,000)) 33,000) (8,000) $25,000)

)

(See Illustration 12-13 and cash proceeds = book value – loss on sale of equipment) LO 2 BT: AN Difficulty: High TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

12-20

Kimmel, Financial Accounting, 8/e, Solutions Manual

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EXERCISE 12-7 MITCH COMPANY Statement of Cash Flows For the Year Ended December 31, 2017 Cash flows from operating activities Net income................................................. Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense........................ Increase in accounts receivable ....... Decrease in inventory ....................... Decrease in accounts payable.......... Net cash provided by operating activities ......................................... Cash flows from investing activities Sale of land ................................................ Purchase of equipment............................. Net cash used by investing activities ......................................... Cash flows from financing activities Issuance of common stock ...................... Payment of cash dividends ...................... Redemption of bonds ............................... Net cash used by financing activities .........................................

$ 93,000)

$34,000) (12,000) 22,000) (4,000)

40,000) 133,000)

20,000) (60,000) (40,000) 42,000) (39,000) (50,000) (47,000)

Net increase in cash ......................................... Cash at beginning of period ............................ Cash at end of period .......................................

46,000) 22,000) $ 68,000)

(See Illustration 12-13) LO 2 BT: AP Difficulty: High TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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12-21

EXERCISE 12-8 Point in Time M N O P

Phase Introductory phase Decline phase Maturity phase Growth phase

During the introductory phase (point M), net cash provided by operating and investing activities are expected to be negative while cash from financing would be positive. In the growth phase (point P), a company would continue to show negative net cash provided by operating and investing and positive cash from financing. During the maturity phase (point O), net cash provided by operating activities and net income would be approximately the same. Net cash provided by operating activities would exceed investing needs. In the decline phase (point N), net cash provided by operating activities would diminish while cash from financing would be negative. LO 3 BT: C Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Measurement and Reporting

EXERCISE 12-9

Free cash flow

PepsiCo

Coca-Cola

$6,796 – $2,128 – $2,732 = $1,936

$8,186 – $1,993 – $3,800 = $2,393

Coca-Cola’s free cash flow is greater than Pepsi's. LO 3 BT: AN Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement and Reporting

12-22

Kimmel, Financial Accounting, 8/e, Solutions Manual

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EXERCISE 12-10

Free cash flow

Merrill Corporation

Wingate Corporation

$80,000 – $40,000 – $5,000 = $35,000

$100,000 – $70,000 – $10,000 = $20,000

Merrill's free cash flow is better than Wingate's LO 3 BT: AN Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement and Reporting

*EXERCISE 12-11 Revenues ................................................................ Deduct: Increase in accounts receivable ............ Cash receipts from customers* ..................... Operating expenses ............................................... Deduct: Increase in accounts payable................. Cash payments for operating expenses** .... Net cash provided by operating activities ............ **

$198,000) 60,000 $138,000 83,000) 23,000 60,000 $ 78,000

Accounts Receivable Balance, Beginning of year 0 Revenues for the year 198,000 Cash receipts for year Balance, End of year 60,000

** Payments for the year

138,000

Accounts Payable Balance, Beginning of year 60,000 Operating expenses for year Balance, End of year

0 83,000 23,000

(Cash receipts from customers = Revenues – increase in accounts receivable; cash payments for operating expense = Operating expenses – increase in accounts payable) LO 4 BT: AP Difficulty: Hard TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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12-23

*EXERCISE 12-12 (a) Cash payments to suppliers Cost of goods sold ........................ Deduct: Decrease in inventory .... Cost of purchases ......................... Deduct: Increase in accounts payable ........................... Cash payments to suppliers .........

$5,178.0 million 5.3 $5,172.7 million 15.6 $5,157.1 million

(See Illustration 12A-9)

(b) Cash payments for operating expenses Operating expenses exclusive of depreciation ($10,725.7 – $1,216.2) ................ Add: Increase in prepaid expenses ........................ Deduct: Increase in accrued expenses payable ..................... Cash payments for operating expenses ....................................

$9,509.5 million $42.2 199.8

(157.6) $9,351.9 million

(See Illustration 12A-11) LO 4 BT: AP Difficulty: Hard TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

12-24

Kimmel, Financial Accounting, 8/e, Solutions Manual

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*EXERCISE 12-13 Cash flows from operating activities Cash receipts from Customers ................................................. Dividend revenue ...................................... Less cash payments: To suppliers for merchandise .................. For salaries and wages ............................. For operating expenses ............................ For income taxes....................................... For interest ................................................ Net cash provided by operating activities.................................................

$243,000* 18,000* 261,000* $97,000 53,000 28,000 12,000 10,000

200,000* $ 61,000*

*$48,000 + $195,000 (See Illustration 12A-14) LO 4 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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12-25

*EXERCISE 12-14 BALBOA CORP. Statement of Cash Flows—Direct Method For the Year Ended December 31, 2017 Cash flows from operating activities Cash receipts from customers ........................... Less: Cash payments: For goods and services ................................ For income taxes .......................................... For operating expenses ............................... For interest .................................................... Net cash provided by operating activities............................................... Cash flows from investing activities Sale of building ............................................. Purchase of equipment ................................ Net cash provided by investing activities............................................... Cash flows from financing activities Issuance of common stock .......................... Payment of cash dividend ............................ Purchase treasury stock .............................. Cash paid to redeem bonds at maturity ...... Net cash provided by financing activities...............................................

$566,100 $279,100 99,000 77,000 22,400

477,500 88,600

197,600 (113,200) 84,400 355,000 (21,800) (48,100) (200,000)

Net increase in cash .................................................. Cash at beginning of period ..................................... Cash at end of period ................................................

85,100 258,100 11,000 $269,100

(See Illustration 12A-16) LO 4 BT: AP Difficulty: Hard TOT: 12 min. AACSB: Analytic AICPA FC: Reporting

12-26

Kimmel, Financial Accounting, 8/e, Solutions Manual

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*EXERCISE 12-15 Cash payments for rent Rent expense .............................................................. Add: Increase in prepaid rent ................................... Cash payments for rent ..............................................

$ 30,000* 1,500* $ 31,500*

Cash payments for salaries Salaries and wages expense ..................................... Deduct: Increase in salaries and wages payable .... Cash payments for salaries .......................................

$ 54,000* 6,000* $ 48,000*

Cash receipts from customers Revenue from sales .................................................... Add: Decrease in accounts receivable..................... Cash receipts from customers ..................................

$160,000* 9,000* $169,000*

(See Illustrations 12A-5 and 12A-11) LO 4 BT: AN Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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12-27

SOLUTIONS TO PROBLEMS PROBLEM 12-1A

(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)

Depreciation expense was $80,000 Interest Payable account increased $5,000 Received $26,000 from sale of Plant assets Acquired land by issuing common stock to seller Paid $17,000 cash dividend to preferred stockholders Paid $4,000 cash dividend to common stockholders Accounts Receivable account decreased $10,000 Inventory increased $2,000 Received $100,000 from issuing bonds payable Acquired equipment for $16,000 cash

SCF Section Affected O

If Operating, did it increase/decrease Reported cash from Operating activities A

–

O F

S –

–

LO 1, 2 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

12-28

Kimmel, Financial Accounting, 8/e, Solutions Manual

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PROBLEM 12-2A

(a) Net income can be determined by analyzing the retained earnings account. Retained earnings beginning of year .......................... Add: Net income (plug) ................................................ Less: Cash dividends .................................................. Stock dividends ................................................. Retained earnings, end of year ....................................

$270,000 58,800* 328,800 20,000 8,800 $300,000

*($300,000 + $8,800 + $20,000 – $270,000) (Analyze the change in the Retained earnings account balance)

(b) Cash inflow from the issue of stock was $12,000 ($160,800 – $140,000 – $8,800). Common Stock 140,000 8,800 12,000 160,800

Stock Dividend Shares Issued for Cash

Cash outflow for dividends was $20,000. The stock dividend does not use cash. (c) Both of the above activities (issue of common stock and payment of dividends) would be classified as financing activities on the statement of cash flows. LO 2 BT: AN Difficulty: Hard TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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12-29

PROBLEM 12-3A

MUNSUN COMPANY Partial Statement of Cash Flows For the Year Ended November 30, 2017 Cash flows from operating activities Net income ........................................................... $1,750,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ............................. $ 110,000 Decrease in accounts receivable ............... 380,000 Decrease in inventory ............................. 300,000 Increase in prepaid expenses ................ (150,000) Decrease in accounts payable ............... (350,000) Decrease in accrued expenses payable ... (100,000) 190,000 Net cash provided by operating activities .......................................... $1,940,000 (See Illustration 12-13) LO 2 BT: AP Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

12-30

Kimmel, Financial Accounting, 8/e, Solutions Manual

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*PROBLEM 12-4A MUNSUN COMPANY Partial Statement of Cash Flows For the Year Ended November 30, 2017 Cash flows from operating activities Cash receipts from customers ........ Less cash payments: To suppliers............................... For operating expenses ............ Net cash provided by operating activities ........................................

$7,980,000 (1) $4,750,000 (2) 1,290,000 (3)

6,040,000 $1,940,000

(See Illustrations 12A-5; 12A-9; and 12A-11)

Computations: (1) Cash receipts from customers Sales ................................................................. Add: Decrease in accounts receivable .......... Cash receipts from customers ........................

$7,600,000 380,000 $7,980,000

(2) Cash payments to suppliers Cost of goods sold ........................................... Deduct: Decrease in inventories .................... Cost of purchases ............................................ Add: Decrease in accounts payable .............. Cash payments to suppliers ...........................

$4,700,000 300,000 4,400,000 350,000 $4,750,000

(3) Cash payments for operating expenses Operating expenses, exclusive of depreciation .............................. Add: Increase in prepaid expenses ................................. Decrease in accrued expenses payable.................. Cash payments for operating expenses........................................

$1,040,000* $150,000 100,000

250,000 $1,290,000

Kimmel, Financial Accounting, 8/e, Solutions Manual

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12-31

PROBLEM 12-5A

REWE COMPANY Partial Statement of Cash Flows For the Year Ended December 31, 2017 Cash flows from operating activities Net income ....................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense .............................. Loss on disposal of plant assets ............ Increase in accounts receivable.............. Increase in accounts payable .................. Increase in income taxes payable ........... Net cash provided by operating activities ................................................

$229,000

$55,000 16,000 (10,000) 9,000 6,000

76,000 $305,000

(See Illustration 12-13) LO 2 BT: AP Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

12-32

Kimmel, Financial Accounting, 8/e, Solutions Manual

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*PROBLEM 12-6A

REWE COMPANY Partial Statement of Cash Flows For the Year Ended December 31, 2017 Cash flows from operating activities Cash receipts from customers ........ Less cash payments: For operating expenses ............ For income taxes....................... Net cash provided by operating activities ........................................

$960,000 (1) $605,000 (2) 50,000 (3)

655,000 $305,000

(See Illustrations 12A-5; 12A-11; and 12A-13)

(1) Cash receipts from customers Revenues........................................................................ Deduct: Increase in accounts receivable ($70,000 – $60,000) ......................................... Cash receipts from customers ..................................... (2) Cash payments for operating expenses Operating expenses per income statement ................. Deduct: Increase in accounts payable ($41,000 – $32,000) ......................................... Cash payments for operating expenses ...................... (3) Cash payments for income taxes Income tax expense per income statement ................. Deduct: Increase in income taxes payable ($13,000 – $7,000) ........................................... Cash payments for income taxes .................................

$970,000 10,000 $960,000 $614,000 9,000 $605,000 $ 56,000 6,000 $ 50,000

LO 4 BT: AP Difficulty: Hard TOT: 25 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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12-33

PROBLEM 12-7A

(a)

WARNER COMPANY Statement of Cash Flows For the Year Ended December 31, 2017 Cash flows from operating activities Net income ................................................. Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense .......................... Increase in accounts receivable ......... Increase in inventory ........................... Increase in accounts payable.............. Decrease in income taxes payable ..... Net cash provided by operating activities............................................

$32,000

$17,500 (6,000) (8,000) 4,000 (1,000)

38,500

Cash flows from investing activities Sale of equipment ...................................... Cash flows from financing activities Issuance of common stock ....................... Redemption of bonds ................................ Payment of dividends ................................ Net cash used by financing activities.............................................

6,500

8,500 4,000 (16,000) (20,000)

Net increase in cash ......................................... Cash at beginning of period ............................. Cash at end of period .......................................

(32,000) 15,000 20,000 $35,000

(See Illustration 12-13)

(b) $38,500 – $0 – $20,000 = $18,500 LO 2, 3 BT: AP Difficulty: Hard TOT: 40 min. AACSB: Analytic AICPA FC: Measurement and Reporting

12-34

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

*PROBLEM 12-8A

(a)

WARNER COMPANY Statement of Cash Flows For the Year Ended December 31, 2017 Cash flows from operating activities Cash receipts from customers ...... Less cash payments: To suppliers ............................ For operating expenses ......... For interest.............................. For income taxes .................... Net cash provided by operating activities .............

$236,000 (1) $179,000 (2) 6,500 (3) 3,000 9,000 (4)

38,500

Cash flows from investing activities Sale of equipment .......................... Cash flows from financing activities Issuance of common stock ........... Redemption of bonds .................... Payment of dividends .................... Net cash used by financing activities ..............................

197,500

8,500 4,000 (16,000) (20,000) (32,000)

Net increase in cash .............................. Cash at beginning of period ................. Cash at end of period ............................

15,000 20,000 $ 35,000

(See Illustrations 12A-5; 12A-9; 12A-11; 12A-13; and 12A-16)

Computations: (1) Cash receipts from customers Sales ....................................................................... Deduct: Increase in accounts receivable ............ Cash receipts from customers .....................................

Kimmel, Financial Accounting, 8/e, Solutions Manual

$242,000 6,000 $236,000

(For Instructor Use Only)

12-35

*PROBLEM 12-8A (Continued) (2) Cash payments to suppliers Cost of goods sold ....................................................... Add: Increase in inventory ......................................... Cost of purchases ........................................................ Deduct: Increase in accounts payable....................... Cash payments to suppliers ........................................

$175,000 8,000 183,000 4,000 $179,000

(3) Cash payments for operating expenses Operating expenses ..................................................... Deduct: Depreciation .................................................. Cash payments for operating expenses .....................

$ 24,000 17,500 $ 6,500

(4) Cash payments for income taxes Income tax expense ..................................................... Add: Decrease in income taxes payable ................... Cash payments for income taxes................................

$ $

8,000 1,000 9,000

(b) $38,500 – $0 – $20,000 = $18,500 LO 3, 4 BT: AP Difficulty: Hard TOT: 50 min. AACSB: Analytic AICPA FC: Measurement and Reporting

12-36

Kimmel, Financial Accounting, 8/e, Solutions Manual

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PROBLEM 12-9A GRANGER INC. Statement of Cash Flows For the Year Ended December 31, 2017 Cash flows from operating activities Net income ........................................................ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ............................... Loss on disposal of plant assets ............. Increase in accounts receivable .............. Increase in inventory ................................ Increase in prepaid expenses .................. Increase in accounts payable................... Decrease in accrued expenses payable .... Net cash provided by operating activities................................................. Cash flows from investing activities Sale of plant assets .......................................... Purchase of investments ................................. Purchase of plant assets.................................. Net cash used by investing activities................................................. Cash flows from financing activities Sale of common stock ...................................... Payment of cash dividends.............................. Redemption of bonds ....................................... Net cash used by financing activities.................................................

$154,580

$46,500 7,500 (49,800) (9,650) (2,400) 34,700 (4,500)

22,350 176,930

1,500 (29,000) (100,000) (127,500) 45,000 (26,030) (36,000) (17,030)

Net increase in cash................................................. Cash at beginning of period .................................... Cash at end of period ...............................................

32,400 48,400 $ 80,800

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12-37

*PROBLEM 12-10A

GRANGER INC. Statement of Cash Flows For the Year Ended December 31, 2017 Cash flows from operating activities Cash receipts from customers.............. Less cash payments: To suppliers .................................... For income taxes ............................ For operating expenses ................. For interest ..................................... Net cash provided by operating activities ...................................... Cash flows from investing activities Sale of plant assets ............................... Purchase of investments....................... Purchase of plant assets ....................... Net cash used by investing activities ...................................... Cash flows from financing activities Sale of common stock ........................... Payment of cash dividends ................... Redemption of bonds ............................ Net cash used by financing activities ......................................

$338,660 (1) $110,410 (2) 27,280 19,310 (3) 4,730

161,730 176,930

1,500 (29,000) (100,000) (127,500) 45,000 (26,030) (36,000)

Net increase in cash ...................................... Cash at beginning of period ......................... Cash at end of period ....................................

(17,030) 32,400 48,400 $ 80,800

(See Illustration 12A-5; 12A-9; 12A-11; and 12A-16)

12-38

Kimmel, Financial Accounting, 8/e, Solutions Manual

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*PROBLEM 12-10A (Continued) Computations: (1) Cash receipts from customers Sales ............................................................................... Deduct: Increase in accounts receivable .................... Cash receipts from customers ......................................

$388,460 49,800 $338,660

(2) Cash payments to suppliers Cost of goods sold ......................................................... Add: Increase in inventory ........................................... Cost of purchases .......................................................... Deduct: Increase in accounts payable ........................ Cash payments to suppliers .........................................

$135,460 9,650 145,110 34,700 $110,410

(3) Cash payments for operating expenses Operating expenses exclusive of depreciation .............................................. Add: Increase in prepaid expenses ............... $2,400 Decrease in accrued expenses payable ................................................. 4,500 Cash payment for operating expenses ...................................................

$12,410 6,900 $19,310

LO 4 BT: AP Difficulty: Hard TOT: 50 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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12-39

PROBLEM 12-11A

SPICER COMPANY Statement of Cash Flows For the Year Ended December 31, 2017 Cash flows from operating activities Net income ........................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense .................................. Loss on disposal of plant assets ................ Decrease in accounts receivable ................ Increase in inventory ................................... Decrease in prepaid expenses .................... Increase in accounts payable ...................... Net cash provided by operating activities .................................................... Cash flows from investing activities Sale of land ($130,000 + $40,000 – $145,000) ..... Sale of equipment ................................................ Purchase of equipment ....................................... Net cash used by investing activities .........

$ 37,000

$42,000 2,000 8,000 (9,450) 5,720 8,730

57,000 94,000

25,000 8,000 (92,000) (59,000)

Cash flows from financing activities Payment of cash dividends .................................

(12,000)

Net increase in cash .................................................... Cash at beginning of period ....................................... Cash at end of period ..................................................

23,000 45,000 $68,000

Noncash investing and financing activities Acquired land by issuance of common stock..........................................

$40,000

(See Illustration 12-13) LO 2 BT: AP Difficulty: Hard TOT: 40 min. AACSB: Analytic AICPA FC: Reporting

12-40

Kimmel, Financial Accounting, 8/e, Solutions Manual

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PROBLEM 12-12A

(a) (b) (c) (d) (e) (f)

Transaction Recorded credit sales $2,500. Collected $1,900 owed by customers. Paid amount owed to suppliers, $2,750. Recorded sales returns of $500 and credited the customer’s account. Purchased new equipment $5,000; signed a long-term note payable for the cost of the equipment. Purchased a patent and paid $65,000 cash for the asset.

Free Cash Flow ($125,000) NE I D NE D* D

*Note to Instructor: If only cash capital expenditures are deducted, this answer would be NE. LO 3 BT: C Difficulty: Medium TOT: 15 min. AACSB: None AICPA FC: Measurement and Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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12-41

CT 12-1

FINANCIAL REPORTING PROBLEM

(a) Net cash provided by operating activities (in millions): 2014 2013

$59,713 $53,666

(b) The decrease in cash and cash equivalents for the year ended September 27, 2014 was $415 million. (c) Apple uses the indirect method of computing and presenting the net cash provided by operating activities. (d) According to the statement of cash flows, accounts receivable increased $4,232 million in the year ended September 27, 2014. Inventories increased $76 million. Accounts payable increased $5,938 million in fiscal year ending September 27, 2014. (e) The net cash used by investing activities in fiscal year ending September 27, 2014 was $22,579 million. (f)

The supplemental disclosure of cash flow information disclosed interest paid of $339 million and income taxes paid of $10,026 million in fiscal year ending September 27, 2014.

LO 1, 2 BT: AN Difficulty: Medium TOT: 15 min. AACSB: Analytic and Communication AICPA FC: Reporting AICPA PC: Communication

12-42

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 12-2

(a)

COMPARATIVE ANALYSIS PROBLEM

(in thousands) $185,783 − $60,283 − $39,836 = $1,697,629−$234,077−$478,933 =

Columbia Sportswear

VF Corporation

$85,664 $984,619

(b) VF Corporation generated over 11 times as much free cash flow as Sportswear. However, both had a significant amount of "free cash" available after covering capital expenditures and cash dividends. LO 3 BT: AN Difficulty: Medium TOT: 15 min. Reporting AICPA PC: Communication

AACSB: Analytic and Communication

Kimmel, Financial Accounting, 8/e, Solutions Manual

AICPA FC:

(For Instructor Use Only)

12-43

CT 12-3

(a)

COMPARATIVE ANALYSIS PROBLEM

(All amounts in millions) $6,842 − $4,893 − $0 =

Amazon

Wal-Mart

$1,949

$10,205* *$28,564 –$12,174 – $6,185

(b) Both companies had a significant amount of “free cash” available after covering capital expenditures and cash dividends. However, Wal-Mart did generate approximately five times as much free cash flow compared to Amazon. LO 3 BT: E Difficulty: Medium TOT: 15 min. AACSB: Analytic and Communication AICPA FC: Reporting AICPA PC: Communication

12-44

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 12-4

REAL-WORLD FOCUS

Answers will vary depending on the company chosen by the student. LO - BT: AP Difficulty: Medium TOT: 20 min. AACSB: Analytic, Technology and Communication AICPA FC: Measurement and Reporting AICPA PC: Communication

Kimmel, Financial Accounting, 8/e, Solutions Manual

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12-45

CT 12-5

REAL-WORLD FOCUS

(a) At the end of 2009 the nonfinancial companies in the Standard and Poor’s 500 had accumulated $932 billion. This represented a 31% increase over the prior year. (b) First, cash (and short term investments) do not generate a very good return. Thus, having too much cash on your balance sheet can drag down the return on assets. Second, managers worry that if they accumulate too much cash it will appear that they have run out of good ideas to invest in to grow the company. Another concern is that, if you have a lot of cash on your balance sheet, another company might decide to acquire your company. If you use debt to acquire a company that has a lot of cash, you can use the acquired company’s cash to pay down the debt. (c) In order to motivate its managers to accumulate cash, Alcoa pegged the compensation of its top executives to cash goals. In response, top management cut 28,000 jobs (32% of its workforce), and reduced capital expenditures by 53%. As a consequence, even though its revenue dropped by 31%, it nearly doubled its cash to $1.5 billion. (d) At the time the article was written the stock prices of the Standard and Poor’s 500 was 29% below its October 2007 peak. As a consequence, companies felt that their shares were still undervalued, so they didn’t want to use them to acquire other companies. They felt that they should instead use cash. (e) In addition to acquisitions, companies can increase their dividends or do stock buybacks (buy treasury shares). LO - BT: S Difficulty: Hard TOT: 40 min. AACSB: Analytic, Technology and Communication AICPA FC: Measurement and Reporting AICPA PC: Communication

12-46

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

CT 12-6

REAL-WORLD FOCUS

(a) The stock was issued at a price of $70 per share. A few months previously it sold for more than $300 per share. (b) The company issued shares of stock, even though its stock price was depressed, because its cash flows were not meeting its immediate needs. The company’s cash flows declined because the company lost subscribers when it raised its prices. (c) Netflix had used up more than $1 billion of cash to buy back stock during the previous four years. (d) The article says that growth companies should be very cautious about using cash to buy back stock. Growth companies have many ups and downs. They need to make sure they have enough cash on hand to get them through downtrends. LO - BT: S Difficulty: Hard TOT: 30 min. AACSB: Analytic, Technology and Communication AICPA FC: Measurement and Reporting AICPA PC: Communication

Kimmel, Financial Accounting, 8/e, Solutions Manual

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12-47

CT 12-7

(a)

DECISION MAKING ACROSS THE ORGANIZATION

COMPUTER SERVICES COMPANY Statement of Cash Flows For the Year Ended January 31, 2017 Cash flows from operating activities Net loss .................................................. Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense .................... Gain from disposal of investment Net cash provided by operating activities ..................................... Cash flows from investing activities Sale of investment................................. Purchase of investment ........................ Purchase of fixtures and equipment .... Net cash used by investing activities ..................................... Cash flows from financing activities Sale of capital stock .............................. Purchase of treasury stock .................. Net cash provided by financing activities ..................................... Net increase in cash ..................................... Cash at beginning of period ......................... Cash at end of period ...................................

$ (35,000)*

$ 55,000 (5,000)

15,000 80,000 (75,000) (320,000) (315,000)* 405,000 (10,000)

Noncash investing and financing activities Issuance of note for truck .....................

12-48

50,000

Kimmel, Financial Accounting, 8/e, Solutions Manual

395,000 95,000 140,000 $235,000 $ 20,000

(For Instructor Use Only)

CT 12-7 (Continued) *Computation of net income (loss) Sales of merchandise ............................... Interest revenue ........................................ Gain on sale of investment ($80,000 – $75,000) ................................ Total revenues and gains .................. Merchandise purchased ........................... Operating expenses ($170,000 – $55,000) .............................. Depreciation .............................................. Interest expense ........................................ Total expenses................................... Net loss ......................................................

$385,000 6,000 5,000 396,000 $258,000 115,000 55,000 3,000 431,000 $ (35,000)

(b) From the information given, it appears that from an operating standpoint, Computer Services Company did not have a superb first year, having suffered a $35,000 net loss. Maria is correct; the statement of cash flows is not prepared in correct form. The correct format classifies cash flows from three activities—operating, investing, and financing; and it also presents significant noncash investing and financing activities in a separate schedule. Maria is wrong, however, about the actual increase in cash not being $95,000; $95,000 is the correct increase in cash. LO 2 BT: AN Difficulty: Hard TOT: 40 min. AACSB: Analytic and Communication AICPA FC: Reporting AICPA PC: Interaction, Leadership and Communication

Kimmel, Financial Accounting, 8/e, Solutions Manual

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12-49

CT 12-8

COMMUNICATION ACTIVITY

MEMO To:

Walt Jax

From:

Student

Re:

Statement of cash flows

The statement of cash flows provides information about the cash receipts and cash payments of a firm, classified as operating, investing, and financing activities. The operating activities section of the company’s statement of cash flows shows that cash increased by $172,000 as a result of transactions which affected net income. This amount is computed by adjusting net income for those items which affect net income, but do not affect cash, such as sales on account which remain uncollected at year-end. The investing activities section of the statement reports cash flows resulting from changes in investments and other long-term assets. The company had a cash outflow from investing activities due to purchases of buildings and equipment. The financing activities section of the statement reports cash flows resulting from changes in long-term liabilities and stockholders’ equity. The company had a cash inflow from financing activities due to the issuance of common stock and an outflow due to the payment of cash dividends. If you have any further questions, please do not hesitate to contact me. LO 1, 2 BT: C Difficulty: Medium TOT: 30 min. AACSB: None AICPA FC: Reporting AICPA PC: Communication

12-50

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 12-9

ETHICS CASE

(a) The stakeholders in this situation are: Hans Pfizer, president of Pendleton Automotive Corporation. Kurt Nolte, controller. The Board of Directors. The stockholders of Pendleton Automotive Corporation. (b) The president’s statement, “We must get that amount above $1 million,” puts undue pressure on the controller. This statement along with his statement, “I know you won’t let me down Kurt,” encourages Kurt to do something unethical. Controller Kurt Nolte's reclassification (intentional misclassification) of a cash inflow from a long-term note (financing activity) issuance to an “increase in payables” (operating activity) is inappropriate and unethical. (c) It is unlikely that any board members (other than board members who are also officers of the company) would discover the misclassification. Board members generally do not have detailed enough knowledge of their company’s transactions to detect this misstatement. It is possible that an officer of the bank that made the loan would detect the misclassification upon close reading of Pendleton Automotive Corporation’s statement of cash flows. It is also possible that close scrutiny of the balance sheet showing an increase in notes payable (long-term debt) would reveal that there is no comparable financing activity item (proceeds from note payable) in the statement of cash flows. LO 2 BT: E Difficulty: Hard TOT: 40 min. AACSB: Communication and Ethics AICPA FC: Reporting AICPA PC: Professional Demeanor

Kimmel, Financial Accounting, 8/e, Solutions Manual

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12-51

CT 12-10

ALL ABOUT YOU

(a) The article describes three factors that determine how much money you should set aside. (1) Your willingness to take risk. You need to evaluate how willing you are to experience wide swings in your financial position. (2) Your needs. You need to carefully evaluate your situation and evaluate the possibility of various events and what the financial implications would be. This is also impacted by the number of dependents you have. (3) Your upcoming expenses. Here you need to look further out into the horizon and consider the implications of larger events such as a big trip, a wedding, or education costs. (b) They recommend having at least three months of living expenses set aside, and up to six months. (c) Responses to this question will vary. What is most important is that students begin the process of considering their cash needs and developing a plan to set aside enough money to provide a cushion in the event of a financial “hiccup.” LO - BT: S Difficulty: Medium TOT: 30 min. AACSB: Analytic, Technology and Communication AICPA FC: Reporting AICPA PC: Communication

12-52

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 12-11

FASB CODIFICATION ACTIVITY

(a) Cash equivalents are short-term, highly liquid investments that have both of the following characteristics: a. Readily convertible to known amounts of cash b. So near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Generally, only investments with original maturities of three months or less qualify under that definition. Original maturity means original maturity to the entity holding the investment. For example, both a three-month U.S. Treasury bill and a three-year U.S. Treasury note purchased three months from maturity qualify as cash equivalents. However, a Treasury note purchased three years ago does not become a cash equivalent when its remaining maturity is three months. Examples of items commonly considered to be cash equivalents are Treasury bills, commercial paper, money market funds, and federal funds sold (for an entity with banking operations). (b) Financing activities include obtaining resources from owners and providing them with a return on, and a return of, their investment; receiving restricted resources that by donor stipulation must be used for long-term purposes; borrowing money and repaying amounts borrowed, or otherwise setting the obligation; and obtaining and paying for other resources obtained from creditors on long-term credit. (c) Investing activities include making and collecting loans and acquiring and disposing of debt or equity instruments and property, plant, and equipment and other productive assets, that is, assets held for or used in the production of goods or services by the entity (other than materials that are part of the entity’s inventory). Investing activities exclude acquiring and disposing of certain loans or other debt or equity instruments that are acquired specifically for resale, as discussed in paragraph 230-10-45-12 and 230-10-45-21.

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CT 12-11 (Continued) (d) Operating activities include all transactions and other events that are not defined as investing or financing activities (see paragraph 230-1045-12 through 45-15). Operating activities generally involve producing and delivering goods and providing services. Cash flow from operating activities are generally the cash effects of transactions and other events that enter into the determination of net income. (e) The primary objective of a statement of cash flows is to provide relevant information about the cash receipts and cash payments of an entity during a period. As indicated in the glossary at this same section, cash includes not only currency on hand but demand deposits with banks or other financial institutions. Cash also includes other kinds of accounts that have the general characteristics of demand deposits in that the customer may deposit additional funds at any time and also effectively may withdraw funds at any time without prior notice or penalty. All charges and credits to those accounts are cash receipts or payments to both the entity owning the account and the bank holding it. For example, a bank’s granting of a loan by crediting the proceeds to a customer’s demand deposit account is a cash payment by the bank and a cash receipt of the customer when the entry is made. Thus, the basis for the statement of cash flows is cash, not broader measures of liquidity, like working capital. (f)

Information about all investing and financing activities of an entity during a period that affect recognized assets or liabilities but that do not result in cash receipts or cash payments in the period shall be disclosed. Those disclosures may be either narrative or summarized in a schedule, and they shall clearly relate the cash and noncash aspects of transactions involving similar items.

LO 1 BT: S Difficulty: Hard TOT: 50 min. AACSB: Analytic, Technology and Communication AICPA FC: Reporting AICPA PC: Communication

12-54

Kimmel, Financial Accounting, 8/e, Solutions Manual

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IFRS CONCEPTS AND APPLICATION

IFRS 12-1 Under IFRS bank overdrafts are treated as part of cash and cash equivalents on the balance sheet. As a result, on the statement of cash flows they are part of the change in cash and cash equivalents. In contrast, under GAAP they are treated as a liability on the balance sheet, as a source of financing on the statement of cash flows. LO 6 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement and Reporting

IFRS 12-2 The treatment of these items under IFRS and GAAP is as follows:

(a) (b) (c) (d)

Interest paid Interest received Dividends paid Dividends received

IFRS

GAAP

Operating or financing Operating or investing Operating or financing Operating or investing

Operating Operating Financing Operating

LO 6 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement and Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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12-55

IFRS 12-3 INTERNATIONAL FINANCIAL REPORTING PROBLEM

(a) The company reports interest paid as an operating activity. (b) The company reports dividends received as an operating activity. (c) Under GAAP bank overdrafts are not reported in cash and cash equivalents. Instead they are treated as a financing activity, and would be reported on the balance sheet as a liability. LO 6 BT: AN Difficulty: Medium TOT: 8 min. Reporting AICPA PC: Communication

12-56

AACSB: Analytic and Communication

Kimmel, Financial Accounting, 8/e, Solutions Manual

AICPA FC:

(For Instructor Use Only)

CHAPTER 13 Financial Analysis: The Big Picture Learning Objectives 1. Explain the concepts of sustainable income and quality of earnings. 2. Apply horizontal analysis and vertical analysis. 3. Analyze a company's performance using ratio analysis.

Summary of Questions by Learning Objectives and Bloom’s Taxonomy Item

Item

Questions 1.

11.

16.

20.

12.

17.

21.

13.

18.

22.

14.

19.

10.

15.

Brief Exercises 1.

10.

13.

11.

14.

12.

15.

Do It! Exercises 1.

Exercises 1.

12.

10.

13.

11.

Problems: Set A 1.

2, 3

*Continuing Cookie Solutions for this chapter are available online.

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13-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Prepare vertical analysis and comment on profitability.

Moderate

20–30

Compute ratios from balance sheet and income statements.

Moderate

20–30

Perform ratio analysis, and discuss change in financial position and operating results.

Moderate

20–30

Compute ratios; comment on overall liquidity and profitability.

Moderate

40–50

Compute selected ratios, and compare liquidity, profitability, and solvency for two companies.

Moderate

50–60

13-2

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ANSWERS TO QUESTIONS 1.

Sustainable income is defined as the most likely level of income to be obtained in the future. It is the amount of regular income that a company can expect to earn from its normal operations. In order to distinguish a company’s net income from its sustainable income, irregular items, such as discontinued operations, are reported separately on the income statement.

LO 1 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting 2.

This would not be considered a favorable trend for Hogan Inc. The relevant earnings per share figures are the $3.26 in 2016 and the $2.99 in 2017. These figures indicate that, unless there was a sale of common stock, the earnings from the continuing operations of the company decreased during 2017. This should give the company’s management some concern because they will not always be able to count on income or gains from discontinued operations.

LO 1 BT: AN Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting 3.

Companies report a change from FIFO to average cost pricing for inventory retroactively. That is, they report both the current period and any previous periods reported on the face of the statement using the new principle. As a result, the same principle applies in all periods. This treatment improves the ability to compare results across years.

LO 1 BT: C Difficulty: Easy TOT: 3 AACSB: None AICPA FC: Reporting 4.

Apple reported “Other comprehensive income” of $1,553 millions for year ended September 27, 2014. “Comprehensive income” was more than “Net income” by 3.9% [($41,063 – $39,510) ÷ $39,510]

LO 1 BT: AN Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting 5.

(1) Use of alternative accounting methods. Variations among companies in the application of generally accepted accounting principles may hamper comparability. (2) Use of pro forma income measures that do not follow GAAP. Pro forma income is calculated by excluding items that the company believes are unusual or nonrecurring. It is often difficult to determine what was included and excluded. (3) Improper revenue and expense recognition. Many high-profile cases of inappropriate accounting involve recording items in the wrong period.

LO 1 BT: K Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting 6.

(a) During a period of inflation, net income will be less under the LIFO inventory costing method than it will be using the FIFO method because LIFO results in the larger cost of goods sold amount. (b) Inflation does not affect the amount of depreciation taken (except through its effect on salvage) since the depreciable amount is based on the acquisition cost. A six-year life produces greater depreciation for the first six years (thus, less net income) and less depreciation in years 7, 8, 9 (thus, more net income in those years) than a nine-year life.

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13-3

(c)

Inflation does not affect the amount of depreciation taken. Use of the straight-line method results in less depreciation in the earlier years (thus, more net income) than the decliningbalance method but more depreciation in the later years.

LO 1 BT: AN Difficulty: Hard TOT: 5 min. AACSB: Analytic AICPA FC: Reporting 7.

Horizontal analysis (also called trend analysis) measures the dollar and percentage increase or decrease of an item over a period of time. In this approach, the amount of the item on one statement is compared with the amount of that same item on one or more earlier statements. Vertical analysis, also called common-size analysis, expresses each item within a financial statement as a percent of a relevant base amount.

LO 2 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting 8.

(a) $300,000 X 1.245 = $373,500, 2017 net income. (b) $300,000 ÷ .06 = $5,000,000, 2016 revenue.

LO 2 BT: AP Difficulty: Medium TOT: 3 min. AACSB: Analytic AICPA FC: Reporting 9.

(a) Gina is not correct. There are three characteristics: liquidity, profitability, and solvency. (b) The three parties are not primarily interested in the same characteristics of a company. Shortterm creditors are primarily interested in the liquidity of the enterprise. In contrast, long-term creditors and stockholders are primarily interested in the profitability and solvency of the company.

LO 2 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting 10. (a) Comparison of financial information can be made on an intracompany basis, an intercompany basis, and an industry average basis. 1. An intracompany basis compares the same item with prior periods, or with other financial items in the same period. 2. An intercompany basis compares the same item with other companies’ published reports. 3. The industry average compares the item with the industry average as compiled by Dun & Bradstreet or by trade associations. (b) The intracompany basis of comparison is useful in detecting changes in financial relationships and significant trends within a company. The intercompany basis of comparison provides insight into a company’s competitive position. The industry average basis provides information about a company’s relative position within the industry. LO 2 BT: C Difficulty: Hard TOT: 5 min. AACSB: None AICPA FC: Reporting 11.

(a) Liquidity ratios: Working capital, current ratio, inventory turnover, days in inventory, accounts receivable turnover, and average collection period. (b) Solvency ratios: Debt to assets ratio, times interest earned, and free cash flow.

LO 3 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

13-4

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

12.

Tina is correct. A single ratio by itself may not be very meaningful and is best interpreted by comparison with (1) past ratios of the same company, (2) ratios of other companies, or (3) industry norms or predetermined standards. In addition, other ratios of the company are necessary to determine overall financial well-being.

LO 3 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting 13.

(a) Liquidity ratios measure the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash. (b) Solvency ratios measure the company’s ability to survive over a long period of time. (c) Profitability ratios measure the income or operating success of a company for a given period of time.

LO 3 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting 14.

Working capital and the current ratio both relate current assets to current liabilities. Working capital produces a dollar amount that indicates the difference between current assets and current liabilities. The current ratio produces a ratio which indicates the proportional relationship between current assets and current liabilities.

LO 3 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting 15.

Handi Mart does not necessarily have a problem. The accounts receivable turnover can be misleading in that some companies encourage credit and revolving charge sales and slow collections in order to earn a healthy return on the outstanding receivables in the form of high rates of interest.

LO 3 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting 16.

(a) (b) (c) (d)

Asset turnover. Inventory turnover and days in inventory. Return on common stockholders’ equity. Times interest earned.

LO 3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting 17.

The price earnings (P-E) ratio is a reflection of investors’ assessments of a company’s future earnings. The P-E ratio takes into account such factors as relative risk, stability of earnings, trends in earnings, and the market’s perception of the company’s growth potential. In this question, investors favor Microsoft because it has the higher P-E ratio. The investors feel that Microsoft will be able to generate even higher future earnings and thus investors are willing to pay more for the stock.

LO 3 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting 18.

The payout ratio is cash dividends declared on common stock divided by net income. In a growth company, the payout ratio is often low because the company is reinvesting earnings in the business.

LO 3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

13-5

19.

(a) The increase in the profit margin is good news because it means that a greater percentage of net sales is going towards income. (b) The decrease in inventory turnover signals bad news because it is taking the company longer to sell the inventory and consequently there is a greater chance of inventory obsolescence. (c)

An increase in the current ratio signals good news because the company improved its ability to meet maturing short-term obligations.

(d) Earnings per share is a deceptive ratio. The decrease might be bad news to the company because it could mean a decrease in net income. Or the decrease might be good news to the company because of an increase in stockholders’ investment. (e) The increase in the price-earnings ratio is generally good news because it means that the market price per share of stock has increased and investors are willing to pay that higher price for the stock. (f)

The increase in the debt to assets ratio is bad news because it means that the company has increased its obligations to creditors and has lowered its equity “buffer.”

(g) The decrease in the times interest earned is bad news because it means that the company’s ability to meet interest payments as they come due has weakened. LO 3 BT: C Difficulty: Hard TOT: 6 min. AACSB: None AICPA FC: Reporting 20.

Net Income Return on assets = Average Total Assets (7.6%) Net Income − Preferred dividends

Return on common stockholders’ equity = Average common stockholders’ equity (12.8%) The difference between the two rates can be explained by looking at the denominator value and by remembering the basic accounting equation, A = L + SE. The asset value will clearly be the larger of the two denominator values; therefore, it will also give the smaller rate of return. LO 3 BT: AN Difficulty: Hard TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

13-6

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

21.

(a) Times interest earned, which is an indication of the company’s ability to meet interest charges, and the debt to assets ratio, which indicates the company’s ability to withstand losses without impairing the interests of creditors. (b) The current ratio and accounts receivable turnover, which indicate a company’s liquidity and short-term debt-paying ability. (c)

The earnings per share of common stock and the return on common stockholders’ equity, both of which indicate the earning power of the investment.

LO 3 BT: C Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Reporting 22.

Net income - Preferred dividends = Earnings per share. Average common shares outstanding

$200,000 – $20,000

= $4.50

40,000

EPS of $4.50 is high relative to what? Is it high relative to last year’s EPS? The president may be comparing the EPS of $4.50 to the market price of the company’s stock, which is inappropriate. LO 3 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

13-7

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 13-1 FLORES CORPORATION Partial Income Statement Discontinued operations: Loss on disposal of Mexico facility, net of $160,000 ($640,000 X 25%) tax savings .........................................

($480,000)

LO 1 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement and Reporting

BRIEF EXERCISE 13-2 SILVA CORPORATION Partial Statement of Comprehensive Income Income before income taxes ...................................................... Income tax expense ($450,000 X 25%) ....................................... Net Income .................................................................................. Other comprehensive income Unrealized holding gain on available-for-sale securities, net of $17,500 income taxes ($70,000 X 25%)………… ..... Comprehensive income .............................................................

$450,000 112,500 337,500 52,500 $390,000

LO 1 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Measurement and Reporting

BRIEF EXERCISE 13-3 The change in inventory pricing for Bryce should be reported retroactively. That is, it should report both the current period and previous periods included on the face of the statement using the new principle. As a result, the same principle applies in all periods. The treatment improves the ability to compare results across years. LO 1 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement AICPA PC: Communication

13-8

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 13-4 Horizontal analysis: Increase or (Decrease) Dec. 31, 2017 Dec. 31, 2016 Amount Percentage* Accounts receivable $ 460,000 $ 400,000 $ 60,000 15% Inventory $ 780,000 $ 650,000 $130,000 20% Total assets $3,164,000 $2,800,000 $364,000 13%

*$60,000 = .15 $400,000

$130,000 = .20 $650,000

$364,000 = .13 $2,800,000

LO 2 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Measurement and Reporting

BRIEF EXERCISE 13-5 Vertical analysis:

Accounts receivable Inventory Total assets

Dec. 31, 2017 Dec. 31, 2016 Amount Percentage* Amount Percentage** $ 460,000 14.5% $ 400,000 14.3% $ 780,000 24.7% $ 650,000 23.2% $3,164,000 100% $2,800,000 100%

*$460,000 = .145 $3,164,000

**$400,000 = .143 $2,800,000

* $780,000 = .247 $3,164,000

$650,000 = .232 $2,800,000

LO 2 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Measurement and Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

13-9

BRIEF EXERCISE 13-6

Net income

2017 $518,400

2016 $485,000

2015 $500,000

Increase or (Decrease) Amount Percentage* ($15,000) (3%) $33,400) 7%)

(a) 2015–2016 (b) 2016–2017

*($15,000) = (.03) $500,000

$33,400 = .07 $485,000

LO 2 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Measurement and Reporting

BRIEF EXERCISE 13-7

Net income .16 =

2017 $382,800

2016 X

Increase 16%

$382,800 – X X

.16X = $382,800 – X 1.16X = $382,800 X = $330,000 2016 Net Income = $330,000 (% increase in net income = ($380,000 – 2016 net income) ÷ 2016 net income) LO 2 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Measurement and Reporting

13-10

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 13-8

Sales revenue Cost of goods sold Expenses Net income

2017 100.0 60.5 26.0 13.5

2016 100.0 62.9 26.6 10.5

2015 100.0 64.8 27.5 7.7

Net income as a percent of sales for Palau increased over the three-year period because cost of goods sold and expenses both decreased as a percent of sales every year. LO 2 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement and Reporting

BRIEF EXERCISE 13-9 Comparing the percentages presented results in the following conclusions: The net income for Phoenix increased in 2016 because of the combination of an increase in sales and a decrease in both cost of goods sold and expenses. However, the reverse was true in 2017 as sales decreased, while both cost of goods sold and expenses increased. This resulted in a decrease in net income. LO 2 BT: AP Difficulty: Medium TOT: 5 min. Reporting AICPA PC: Communication

AACSB: Analytic and Communication

AICPA FC:

BRIEF EXERCISE 13-10 Current ratio: 2017

$80,260 Current assets = = .33:1 Current liabilities $245,805

2016

$70,874 = .22:1 $326,203

The current ratio increased by 50% indicating that Bob Evans Farms is more liquid in 2017. LO 3 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement and Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

13-11

BRIEF EXERCISE 13-11 Accounts receivable turnover = 2017 (a)

$4,300,000 = 7.9 times $545,000* *($540,000 + $550,000) ÷ 2

Net credit sales Average net accounts receivable 2016 $4,000,000 = 7.5 times $530,000**

**($520,000 + $540,000) ÷ 2

(b) Average collection period 365 = 46.2 days 7.9

365 = 48.7 days 7.5

Colby Company can be somewhat pleased with the effectiveness of its credit and collection policies. The company has decreased the average collection period by more than two days and the collection period of approximately 46 days almost equals the 45 days allowed in the credit terms. LO 3 BT: AN Difficulty: Medium TOT: 10 min. AACSB: Analytic and Communication AICPA FC: Measurement and Reporting AICPA PC: Communication

13-12

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 13-12 (a) Inventory turnover =

Cost of goods sold Average inventory

2017

2016

$4,780,000* = 4.8 times  $960,000 + $1,020,000 

 

 

Beginning inventory Purchases Goods available for sale Ending inventory Cost of goods sold

$4,541,000**  $840,000 + $960,000    2  

2017 $ 960,000 4,840,000 5,800,000 1,020,000 $4,780,000*

= 5.0 times

2016 $ 840,000 4,661,000 5,501,000 960,000 $4,541,000**

(Inventory turnover = cost of goods sold ÷ Average inventory)

(b) Days in inventory

365 = 76 days 4.8

365 = 73 days 5.0

Management should be concerned with the fact that inventory moved slower in 2017 than it did in 2016. The decrease in inventory turnover could be because of poor pricing decisions or because the company is stuck with obsolete inventory. LO 3 BT: AN Difficulty: Hard TOT: 15 min. AACSB: Analytic and Communication Measurement and Reporting AICPA PC: Communication

Kimmel, Financial Accounting, 8/e, Solutions Manual

AICPA FC:

(For Instructor Use Only)

13-13

BRIEF EXERCISE 13-13 (a) Asset turnover =

Net sales Average total assets

$24,275.5 $13,073.1 + $13,717.3 2 = 1.81 times

Staples generated $1.81 of sales for each dollar it had invested in assets. (Asset turnovers =Net sales ÷ Average total assets)

(b) Profit margin =

Net income Net sales

$738.7 $24,275.5

= 3.0% Each dollar of sales resulted in about 3 cents of net income. LO 3 BT: AN Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Measurement and Reporting

13-14

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 13-14 Payout ratio =

.18 =

Cash dividends declared on common stock Net income

X $72,000

X = $72,000 (.18) = $12,960 Cash dividends = $12,960 (Cash dividends = Net income × Payout ratio)

Return on assets

.20 =

Net income Average total assets $72,000 X

.20X = $72,000 X =

$72,000 .20

X = $360,000 Average total assets = $360,000 (Average total assets = Net income ÷ Return on assets) LO 3 BT: AN Difficulty: Hard TOT: 12 min. AACSB: Analytic AICPA FC: Measurement and Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

13-15

BRIEF EXERCISE 13-15 Free Cash Flow = Cash provided by operating activities – Capital expenditures – Cash dividends $10.4 – $3.7 – $6.2 = $.5 Topps Company generated enough cash from operating activities to maintain its current productive capacity and pay dividends. The free cash flow that remained could have been used to expand operations, pay additional dividends, or reduce debt. LO 3 BT: AN Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement and Reporting

13-16

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO DO IT! EXERCISES DO IT! 13-1 HRABIK CORPORATION Partial Statement of Comprehensive Income Income before income taxes ........................................ Income tax expense ...................................................... Income from continuing operations ............................ Discontinued operations Loss from operations of music division, net of $12,000 income tax saving ........ $48,000 Gain from disposal of music division, net of $8,000, taxes .............................. 32,000 Net income ..................................................................... Other comprehensive income: Unrealized holding loss of available-for-sale securities, net of $30,000 income tax saving .......................... Comprehensive income ................................................

$500,000 100,000 400,000

16,000 384,000 120,000 $264,000

(Any gains or losses from discontinued operations should be reported net of their income tax effects) LO 1 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Measurement and Reporting

DO IT! 13-2 Increase in 2017 Amount Current assets Plant assets Total assets

Percent

$ (20,000) (9.1)% [($ 200,000 – $ 220,000) ÷ $ 220,000] 260,000 33.3% [($1,040,000 – $ 780,000) ÷ $ 780,000] $240,000 24% [($1,240,000 – $1,000,000) ÷ $1,000,000]

LO 2 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement and Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

13-17

DO IT! 13-3 2017 (a) Current ratio: $1,380 ÷ $900 = $1,310 ÷ $790 =

1.53:1

(b) Inventory turnover: $955/ [($460 + $390) ÷ 2)] = $890/ [($390 + $340) ÷ 2)]=

2.25 times

7.7%

(d) Return on assets: $294/[($2,340 + $2,210) ÷ 2)] = $154/[($2,210 + $1,900) ÷ 2)] =

12.9%

(e) Return on common stockholders’ equity: $294/[($1,030 + $1,040) ÷ 2)] = $154/[$1,040 + $900) ÷ 2)] =

28.4%

(f)

Debt to assets ratio: $1,310 ÷ $2,340 = $1,170 ÷ $2,210 =

(g) Times interest earned: ($294 + $126 + $25) ÷ $25 = ($154 + $66 + $20) ÷ $20 =

2016 1.66:1

2.44 times

4.5%

7.5%

15.9% 56.0% 52.9% 17.8 times 12.0 times

LO 3 BT: AP Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Measurement and Reporting

13-18

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO EXERCISES EXERCISE 13-1 (a)

HAAS CORPORATION Partial Statement of Comprehensive Income For the Year Ended October 31, 2017 Income before income taxes .................................................. Income tax expense ($540,000 X 20%) .................................. Income from continuing operations ...................................... Discontinued operations Loss from operations, net of $10,000 income tax savings ($50,000 X 20%) .................. 40,000 Loss on disposal, net of $14,000 income tax saving ($70,000 X 20%) .................... 56,000 Net income ..............................................................................

$540,000 108,000 432,000

96,000 $336,000

(Any discontinued operations gains or losses should be reported net of their income tax effects)

(b) To:

Chief Accountant

From: Your name, Independent Auditor After reviewing your income statement for the year ended 10/31/17, we believe it is misleading for the following reasons: The amount reported for income from continuing operations is overstated by $24,000. The income tax expense should be 20% of $540,000, or $108,000, not $84,000. Also, the effect of the loss on discontinued operations on net income is only $96,000, not $120,000. An income tax savings of $24,000 should be netted against the loss. LO 1 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic and Communication Measurement and Reporting AICPA PC: Communication

Kimmel, Financial Accounting, 8/e, Solutions Manual

AICPA FC:

(For Instructor Use Only)

13-19

EXERCISE 13-2 TRAYER CORPORATION Partial Statement of Comprehensive Income For the Year Ended December 31, 2017 Income from continuing operations ...................... Discontinued operations Loss from operations, net of $2,000 income tax savings ...................................... $ 8,000 Gain from disposal, net of $8,000 income taxes .............................................. 32,000 Net income .............................................................. Other comprehensive income Unrealized holding loss on available-for-sale securities, net of $16,000 income tax savings .................................. Comprehensive income..........................................................

$290,000

24,000 $314,000 64,000 $250,000

(Gains and losses from discontinued operations and other comprehensive income should be reported net of their income tax effects) LO 1 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic and Communication Measurement and Reporting AICPA PC: Communication

13-20

Kimmel, Financial Accounting, 8/e, Solutions Manual

AICPA FC:

(For Instructor Use Only)

EXERCISE 13-3 GLITTER INC. Condensed Balance Sheet December 31 Increase or (Decrease) Amount Percentage

2017

2016

Assets Current assets Plant assets (net) Total assets

$106,000 400,000 $506,000

$ 90,000 350,000 $440,000

($16,000 50,000 ($66,000

(17.8%) (14.3%) (15.0%)

Liabilities Current liabilities Long-term liabilities Total liabilities

$ 99,000 122,000 $221,000

$ 65,000 90,000 $155,000

($34,000 32,000 $66,000

(52.3%) (35.6%) (42.6%)

130,000 155,000

115,000 170,000

15,000 (15,000)

(13.0%) (8.8%)

285,000

–0–

(–0–

$506,000

$440,000

($66,000

(15.0%)

Stockholders’ Equity Common stock, $1 par Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity

LO 2 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Measurement and Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

13-21

EXERCISE 13-4 JOSHUA CORPORATION Condensed Income Statement For the Years Ended December 31

Sales revenue Cost of goods sold Gross profit Selling expenses Administrative expenses Total operating expenses Income before income taxes Income tax expense Net income

2017 Amount Percent $800,000 100.0% 520,000 65.0% 280,000 35.0% 120,000 15.0% 60,000 7.5% 180,000 22.5% 100,000 12.5% 30,000 3.7% $ 70,000 8.8%

2016 Amount Percent $600,000 100.0% 408,000 68.0% 192,000 32.0% 72,000 12.0% 48,000 8.0% 120,000 20.0% 72,000 12.0% 24,000 4.0% $ 48,000 8.0%

LO 2 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Measurement and Reporting

EXERCISE 13-5 (a)

NIKE, INC. Condensed Balance Sheet May 31 ($ in millions)

Assets Current assets Property, plant, and equipment (net) Other assets Total assets

13-22

Percentage Increase Change (Decrease) from 2016

2017

2016

$ 9,734

$ 8,839

$895

10.1%

1,958 1,558 $13,250

1,891 1,713 $12,443

67 (155) $807

3.5% (9.0)% 6.5%

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 13-5 (Continued) NIKE, INC. Condensed Balance Sheet (Continued) May 31 Percentage Increase Change (Decrease) from 2016

2017

2016

$ 3,277

$ 3,322

$ (45)

(1.4%)

1,280

1,296

(16)

(1.2%)

8,693

7,825

868

11.1%

$13,250

$12,443

$807

6.5%

$ (in millions)

Percent

Assets Current assets Property, plant, and equipment (net) Other assets Total assets

$ 9,734 1,958 1,558 $13,250

73.5% 14.8% 11.7% 100.0%

Liabilities and stockholders’ equity Current liabilities Long-term liabilities Stockholders’ equity Total liabilities and stockholders’ equity

$ 3,277 1,280 8,693 $13,250

24.7% 9.7% 65.6% 100.0%

Liabilities and stockholders’ equity Current liabilities Long-term liabilities Stockholders’ equity Total liabilities and stockholders’ equity

(b)

NIKE, INC. Condensed Balance Sheet May 31, 2017

LO 2 BT: AP Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA FC: Measurement and Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

13-23

EXERCISE 13-6 (a)

DELANEY CORPORATION Condensed Income Statement For the Years Ended December 31

Net sales Cost of goods sold Gross profit Operating expenses Net income (b)

2017 $598,000 477,000 121,000 80,000 $ 41,000

2016 $500,000 420,000 80,000 44,000 $ 36,000

Increase or (Decrease) During 2017 Amount Percentage $98,000 19.6% 57,000 13.6% (41,000) (51.3% 36,000) 81.8% $ 5,000) (13.9%

DELANEY CORPORATION Condensed Income Statements For the Years Ended December 31

Net sales Cost of goods sold Gross profit Operating expenses Net income

2017 $ Percent $598,000 100.0% 477,000 79.8% 121,000 20.2% 80,000 13.4% $ 41,000 6.8%

2016 $ Percent $500,000 100.0% 420,000 84.0% 80,000 16.0% 44,000 8.8% $ 36,000 7.2%

LO 2 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Measurement and Reporting

EXERCISE 13-7 Current ratio = 2.01:1 ($4,054 ÷ $2,014) Accounts receivable turnover = 4.2 times ($8,258 ÷ $1,988.5a) Average collection period = 86.9 days (365 days ÷ 4.2) Inventory turnover = 5.9 times ($5,328 ÷ $899b) Days in inventory = 61.9 days (365 days ÷ 5.9) a

($2,035 + $1,942) ÷ 2 ($898 + $900) ÷ 2

LO 3 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Measurement and Reporting 13-24

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 13-8 Current ratio as of February 1, 2017 = 3.00:1 ($120,000 ÷ $40,000). Feb. 3 7 11 14 18

3.00 No change in total current assets or liabilities. 2.43 ($97,000 ÷ $40,000). 2.43 No change in total current assets or liabilities. 3.04 ($85,000 ÷ $28,000). 2.66 ($85,000 ÷ $32,000).

LO 3 BT: AP Difficulty: Hard TOT: 15 min. AACSB: Analytic AICPA FC: Measurement and Reporting

EXERCISE 13-9 (a) Current ratio =

$145,000 = 2.90:1 $50,000

(b) Accounts receivable turnover = (1) (c)

$350,000 = 5.4 times $65,000 (1)

($70,000 + $60,000) 2

Average collection period = 365 days ÷ 5.4 = 67.6 days

(d) Inventory turnover = (2)

$198,000 = 3.6 times $55,000 (2)

$60,000 + $50,000 2

(e)

Days in inventory = 365 days ÷ 3.6 = 101.4 days

(f)

Free cash flow = $48,000 – $25,000 – $10,000 = $13,000

LO 3 BT: AP Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Measurement and Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

13-25

EXERCISE 13-10 (a) Profit margin

(b) Asset turnover

$75.9 = 1.5% $5,121.8 $5,121.8 = 1.64 times  $2,993.9 + $3,249.8    2

(Asset turnover = Net sales ÷ Average total assets)

$75.9 = 2.4%  $2,993.9 + $3,249.8    2

(Return on assets = Net income ÷ Average total assets)

(d) Return on common stockholders’ equity

$75.9 = 7.6%  $921.6 + $1,074.7    2

(Return on common stockholders' equity = Net income ÷ Average common stockholders' equity)

(e) Gross profit rate

$5,121.8 – $3,540.6 = 30.9% $5,121.8

LO 3 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Measurement and Reporting

EXERCISE 13-11 (a) Earnings per share

$72,000 – $5,000 $67,000 = = $1.86  32,000 + 40,000  36,000   2

(EPS = (Net income – preferred dividends) ÷ Average number of common share outstanding)

(b) Price-earnings ratio

$14.00 = 7.5 times $1.86

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Kimmel, Financial Accounting, 8/e, Solutions Manual

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EXERCISE 13-11 (Continued)

$21,000 – $5,000 = 22.2% $72,000

(d) Times interest earned

$72,000 + $16,000 + $24,000 $112,000 = = 7.0 times $16,000 $16,000

LO 3 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Measurement and Reporting

EXERCISE 13-12 (a) Inventory turnover = 3.8 =

Cost of goods sold  $200,000 + $180,000    2

3.8 X $190,000 = Cost of goods sold Cost of goods sold = $722,000. (Cost of goods sold = Average inventory × inventory turnover)

(b) Accounts receivable turnover = 11.2 =

Net sales (credit)  $126,000 + $72,500    2

11.2 X $99,250 = Net sales (credit) = $1,111,600. (Net sales (credit) = Average accounts receivable × accounts receivable turnover )

.22 X $507,250 = Net income = $111,595. (Net income = Average common stockholders' equity × Return on common stockholders' equity)

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13-27

EXERCISE 13-12 (Continued) (d) Return on assets = 18% =

Average assets =

$111,595 [see (c) above] Net income = Average assets Average assets

$111,595 = $619,972 .18

Total assets (Dec. 31, 2017) + $605,000 = $619,972 2 Total assets (Dec. 31, 2017) = ($619,972 X 2) – $605,000 = $634,944. (Average assets = Net income ÷ Return on assets) LO 3 BT: AP Difficulty: Hard TOT: 20 min. AACSB: Analytic AICPA FC: Measurement and Reporting

EXERCISE 13-13 2017 (a) Current ratio: $1,390 ÷ $820 = $1,310 ÷ $790 =

1.70:1

(b) Inventory turnover: $970/[($460 + $390) ÷ 2)] = $890/[($390 + $340) ÷ 2)] =

2.28

2016 1.66:1

2.44

(Inventory turnover = Cost of goods sold ÷ Average inventory)

6.6%

(d) Return on assets: $252/[($2,340 + $2,210) ÷ 2)] = $132/[($2,210 + $1,900) ÷ 2)] =

11.1%

3.8%

6.4%

(Return on assets = Net income ÷ Average total assets)

13-28

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EXERCISE 13-13 (Continued) (e) Return on common stockholders’ equity: $252/[($1,040 + $1,040) ÷ 2)] = $132/[($1,040 + $900) ÷ 2)] =

24.2% 13.6%

(Return on common stockholders' equity = Net income ÷ Average common stockholders' equity)

(f) Debt to assets ratio: ($820 + $480) ÷ $2,340 = ($790 + $380) ÷ $2,210 =

55.6%

(g) Times interest earned: ($252 + $168 + $10) ÷ $10 = ($132 + $ 88 + $20) ÷ $20 =

43 times

52.9%

12 times

LO 3 BT: AP Difficulty: Medium TOT: 20 min. AACSB: Analytic AICPA FC: Measurement and Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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13-29

SOLUTIONS TO PROBLEMS PROBLEM 13-1A

(a)

Condensed Income Statement For the Year Ended December 31, 2017 Duke Company Lord Company Dollars Percent Dollars Percent $1,849,000 100.0% $546,000 100.0% 1,063,200 57.5% 289,000 52.9% 785,800 42.5% 257,000 47.1% 240,000 13.0% 82,000 15.0% 545,800 29.5% 175,000 32.1%

Net sales Cost of goods sold Gross profit Operating expenses Income from operations Other expenses and losses Interest expense 6,800 Income before income taxes 539,000 Income tax expense 62,000 Net income $ 477,000

.4% 3,600 29.1% 171,400 3.3% 28,000 25.8% $143,400

.7% 31.4% 5.1% 26.3%

(b) Lord Company appears to be more profitable. It has higher relative gross profit, income from operations, income before taxes, and net in$477,000  a come. Also, Duke's return on assets of 57.3%   is lower than  $832,593   $143,400  b Lord's return on assets of 67%   , and Duke's return on  $214,172   $477,000  c common stockholders’ equity of 72.3%   is lower than Lord's  $659,528   $143,400  d return on common stockholders’ equity of 93.1%   .  $154,047 

13-30

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PROBLEM 13-1A (Continued) a

$477,000 is Duke's 2017 net income. $832,593 is Duke's 2017 average assets: Current assets Plant assets Total assets

2017 2016 $325,975 $312,410 526,800 500,000 $852,775 + $812,410 =

$1, 665, 185 2

b a

$143,400 is Lord's 2017 net income. $214,172 is Lord's 2017 average assets: Current assets Plant assets Total assets

2017 2016 $ 83,336 $ 79,467 139,728 125,812 $223,064 + $205,279 =

$428, 343 2

$477,000 is Duke's 2017 net income. $659,528 is Duke's 2017 average stockholders’ equity: 2017 2016 Common stock $500,000 $500,000 Retained earnings 172,460 146,595 Stockholders’ equity $672,460 + $646,595 =

$1, 319, 055 2

d d

$143,400 is Lord's 2017 net income. $154,047 is Lord's 2017 average stockholders’ equity: 2017 2016 Common stock $120,000 $120,000 Retained earnings 38,096 29,998 Stockholders’ equity $158,096 + $149,998 =

$308, 094 2

LO 2, 3 BT: AN Difficulty: Medium TOT: 30 min. AACSB: Analytic and Communication AICPA FC: Measurement and Reporting AICPA PC: Communication

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13-31

PROBLEM 13-2A

(a) Earnings per share =

(1)

$218,000 = $3.69 59,000 (1)

 60,000* + 58,000**    2  

*$300,000 $5

**$290,000 $5

(b) Return on common stockholders’ equity =

$218,000  $465,400 + $603,400    2

$218,000 $534,400

= 40.8% (Return on common stockholders' equity = Net income ÷ Average common stockholders' equity)

$218,000 $218,000 = = 23.2%  $852,800 + $1,026,900  $939,850   2

(Return on assets = Net income ÷ Average total assets)

(d) Current ratio = $377,900 = 1.86:1 $203,500

(e) Accounts receivable turnover =

$1,890,540  ($102,800 + $117,800)    2

$1,890,540 = 17.1 times $110,300

(Accounts receivable turnover = Net credit sales ÷ Average accounts receivable)

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PROBLEM 13-2A (Continued) (f)

Average collection period = 365 days ÷ 17.1 = 21.3 days

(g) Inventory turnover =

$1,058,540 $1,058,540 = = 8.8 times  $115,500 + $126,000  $120,750   2

(Inventory turnover = Cost of goods sold ÷ Average inventory)

(h) Days in inventory = 365 days ÷ 8.8 = 41.5 days

(i)

Times interest earned = $310,000 + $22,000 = 15.1 times $22,000

(j)

Asset turnover = 

    

$1,890,540 = 2.01 times $1,026,900 + $852,800    2 

(Asset turnover = Net sales ÷ Average total assets)

(k) Debt to assets ratio = $423,500 = 41% $1,026,900 (l)

Free cash flow = $220,000 – $136,000 – $70,000 = $14,000

LO 3 BT: AP Difficulty: Medium TOT: 30 min. AACSB: Analytic AICPA FC: Measurement and Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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13-33

PROBLEM 13-3A

(a)

2017 (1)

Profit margin.

$95,000 $700,000 (2)

2016

$70,000

= 13.6%

$570,000

Gross profit rate.

$220,000 = 38.6% $570,000

$275,000 = 39.3% $700,000 (3)

= 12.3%

Asset turnover.

$700,000 = 1.06 times  $ 600 ,000 + $725,000    2

$570,000 = 1.01 times  $533,000 + $600,000    2

(Asset turnover = Net Sales ÷ Average total assets)

(4)

Earnings per share. $95,000 = $3.02  3 1 ,000 + 32,000    2

(5)

Price-earnings ratio.

$8.50 $3.02 (6)

$7.50

= 2.8 times

$2.30

$95,000

$58,000*

= 47%

$70,000

**($125,000 + $95,000 – $175,000)

= 83%

*($113,000 + $70,000 – $125,000)

Debt to assets ratio.

($85,000 + $145,000) = 32% $725,000

13-34

= 3.3 times

Payout ratio.

$45,000**

(7)

$70,000 = $2.30  3 0 ,000 + 3 1 ,000    2

($80,000 + $85,000) = 28% $600,000

Kimmel, Financial Accounting, 8/e, Solutions Manual

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PROBLEM 13-3A (Continued) (b) The underlying profitability of the corporation appears to have improved. For example, profit margin and earnings per share have both increased. The corporation’s debt to assets ratio has increased but the improvements in profitability indicate that taking on more debt was a wise move. LO 3 BT: AN Difficulty: Medium TOT: 30 min. AACSB: Analytic and Communication Measurement and Reporting AICPA PC: Communication

Kimmel, Financial Accounting, 8/e, Solutions Manual

AICPA FC:

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13-35

PROBLEM 13-4A

(a) LIQUIDITY 2016

2017

% Change

Current ratio

$383,000 = 1.81:1 $212,000

$484,000 = 1.76:1 $275,000

(3%)

Accounts receivable turnover

$790,000 $882,000 = 9.0 times = 9.1 times $88,000 $97,000

Inventory turnover

$575,000 $640,000 = 4.1 times = 3.2 times $140,000 $197,500

(22%)

An overall decrease in short-term liquidity has occurred. (Both accounts receivable and inventory turnovers have an average in their denominator)

PROFITABILITY

$52,000 = 5.9% $882,000

Profit margin

$48,000 = 6.1% $790,000

Asset turnover

$790,000 = 1.16 times $882,000 = 1.12 times $679,000 $786,000

Return on assets

$48,000 = 7.1% $679,000

$52,000 = 6.6% $786,000

(7%)

Earnings per share

$48,000 = $2.40 20,000

$52,000 = $2.60 20,000

(3%)

Profitability has decreased slightly. (Both Asset turnover and Return on assets have the same average in their denominator)

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Kimmel, Financial Accounting, 8/e, Solutions Manual

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PROBLEM 13-4A (Continued) (b)

2017 1.

2018

%Change

Return on $52,000 $54,000 common = 11.6% = 15.6% $466,000 (b) stockhold- $332,500 (a) ers’ equity

(26%)

Debt to assets ratio

$525,000 = 60% $874,000

$355,000 = 39% $900,000

(35%)

Priceearnings ratio

$9.00 = 3.5 times $2.60

$12.00 = 4.4 times $2.70 (c)

26%

(a) ($200,000 + $149,000 + $200,000 + $116,000) ÷ 2. (b) ($380,000* + $203,000** + $200,000 + $149,000) ÷ 2. (c) $54,000 ÷ 20,000. **$200,000 + (18,000 X $10/share) **$149,000 + $54,000 (Return on common stockholders' equity has an average in its denominator) LO 3 BT: AN Difficulty: Medium TOT: 50 min. AACSB: Analytic AICPA FC: Measurement and Reporting

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13-37

PROBLEM 13-5A

(a)

Ratio

Target

Wal-Mart

(All Dollars Are in Millions) (1) Current ratio 1.63:1 ($18,424 ÷ $11,327) .87:1 ($48,331 ÷ $55,561) (2) Accounts receivable turnover 8.7 ($65,357 ÷ $7,525) 101.4 ($408,214 ÷ $4,025) (3) Average collection period (in days) 42.0 (365 ÷ 8.7) 3.6 (365 ÷ 101.4) (4) Inventory turnover 6.6 ($45,583 ÷ $6,942) 9.0 ($304,657 ÷ $33,836) (5) Days in inventory 55.3 (365 ÷ 6.6) 40.6 (365 ÷ 9.0) (6) Profit margin 3.8% ($2,488 ÷ $65,357) 3.5% ($14,335 ÷ $408,214) (7) Asset turnover 1.5 ($65,357 ÷ $44,319.5a) 2.4 ($408,214 ÷ $167,067.5d) (8) Return on assets 5.6% ($2,488 ÷ $44,319.5a) 8.6% ($14,335 ÷ $167,067.5d) (9) Return on common stockholders’ equity 17.1% ($2,488 ÷ $14,529.5b) 21.0% ($14,335 ÷ $68,369e) (10) Debt to assets ratio 66% ($29,186 ÷ $44,533) 58% ($99,650 ÷ $170,706) c (11) Times interest earned 6.5 ($4,579 ÷ $707) 11.4 ($23,539f ÷ $2,065) (12) Free cash flow $3,656 ($5,881 – $1,729 – $496) $9,848 ($26,249 – $12,184 – $4,217) a

($44,533 + $44,106) ÷ 2 ($15,347 + $13,712) ÷ 2 c ($2,488 + $1,384 + $707)

($170,706 + $163,429) ÷ 2 ($71,056 + $65,682) ÷ 2 f ($14,335 + $7,139 + $2,065)

(b) The comparison of the two companies shows the following: Liquidity—Target’s current ratio of 1.63:1 is better than Wal-Mart’s .87:1. However, Wal-Mart has a better inventory turnover than Target and its accounts receivable turnover is significantly better than Target’s. Solvency—Wal-Mart betters Target in all of the solvency ratios. Thus, it is more solvent than Target. Profitability—With the exception of profit margin, Wal-Mart betters Target in all of the profitability ratios. Thus, it is more profitable than Target. LO 3 BT: AN Difficulty: Medium TOT: 60 min. AACSB: Analytic and Communication Measurement and Reporting AICPA PC: Communication

13-38

Kimmel, Financial Accounting, 8/e, Solutions Manual

AICPA FC:

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CT 13-1

(a)

FINANCIAL REPORTING PROBLEM

APPLE INC . Trend Analysis of Net Sales and Net Earnings For the Five Years Ended 2014 Base Period 2010—($ in millions) 2014

2013

2012

2011

2010

(1) Net sales Trend

$182,795 280%

$170,910 262%

$156,508 $108,249 240% 166%

(2) Net income Trend

$ 39,510 282%

$ 37,037 264%

$ 41,733 $ 25,922 $ 14,013 298% 185% 100%

$65,225 100%

Both net sales and net income increased significantly form, 2010–2014. They both appear to have increased at approximately the same rate, indicating that costs increased at the same rate. (b) (in millions) 1.

Debt to Assets Ratio 2014: 2013:

$120,292 ÷ $231,839 = 52% $83,451 ÷ $207,000 = 40%

Times Interest Earned 2014: 2013:

($39,510 + $13,973 + $384) ÷ $384 = 140.3 times ($37,037 + $13,118 + $136) ÷ $136 = 369.8 times

Apple's long-term solvency has decreased. The debt to assets ratio indicates that creditors are providing approximately 52% of Apple's total assets up from 40%. Also, even though the times interest earned ratio has decreased, Apple easily has the ability to pay interest payments when they come due as indicated by the times interest earned of approximately 140 times.

Kimmel, Financial Accounting, 8/e, Solutions Manual

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13-39

CT 13-1 (Continued) (c) ($ in millions) 1.

Profit Margin 2014: 2013:

Asset Turnover 2014: 2013:

$182,795 ÷ [($231,839 + $207,000) ÷ 2] = .83 times $170,910 ÷ [($207,000 + $176,064) ÷ 2] = .89 times

Return on Assets 2014: 2013:

$39,510 ÷ $182,795 = 21.6% $37,037 ÷ $170,910 = 21.7%

$39,510 ÷ [($231,839 + $207,000) ÷ 2] = 18.0% $37,037 ÷ [($207,000 + $176,064) ÷ 2] = 19.3%

Return on Common Stockholders’ Equity 2014: 2013:

$39,510 ÷ [($111,547 + $123,549) ÷ 2] = 33.6% $37,037 ÷ [($123,549 + $118,210) ÷ 2] = 30.6%

All of the profitability ratios except return on common stockholders' equity decreased in 2014. Stockholders are earning an outstanding 33.6% on their investment. Considering that Apple is primarily in a high-price business where the margin above costs is historically high, the profit margins for both 2014 and 2013 are good. (d) Substantial amounts of important information about a company are not in its financial statements. Events involving such things as industry changes, management changes, competitors’ actions, technological developments, governmental actions, and union activities are often critical to the successful operation of a company. Financial reports in the media and publications of financial service firms (Standard & Poors, Dun & Bradstreet) will provide additional relevant information not usually found in the annual report. LO 2, 3 BT: AN Difficulty: Hard TOT: 60 min. AACSB: 60 min. AACSB: Analytic and Communication AICPA FC: Measurement and Reporting AICPA PC: Communication

13-40

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 13-2

COMPARATIVE ANALYSIS PROBLEM

(a)

Columbia Sportswear

VF Corporation

1. (i) Percentage increase $2,100,590 – $1,684,996 = 24.7% (decrease) in net $1,684,996 sales

$12,154,784 – $11,302,350

(ii) Percentage increase $137,173 – $94,341 = 45.4% (decrease) in net $94,341 income

$1,047,505 – $1,210,119

2. (i) Percentage increase $1,792,209 – $1,605,588 = 11.6% (decrease) in total $1,605,588 assets

$9,980,140 – $10,315,443

(ii) Percentage increase $1,355,234 – $1,252,864 = 8.2% (decrease) in total $1,252,864 stockholders’ equity

$5,630,882 – $6,077,038

3. Basic earnings per share

1.97*

= 7.5%

$11,302,350

= (13.4%)

$1,210,119

= (3.25%

$10,315,443

= (7.3%)

$6,077,038

2.42*

*Given on income statement

(b) Columbia's increases in net sales, net income, total assets, and total stockholders' equity were all significantly larger than VFC's. However, VFC's earnings per share was 22.8% greater than Columbia's, indicating that VFC was much more profitable than Columbia. LO 2 BT: AN Difficulty: Medium TOT: 30 min. AACSB: 60 min. AACSB: Analytic and Communication AICPA FC: Measurement and Reporting AICPA PC: Communication

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13-41

CT 13-3

COMPARATIVE ANALYSIS PROBLEM

(a)

Amazon.com

Wal-Mart Stores

1. (i) Percentage increase $88,988 – $74,452 = 19.5% (decrease) in net $74,452 sales

$482,229 – $473,076

(ii) Percentage increase $(241) – $274 = (188%) (decrease) in net $274 income

$16,363 – $16,022

2. (i) Percentage increase $54,505 – $40,159 = 35.7% (decrease) in total $40,159 assets

$203,706 – $204,751

(ii) Percentage increase $10,741 – $9,746 = 10.2% (decrease) in total $9,746 stockholders’ equity

$85,937 – $81,339

3. Basic earnings per share

$(0.52)*

= 1.9%

$473,076

= 2.1%

$16,022

= (0.5)%

$204,751

= 5.7%

$81,339

$5.07*

*Given on income statement

(b)

Amazon’s increases in net sales, total assets, and total stockholders’ equity were all significantly larger than Wal-Mart. However, Wal-Mart’s earnings per share was substantially greater than Amazon’s, indicating that Wal-Mart was much more profitable than Amazon.

LO 2 BT: AN Difficulty: Medium TOT: 30 min. AACSB: 60 min. AACSB: Analytic and Communication AICPA FC: Measurement and Reporting AICPA PC: Communication

13-42

Kimmel, Financial Accounting, 8/e, Solutions Manual

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CT 13-4 (a)

INTERPRETING FINANCIAL STATEMENTS Liquidity Ratios

Coca-Cola

PepsiCo

(1) Current ratio

1.28:1 ($17,551 ÷ $13,721)

1.44:1 ($12,571 ÷ $8,756)

(2) Accounts receivable turnover

9.1 times ($30,990 ÷ $3,424)

9.3 times ($43,232 ÷ $4,654)

(3) Average collection period

40.1 days (365 ÷ 9.1)

39.2 days (365 ÷ 9.3)

(4) Inventory turnover

4.9 times ($11,088 ÷ $2,271)

7.8 times ($20,099 ÷ $2,570)

(5) Days in inventory

74.5 (365 ÷ 4.9)

46.8 (365 ÷ 7.8)

PepsiCo is more liquid than Coca-Cola. PepsiCo betters Coca-Cola in all of the ratios. (b)

Solvency Ratios (1) Debt to assets ratio

(2) Times interest earned

(3) Free cash flow

Coca-Cola $23,872

= 49%

PepsiCo $23,044

= 58%

$48,671

$39,848

$6,824 + $2,040 + $355

$5,946 + $2,100 + $397

$355 = 26.0 times

$397 = 21.3 times

$8,186 – $1,993 – $3,800 = $2,393

$6,796 – $2,128 – $2,732 = $1,936

Coca-Cola is more solvent than PepsiCo.

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13-43

CT 13-4 (Continued) (c)

Profitability Ratios

Coca-Cola

PepsiCo

(1) Profit margin

22.0% ($6,824 ÷ $30,990)

13.8% ($5,946 ÷ $43,232)

(2) Asset turnover

.69 times ($30,990 ÷ $44,595)

1.14 times ($43,232 ÷ $37,921)

(3) Return on assets

15.3% ($6,824 ÷ $44,595)

15.7% ($5,946 ÷ $37,921)

(4) Return on common stockholders’ equity

30.1% ($6,824 ÷ $22,636)

40.8% ($5,946 ÷ $14,556)

PepsiCo, Inc. has a lower profit margin than the Coca-Cola Company. However, PepsiCo, Inc. has a higher asset turnover, return on assets, and return on common stockholders’ equity. LO 3 BT: AP Difficulty: Medium TOT: 45 min. AACSB: Analytic AICPA FC: Measurement and Reporting

13-44

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CT 13-5

REAL-WORLD FOCUS

(a), (b), and (c) Answers will vary depending on the companies chosen by the student. LO 3 BT: AN Difficulty: Hard TOT: 60 min. AACSB: Analytic, Technology and Communication AICPA FC: Measurement and Reporting AICPA PC: Communication

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13-45

CT 13-6

RESEARCH CASE

(a) As discussed in Chapter 11, when a company does a stock split, its share price drops accordingly. If Amazon had not engaged in past stock splits its stock price at the time of the article would have been $1,166. (b) Amazon dramatically increased its capacity to handle customer orders through its spending on fulfillment centers. However, until its sales increase enough to absorb this additional capacity, the company’s return on assets will probably suffer. First, the increase in plant assets will increase the company’s depreciation expense and reduce net income. Second, increasing plant assets increases the denominator of the return on assets, which reduces the company’s return. (c) At the time of the article, Amazon’s P/E ratio was 76. Apple had a P/E ratio of 11.4, Netflix was 38 and the article says that Amazon’s was 3 1/2 times that of Wal-Mart, making it approximately 21.7. Amazon’s high value suggests that investors were expecting significant growth in Amazon’s earnings in future years. (d) The article notes that Amazon’s 2012 operating margin was about half what it had been in the typical previous year. In the past, many of Amazon’s customers did not pay sales taxes on their purchases, which effectively gave Amazon a price advantage over traditional “brick and mortar” stores that do collect sales taxes. It stated that, because Amazon’s customers might have to start paying sales taxes on their purchases, Amazon might have to reduce its prices in order to continue to compete on price. This would reduce its profitability. LO 3 BT: E Difficulty: Hard TOT: 60 min. AACSB: Analytic, Technology and Communication AICPA FC: Measurement and Reporting AICPA PC: Communication

13-46

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CT 13-7

DECISION MAKING ACROSS THE ORGANIZATION

(a) Lenders prefer that financial statements are audited because an audit gives independent assurance that the financial statements give a reasonable representation of the company’s financial position and results of operations. With this independent assurance they feel more comfortable making a decision. (b) The current ratio increase is a favorable indication as to liquidity, but alone tells little about the going-concern prospects of the client. From this ratio change alone, it is impossible to know the amount and direction of the changes in individual accounts, total current assets, and total current liabilities. Also unknown are the reasons for the changes. The change in asset turnover cannot alone tell anything about either solvency or going-concern prospects. There is no way to know the amount and the direction of the changes in the two items. An increase in sales would be favorable for going-concern prospects, while a decrease in assets could represent a number of possible scenarios and would need to be investigated further. The increase in net income is a favorable indicator for both solvency and going-concern prospects although much depends on the quality of receivables generated from sales and how quickly they can be converted into cash. Indirectly, the improved income picture may have a favorable impact on solvency and going-concern potential by enabling the client to borrow currently to meet cash requirements. The 32 percent [($3.30 – $2.50) ÷ $2.50] increase in earnings per share, which is identical to the percentage increase in net income, is an indication there has probably been no change in the number of shares of common stock outstanding. This in turn indicates that financing was not obtained through the issuance of common stock. It is not possible to reach conclusions about solvency and going-concern prospects without additional information about the nature and extent of financing. The collective implications of these data alone are that the client entity is about as solvent and viable as a going concern at the end of the current year as it was at the beginning although there may be a need for short-term operating cash. Copyright © 2016 John Wiley & Sons, Inc.

Kimmel, Financial Accounting, 8/e, Solutions Manual

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13-47

CT 13-7 (Continued) Although a quick evaluation of a reporting entity can be made using only a few ratios and comparing these with past ratios and industry statistics, the creditors should realize the limitations of such analysis even from the best prepared statements carrying a CPA’s unqualified opinion. A limitation on comparisons with industry statistics or other companies within the industry exists because material differences can be created through the use of alternative (but acceptable) accounting methods. Further, when evaluating changes in ratios or percentages, the evaluation should be directed to the nature of the item being evaluated because very small differences in ratios or percentages can represent significant changes in dollar amounts or trends. The creditors should evaluate conclusions drawn from ratio analysis in light of the current status of, and expected changes in, such things as general economic conditions, the client’s competitive position, the public’s demand (for the product itself, increased quality of the product, control of noise and pollution, etc.), and the client’s specific plans. (c) 1.

Accounts receivable turnover—indicates liquidity.

Debt to assets ratio—indicates solvency.

Times interest earned—indicates ability to repay interest when due.

Other answers are possible. LO 3 BT: E Difficulty: Hard TOT: 60 min. AACSB: Analytic and Communication Measurement and Reporting AICPA PC: Interaction, Leadership and Communication

13-48

Kimmel, Financial Accounting, 8/e, Solutions Manual

AICPA FC:

(For Instructor Use Only)

CT 13-8

COMMUNICATION ACTIVITY

To:

Larry Dundee

From:

Accounting Student

Re:

Financial Statement Analysis

There are two fundamental considerations in financial statement analysis: (1) the bases of comparison and (2) the limitations of financial statement analysis. Each of these considerations is explained below. 1.

Bases of comparison. The bases of comparison are: a.

Intracompany—This basis compares an item or financial relationship within a company in the current year with the same item or relationship in one or more prior years.

Intercompany—This basis compares an item or financial relationship of one company with the same item or relationship in one or more competing companies.

Industry averages—This basis compares an item or financial relationship of a company with industry averages (or norms).

Three factors that affect quality of earnings are: a.

Alternative accounting methods—Variations among companies in the application of generally accepted accounting principles (GAAP) can cause variation in earnings quality across companies.

Pro forma income—Many companies now report non-GAAP income measures in addition to GAAP income. There is little guidance regarding these measures, thus the earnings quality of these measures is difficult to determine.

Improper recognition—In order to meet earnings targets, some companies record revenues and expenses in the wrong period. This directly reduces earnings quality.

Kimmel, Financial Accounting, 8/e, Solutions Manual

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13-49

CT 13-9

ETHICS CASE

(a) The stakeholders in this case are: René Kelly, president of RL Industries. Erin Lourdes, public relations director. You, as controller of RL Industries. Stockholders of RL Industries. Potential investors in RL Industries. Any readers of the press release. (b) The president’s press release is deceptive and incomplete and to that extent her actions are unethical. (c) As controller you should at least inform Erin, the public relations director, about the biased content of the release. She should be aware that the information she is about to release, while factually accurate, is deceptive and incomplete. Both the controller and the public relations director (if she agrees) have the responsibility to inform the president of the bias of the about-to-be-released information. LO 3 BT: E Difficulty: Medium TOT: 20 min. AACSB: Analytic, Communication and Ethics AICPA FC: Reporting AICPA PC: Communication and Professional Demeanor

13-50

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

CT 13-10

ALL ABOUT YOU

Student responses will vary. We suggest that in class you ask for a few students to share their responses in order to increase students understanding of the reasons why different people will choose different investment vehicles. LO - BT: AN Difficulty: Easy TOT: 20 min. AACSB: Analytic and Technology AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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13-51

CT 13-11

FASB CODIFICATION ACTIVITY

(a) Discontinued Operations 205-20-45-1 The results of operations of a component of an entity that either has been disposed of or is classified as held for sale under the requirements of paragraph 360-10-45-9, shall be reported in discontinued operations in accordance with paragraph 205-20-45-3 if both of the following conditions are met: a. The operations and cash flows of the component have been (or will be) eliminated from the ongoing operations of the entity as a result of the disposal transaction. b. The entity will not have any significant continuing involvement in the operations of the component after the disposal transaction.

(b) Comprehensive Income The change in equity (net assets) of a business entity during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. LO 1 BT: S Difficulty: Medium TOT: 20 min. AACSB: Analytic and Technology AICPA FC: Reporting

13-52

Kimmel, Financial Accounting, 8/e, Solutions Manual

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IFRS 13-1 INTERNATIONAL FINANCIAL REPORTING PROBLEM

(a) The company's profit margin for 2014 was 18.4% (€5,648 ÷ €30,638) up from 11.8% (€3,436 ÷ €29,016) in 2013. (b) The 2014 operating profit was €5,431. (c) Other comprehensive gains and losses was a net decrease of €127 million. LO 5 BT: AN Difficulty: Medium TOT: 15 min. AACSB: Analytic, Communication and Diversity AICPA FC: Measurement and Reporting AICPA PC: Communication AICPA BB: International

Kimmel, Financial Accounting, 8/e, Solutions Manual

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13-53

APPENDIX G Time Value of Money SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE G-1 (a) Interest = p X i X n I = $6,000 X .05 X 12 years I = $3,600 Accumulated amount = $6,000 + $3,600 = $9,600 (b) Future value factor for 12 periods at 5% is 1.79586 (from Table 1) Accumulated amount = $6,000 X 1.79586 = $10,775.16 LO 1 BT: AP Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE G-2 (1) Case A Case B

5% 6%

3 periods 8 periods

(2) Case A Case B

3% 4%

8 periods 12 periods

LO 1 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

BRIEF EXERCISE G-3 FV = p X FV of 1 factor = $9,600 X 1.60103 = $15,369.89 LO 1 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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G-1

BRIEF EXERCISE G-4 FV of an annuity of 1 = p X FV of an annuity factor = $78,000 X 13.18079 = $1,028,101.62 LO 1 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE G-5 FV = (p X FV of 1 factor) + (p X FV of an annuity factor) = ($8,000 X 2.40662) + ($1,000 X 28.13238) = $19,252.96 + $28,132.38 = $47,385.34 ((p X FV of 1 factor) + (p X FV of an annuity factor)) LO 1 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE G-6 FV = p X FV of 1 factor = $35,000 X 1.46933 = $51,426.55 LO 1 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE G-7 FV of an annuity = p X FV of an annuity factor $20,000 = p X 9.89747 p = $20,000 ÷ 9.89747 p = $2,020.72 (FV of an annuity = Annuity X FV of an annuity factor) LO 1 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

G-2

Kimmel, Financial Accounting, 8/e, Solutions Manual

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BRIEF EXERCISE G-8 (a) (1) 12% 8% 5%

(b) 7 periods 11 periods 16 periods

(2) 10% 10% 3%

20 periods 7 periods 10 periods

LO 2 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

BRIEF EXERCISE G-9 (a)

i = 10% ?

$25,000

Discount rate from Table 3 is .42410 (9 periods at 10%). Present value of $25,000 to be received in 9 years discounted at 10% is therefore $10,602.50 ($25,000 X .42410). (PV of an amount = Amount X PV of 1 factor)

(b)

i = 9% ?

$25,000 $25,000 $25,000 $25,000 $25,000 $25,000

Discount rate from Table 4 is 4.48592 (6 periods at 9%). Present value of 6 payments of $25,000 each discounted at 9% is therefore $112,148.00 ($25,000 X 4.48592). (PV of an annuity = Annuity X PV of an annuity factor) LO 2 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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G-3

BRIEF EXERCISE G-10 i = 8% ?

$900,000

Discount rate from Table 3 is .63017 (6 periods at 8%). Present value of $900,000 to be received in 6 years discounted at 8% is therefore $567,153 ($900,000 X .63017). Messi Company should therefore invest $567,153 to have $900,000 in six years. (PV of an amount = Amount X PV of 1 factor) LO 2 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE G-11 i = 6% ?

$450,000

Discount rate from Table 3 is .62741 (8 periods at 6%). Present value of $450,000 to be received in 8 years discounted at 6% is therefore $282,334.50 ($450,000 X .62741). Lloyd Company should invest $282,334.50 to have $450,000 in eight years. (PV of an amount = Amount X PV of 1 factor) LO 2 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

G-4

Kimmel, Financial Accounting, 8/e, Solutions Manual

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BRIEF EXERCISE G-12 i = 8% ?

$40,000 $40,000 $40,000 $40,000

$40,000 $40,000

Discount rate from Table 4 is 8.55948. Present value of 15 payments of $40,000 each discounted at 8% is therefore $342,379.20 ($40,000 X 8.55948). Robben Company should pay $342,379.20 for this annuity contract. (PV of an annuity = Annuity X PV of an annuity factor) LO 2 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE G-13 i = 5% ?

$80,000

Discount rate from Table 4 is 5.07569. Present value of 6 payments of $80,000 each discounted at 5% is therefore $406,055.20 ($80,000 X 5.07569). Kaehler Enterprises invested $406,055.20 to earn $80,000 per year for six years. (PV of an annuity = Annuuity X PV of an annuity factor) LO 2 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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G-5

BRIEF EXERCISE G-14 i = 5% ?

$400,000

Diagram for Principal

i = 5% ?

$22,000 $22,000 $22,000 $22,000

$22,000 $22,000

Diagram for Interest

Present value of principal to be received at maturity: $400,000 X 0.37689 (PV of $1 due in 20 periods at 5% from Table 3) .............................................................. Present value of interest to be received periodically over the term of the bonds: $22,000* X 12.46221 (PV of $1 due each period for 20 periods at 5% from Table 4) ........................................................................ Present value of bonds ...............................................................

$150,756*

274,169** $424,925**

*$400,000 X .055 **Rounded. (PV of bond = (Face value of bond X PV of 1 factor) + (Annual interest X PV of an annuity factor)) LO 2 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

G-6

Kimmel, Financial Accounting, 8/e, Solutions Manual

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BRIEF EXERCISE G-15 The bonds will sell at a discount (for less than $400,000). This may be proven as follows: Present value of principal to be received at maturity: $400,000 X .31180 (PV of $1 due in 20 periods at 6% from Table 3) .............................................................. Present value of interest to be received periodically over the term of the bonds: $22,000 X 11.46992 (PV of $1 due each period for 20 periods at 6% from Table 4) ........................................................................ Present value of bonds ...............................................................

$124,720*

252,338* $377,058*

*Rounded.

(PV of bond = (Face value of bond X PV of 1 factor) + (Annual interest X PV of an annuity factor) LO 2 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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G-7

BRIEF EXERCISE G-16 i = 6% ?

$75,000

Diagram for Principal

i = 6% ?

$3,000

Diagram for Interest

Present value of principal to be received at maturity: $75,000 X .70496 (PV of $1 due in 6 periods at 6% from Table 3) ............................................................. Present value of interest to be received annually over the term of the note: $3,000* X 4.91732 (PV of $1 due each period for 6 periods at 6% from Table 4) ................................................................. Present value of note received ..................................................

$52,872.00

14,751.96 $67,623.96

*$75,000 X .04 (PV of note = (PV of principal X PV of 1 factor ) + (Annual interest X PV of an annuity factor)) LO 2 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

G-8

Kimmel, Financial Accounting, 8/e, Solutions Manual

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BRIEF EXERCISE G-17 i = 4% ?

$2,500,000

Diagram for Principal

i = 4% ?

$75,000 $75,000 $75,000 $75,000

$75,000 $75,000 $75,000

Diagram for Interest

Present value of principal to be received at maturity: $2,500,000 X 0.53391 (PV of $1 due in 16 periods at 4% from Table 3) ............................................................. Present value of interest to be received periodically over the term of the bonds: $75,000* X 11.65230 (PV of $1 due each period for 16 periods at 4% from Table 4) ....................................................................... Present value of bonds and cash proceeds ............................. *($2,500,000 X .06 X 1/2)

$1,334,775

873,923** $2,208,698**

**Rounded

(PV of bond = (Face value of bond X PV of 1 factor) + (Annual interest X PV of an annuity factor)) LO 2 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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G-9

BRIEF EXERCISE G-18 i = 5% ?

$48,850

Discount rate from Table 4 is 7.72173. Present value of 10 payments of $48,850 each discounted at 5% is therefore $377,206.51 ($48,850 X 7.72173). Frazier Company should receive $377,206.51 from the issuance of the note. (PV of proceeds = Annual payment × PV of an annuity factor) LO 2 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE G-19 i=? $4,765.50

$12,000

Present value = Future value X Present value of 1 factor $4,765.50 = $12,000 X Present value of 1 factor Present value of 1 factor = $4,765.50 ÷ $12,000 = .39713 The .39713 for 12 periods approximates the value found in the 8% column (.39711) in Table 3. Colleen Mooney will receive a 8% return.

(PV of 1 factor = Present amount ÷ Future amount) LO 2 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

G-10

Kimmel, Financial Accounting, 8/e, Solutions Manual

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BRIEF EXERCISE G-20 i = 11% $36,125

$75,000

n=? Present value = Future value X Present value of 1 factor $36,125 = $75,000 X Present value of 1 factor Present value of 1 factor = $36,125 ÷ $75,000 = .48166 The .48166 at 11% is found in the 7 years row in Table 3. Tim Howard therefore must wait 7 years to receive $75,000. (PV of 1 factor = Present amount ÷ Future amount) LO 2 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE G-21 i=? ?

$1,200 $1,200 $1,200 $1,200 $1,200 $1,200

$1,200 $1,200

$10,271.38

Present value = Future amount X Present value of an annuity factor $10,271.38 = $1,200 X Present value of an annuity factor Present value of an annuity factor = $10,271.38 ÷ $1,200 = 8.55948

The 8.55948 for 15 periods is found in the 8% column in Table 4. Joanne Quick will therefore earn a rate of return of 8%. (PV of an annuity factor = Present amount ÷ Annuity) LO 2 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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G-11

BRIEF EXERCISE G-22 i = 9% $1,300 $1,300 $1,300 $1,300 $1,300 $1,300

$7,793.83 n=? Present value = Future amount X Present value of an annuity factor $7,793.83 = $1,300 X Present value of an annuity factor Present value of an annuity factor = $7,793.83 ÷ $1,300 = 5.99525

The 5.99525 at an interest rate of 9% is shown in the 9-year row in Table 4. Therefore, Kevin will receive 9 payments. (PV of an annuity factor = Present amount ÷ Annuity) LO 2 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE G-23 i = 11%

PV of an annuity = p X Present value of an annuity factor $2,650.15 = p X 5.88923 p = $2,650.15 ÷ 5.88923 p = $450 (Annuity = PV of an annuity ÷ PV of an annuity factor) LO 2 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

G-12

Kimmel, Financial Accounting, 8/e, Solutions Manual

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BRIEF EXERCISE G-24 10*

–18,000

50,000

I/YR.

PMT

10.76% *2027 – 2017 LO 3 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE G-25 10

42,000

–6,500

I/YR.

PMT

8.85% LO 3 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE G-26 40

178,000*

–8,400

I/YR.

PMT

3.55% (semiannual) *$198,000 – $20,000 LO 3 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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G-13

BRIEF EXERCISE G-27 (a) Inputs:

7.35

16,000

PMT

–85,186.34

Answer: (b) Inputs:

10.65

16,000**

200,000*

PMT

–168,323.64

Answer:

*200 X $1,000

**$200,000 X .08

LO 3 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

G-14

Kimmel, Financial Accounting, 8/e, Solutions Manual

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BRIEF EXERCISE G-28 (a) Note—set payments at 12 per year. Inputs: 96 7.8

42,000

PMT

–589.48

Answer: (b) Note—set payments to 1 per year. Inputs: 5 7.25

8,000

PMT

–1,964.20

Answer:

LO 3 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

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G-15

APPENDIX H Reporting and Analyzing Investments Learning Objectives 1. Explain how to account for debt investments. 2. Explain how to account for stock investments. 3. Discuss how debt and stock investments are reported in the financial statements.

Summary of Questions by Learning Objectives and Bloom’s Taxonomy Item

Item

Questions 1.

13.

17.

10.

14.

18.

11.

15.

12.

16.

2, 3

Brief Exercises 1.

Exercises 1.

2. 1, 2, 3 AN

Problems 1.

2, 3,

2, 3

Kimmel, Financial Accounting, 8/e, Solutions Manual

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H-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

PH-1

Journalize debt investment transactions.

Moderate

30–40

PH-2

Journalize investment transactions, prepare adjusting entry, and show financial statement presentation.

Moderate

30–40

PH-3

Journalize transactions, prepare adjusting entry for stock investments, and show balance sheet presentation.

Moderate

30–40

PH-4

Prepare entries under cost and equity methods, and prepare memorandum.

Simple

20–30

PH-5

Journalize stock transactions, and show balance sheet presentation.

Moderate

40–50

PH-6

Prepare a balance sheet.

Moderate

30–40

H-2

Kimmel, Financial Accounting, 8/e, Solutions Manual

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ANSWERS TO QUESTIONS 1.

Companies invest because (1) they have excess cash for a short period of time, or (2) they want to generate investment income or (3) they have strategic reasons such as controlling a competitor or supplier or entering a new industry.

LO 1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting 2.

(a)

The cost of an investment in bonds consists of the market price of the bonds plus any brokerage fees.

(b)

Interest is recorded as it is earned; that is, over the life of the investment in bonds.

LO 1 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting 3.

(a)

Losses and gains on the sale of debt investments are computed by comparing the cost of the securities to the net proceeds from the sale.

(b)

Losses are reported in the income statement under other expenses and losses whereas gains are reported under other revenues and gains.

LO K BT: K Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting 4.

Heliy Company is incorrect. The gain is the difference between the net proceeds, exclusive of interest, and the cost of the bonds. The correct gain is $4,000 [($45,000 – $1,000) – $40,000].

LO 1 BT: AN Difficulty: Medium TOT: 3 min. AACSB: Analytic AICPA FC: Reporting 5.

The cost of an investment in stock includes all expenditures necessary to acquire the investment. These expenditures include the actual purchase price plus any commissions or brokerage fees.

LO 2 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting 6.

Brokerage fees are part of the cost of the investment. Therefore, the entry is: Stock Investments ........................................................................... Cash ......................................................................................

61,500 61,500

LO 2 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Reporting 7.

(a)

Whenever the investor’s influence on the operating and financial affairs of the investee is significant, the equity method should be used. The major factor in determining significant influence is the percentage of ownership interest held by the investor in the investee. The general guideline for use of the equity method is 20% or more ownership interest. Companies are required to use judgement, however, rather than blindly follow the 20% guideline. For example, 25% ownership in a company that is 75% controlled by another organization would not indicate significant influence.

(b)

Revenue is recognized as it is earned by the investee.

Kimmel, Financial Accounting, 8/e, Solutions Manual

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H-3

Since Stetson Corporation uses the equity method, the income reported by Pike Packing ($80,000) should be multiplied by Stetson’s ownership interest (30%) and the result ($24,000) should be debited to Stock Investments and credited to Revenue from Stock Investments. Also, of the total dividend declared and paid by Pike ($10,000) Stetson will receive 30% or $3,000. This amount should be debited to Cash and credited to Stock Investments.

LO 2 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting 9.

Significant influence over an investee may result from representation on the board of directors, participation in policy-making processes, or material intercompany transactions. An investment (direct or indirect) of 20% or more of the voting stock of an investee constitutes significant influence unless there exists evidence to the contrary.

LO 2 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting 10.

Under the cost method, an investment is originally recorded and reported at cost. Dividends are recorded as revenue. In subsequent periods, it is adjusted to fair value and an unrealized holding gain or loss is recognized and included in income (trading security) or as separate component of stockholders’ equity (available-for-sale security). Under the equity method, the investment is originally recorded and reported at cost; subsequently, the investment account is adjusted during each period for the investor’s share of the earnings or losses of the investee. The investor’s share of the investee's earnings is recognized in the earnings of the investor. Dividends received from the investee are reductions in the carrying amount of the investment. LO 3 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting

11.

Consolidated financial statements present the assets and liabilities controlled by the parent company and the total revenues and expenses of the affiliated companies. Consolidated financial statements are useful to the stockholders, board of directors, and management of the parent company.

LO 2 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting 12.

The valuation and reporting of investments is as follows: Category Trading Available-for-sale

Valuation and Reporting At fair value with changes reported in net income At fair value with changes adjusted through equity

LO 3 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting 13.

Pat should report the data as follows: (1) (2)

Under current assets in the balance sheet: Short-term investments, at fair value ....................................................... Under other expenses and losses in the income statement: Unrealized Loss—Income .......................................................................

$70,000 $(4,000)

LO 3 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting

H-4

Kimmel, Financial Accounting, 8/e, Solutions Manual

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14.

Pat should report as follows: (1) (2)

Under investments in the balance sheet: Investments in stock of less than 20% owned companies, at fair value ... Under stockholders’ equity in the balance sheet: Accumulated other comprehensive loss ..................................................

$70,000 $(4,000)

LO 3 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Reporting 15.

The entry is: Fair Value Adjustment—Available-for-Sale ..................................... Unrealized Gain or Loss—Equity ...........................................

8,000 8,000

LO 3 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Reporting 16. The entry is: Fair Value Adjustment—Trading ..................................................... Unrealized Gain—Income ......................................................

8,000 8,000

LO 3 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Reporting 17.

Accumulated other comprehensive loss is reported in stockholders’ equity. It is not included in the computation of net income.

LO 3 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting 18. The investment in Cyrus Corporation stock is not a short-term investment because there is no intent to convert the stock into cash within a year or the operating cycle, whichever is longer. LO 3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

H-5

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE H-1 Jan. July

1 1

Debt Investments.......................................... Cash .......................................................

40,800

Cash .............................................................. Interest Revenue ...................................

1,660

40,800 1,660

LO 1 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement & Reporting

BRIEF EXERCISE H-2 Aug. Dec.

1 1

Stock Investments ........................................ Cash .......................................................

35,600

Cash .............................................................. Stock Investments ................................. Gain on Sale of Stock Investments ........................................

38,000

35,600 35,600 2,400

LO 2 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement & Reporting

BRIEF EXERCISE H-3 Dec. 31

Stock Investments ........................................ Revenue from Stock Investments (25% X $150,000) ................................

37,500

Cash (25% X $60,000) ................................... Stock Investments .................................

15,000

37,500 15,000

LO 2 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement & Reporting

H-6

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE H-4 Dec. 31

Unrealized Loss—Income ............................ Fair Value Adjustment—Trading ($62,000 – $59,600) .............................

2,400 2,400

LO 3 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Measurement & Reporting

BRIEF EXERCISE H-5 Balance Sheet Current assets Short-term investments, at fair value ..............................

$59,600

Income Statement Other expenses and losses Unrealized Loss—Income.................................................

2,400

LO 3 BT: AN Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement & Reporting

BRIEF EXERCISE H-6 Dec. 31

Unrealized Gain or Loss—Equity .................. Fair Value Adjustment— Available-for-Sale .................................

3,000 3,000

LO 3 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Measurement & Reporting

BRIEF EXERCISE H-7 Balance Sheet Investments Investments in stock of less than 20% owned companies, at fair value....................................................

$69,000

Stockholders’ Equity Accumulated other comprehensive loss ...........................

$(3,000)

LO 3 BT: AN Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement & Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

H-7

BRIEF EXERCISE H-8 Investments Bond sinking fund ............................................................... Investments in stock of less than 20% owned companies, at fair value ................................................... Investment in stock of 20–50% owned company, at equity ............................................................................ Total investments.........................................................

$150,000 112,000 230,000 $492,000

LO 3 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement & Reporting

H-8

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO EXERCISES EXERCISE H-1 (a) Jan. 1 July 1 1

(b) Dec. 31

Debt Investments .................................... Cash ..................................................

90,000

Cash ($90,000 X 10% X 1/2) .................... Interest Revenue ..............................

4,500

Cash ........................................................ Debt Investments ($90,000 X 30/90) ........................... Gain on Sale of Debt Investments ($32,000 – $30,000) ........................

32,000

Interest Receivable ................................. Interest Revenue ($60,000 X 10% X 1/2) ....................

3,000

90,000 4,500

30,000 2,000

3,000

LO 1 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Measurement & Reporting

EXERCISE H-2 (a) Feb. 1 July 1 Sept. 1

Dec. 1

Stock Investments ................................. Cash .................................................

8,400

Cash (1,200 X $2) .................................... Dividend Revenue ...........................

2,400

Cash ........................................................ Stock Investments ($8,400 X 500/1,200) ..................... Gain on Sale of Stock Investments ($5,400 – $3,500) ...........................

5,400

Cash (700 X $1)....................................... Dividend Revenue ...........................

700

8,400 2,400

3,500 1,900 700

(b) Dividend revenue and the gain on sale of stock investments are reported under other revenues and gains in the income statement. LO 2, 3 BT: AN Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Measurement & Reporting Copyright © 2016 John Wiley & Sons, Inc.

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

H-9

EXERCISE H-3 Jan.

July

Dec.

Dec. 31

Stock Investments ...................................... Cash ....................................................

59,200

Cash (1,200 X $7) ........................................ Dividend Revenue ...............................

8,400

Cash ........................................................... Stock Investments ($59,200 X 900/1,200) ....................... Gain on Sale of Stock Investments ....

47,200

Cash (300 X $7) ........................................... Dividend Revenue ...............................

2,100

59,200 8,400

44,400 2,800 2,100

LO 2 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Measurement & Reporting

EXERCISE H-4 (a) Jan. 1 Dec. 31 Dec. 31

Stock Investments ............................... Cash ..............................................

150,000

Cash ($80,000 X 25%) .......................... Stock Investments........................

20,000

Stock Investments ............................... Revenue from Stock Investments ($380,000 X 25%) ..

95,000

150,000 20,000

(b) Investment in Shane, January 1 ........................... Less: Dividend received ...................................... Plus: Share of reported income ......................... Investment in Shane, December 31 .....................

95,000 $150,000 20,000 95,000 $225,000

LO 2 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Measurement & Reporting

H-10

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

EXERCISE H-5 1.

2017 Mar. 18 June 30

Dec. 31

Jan. 1 June 15

Dec. 31

Stock Investments ................................ Cash (300,000 X 12% X $14) ..........

504,000

Cash ....................................................... Dividend Revenue ($75,000 X 12%) ...........................

9,000

Fair Value Adjustment— Available-for-Sale ............................... Unrealized Gain or Loss—Equity ($576,000 – $504,000) ..................

504,000

9,000 72,000 72,000

Stock Investments ................................ Cash (30,000 X 25% X $11) ............

82,500

Cash ....................................................... Stock Investments ($35,000 X 25%) ...........................

8,750

Stock Investments ................................ Revenue from Stock Investments ($120,000 X 25%) ..........................

30,000

82,500

8,750

30,000

LO 2 BT: AP Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Measurement & Reporting

EXERCISE H-6 (a) Dec. 31

Unrealized Loss—Income ..................... Fair Value Adjustment—Trading ...

(b)

4,800 4,800

Balance Sheet Current assets Short-term investments, at fair value .............

$48,800

Income Statement Other expenses and losses Unrealized Loss—Income ...............................

$ 4,800

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

H-11

EXERCISE H-7 (a) Dec. 31

Unrealized Gain or Loss—Equity .............. Fair Value Adjustment— Available-for-Sale .............................

(b)

4,800 4,800

Balance Sheet Investments Investments in stock of less than 20% owned companies, at fair value.....................................

$48,800

Stockholders’ equity Less: Unrealized loss on available-for-sale securities ...................................................

$ 4,800

(c) Dear Ms. Jenks: Investments which are classified as trading (held for sale in the near term) are reported at fair value in the current asset section of the balance sheet, with unrealized gains or losses reported in net income. Investments which are classified as available-for-sale (held longer than trading but not to maturity) are also reported at fair value in either the current assets section or the investment section of the balance sheet, but unrealized gains or losses are reported as an item of other comprehensive income. Fair value is used as a reporting basis because it represents the cash realizable value of the securities. Unrealized gains or losses on trading investments are reported in the income statement because of the likelihood that the securities will be sold at fair value in the near term. Unrealized gains or losses on available-for-sale securities are reported in other comprehensive income rather than in income because there is a significant chance that future changes in fair value will reverse unrealized gains or losses. To avoid distorting income with these fluctuations, they are reported in other comprehensive income. I hope the preceding discussion clears up any misunderstandings. Please contact me if you have any questions. Sincerely, Student LO 3 BT: AN Difficulty: Medium TOT: 15 min. Measurement, Reporting, & Communication H-12

AACSB: Analytic & Communication

Kimmel, Financial Accounting, 8/e, Solutions Manual

AICPA FC:

(For Instructor Use Only)

EXERCISE H-8 (a) Fair Value Adjustment—Trading ($122,000 – $110,000) ....................................... Unrealized Gain—Income ............................

12,000 12,000

Unrealized Gain or Loss—Equity ....................... Fair Value Adjustment— Available-for-Sale ...................................... (b)

4,000 4,000

Balance Sheet Current assets Short-term investments, at fair value ....................... Investments Investments in stock of less than 20% owned companies, at fair value ......................................... Stockholders’ equity Accumulated other comprehensive loss ................. Income Statement Other revenues and gains Unrealized gain—income ..........................................

$122,000 96,000 $(4,000)

$ 12,000

Comprehensive Income Statement Other comprehensive income Unrealized loss on available-for-sale securities ......

(4,000)

LO 3 BT: AN Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Measurement & Reporting

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

H-13

SOLUTIONS TO PROBLEMS PROBLEM H-1

2017 Jan. 1 July 1 Dec. 31 2020 Jan. 1 1

July 1 Dec. 31

Debt Investments .............................. Cash ............................................

600,000

Cash ($600,000 X .07 X 1/2) ............... Interest Revenue ........................

21,000

Interest Receivable ............................ Interest Revenue ........................

21,000

Cash ................................................... Interest Receivable.....................

21,000

Cash ($300,000 X 1.10) ..................... Debt Investments ....................... Gain on Sale of Debt Investments .............................

330,000

Cash ($300,000 X .07 X 1/2) ............... Interest Revenue ........................

10,500

Interest Receivable ............................ Interest Revenue ........................

10,500

600,000 21,000 21,000

21,000 300,000 30,000 10,500 10,500

LO 1 BT: AN Difficulty: Medium TOT: 40 min. AACSB: Analytic AICPA FC: Measurement & Reporting

H-14

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

PROBLEM H-2

(a) Feb. 1 Mar. 1 Apr. 1 July 1 Aug. 1

Sept. 1 Oct. 1 1

Stock Investments ..................................... Cash ....................................................

51,600

Stock Investments ..................................... Cash ....................................................

18,500

Debt Investments ....................................... Cash ....................................................

70,000

Cash ($0.80 X 1,200) .................................. Dividend Revenue...............................

960

Cash (200 X $42) ........................................ Loss on Sale of Stock Investments .......... Stock Investments [($51,600 ÷ 1,200) X 200] ..................

8,400 200

Cash ($2 X 500) .......................................... Dividend Revenue...............................

1,000

Cash ($70,000 X 08% X 1/2) ....................... Interest Revenue .................................

2,800

Cash .......................................................... Debt Investments ................................ Gain on Sale of Debt Investments ($75,700 – $70,000) ..........................

75,700

Stock Investments Feb. 1 51,600 Aug. 1 Mar. 1 18,500 Dec. 31 Bal. 61,500

8,600

51,600 18,500 70,000 960

8,600 1,000 2,800 70,000 5,700

Debt Investments Apr. 1 70,000 Oct. 1 Dec. 31 Bal. 0

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

70,000

H-15

PROBLEM H-2 (Continued) (b) Dec. 31

Unrealized Loss—Income ................. Fair Value Adjustment—Trading

Security LAF common NCL common

Cost $43,000* 18,500 $61,500

7,500 7,500

Fair Value $39,000 (1,000 X $39) 15,000 (500 X $30) $54,000

*$51,600 – $8,600 (c) Current assets Short-term investments, at fair value .......................

$54,000

(d) Other revenues and gains: Dividend Revenue, Interest Revenue, and Gain on Sale of Debt Investments. Other expenses and losses: Loss on Sale of Stock Investments, and Unrealized Loss—Income. LO 1, 2, 3 BT: AN Difficulty: Hard TOT: 40 min. AACSB: Analytic AICPA FC: Measurement & Reporting

H-16

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

PROBLEM H-3

(a) 2017 July 1 Aug. 1 Sept. 1

Oct.

Nov. 1 Dec. 15 31

Cash (5,000 X $2.00) ............................... Dividend Revenue..............................

10,000

Cash (1,000 X $0.50) ............................... Dividend Revenue..............................

500

Cash (1,000 X $9) .................................... Stock Investments (1,000 X $7.20) .... Gain on Sale of Stock Investments ...................................

9,000

Cash (300 X $53)..................................... Stock Investments (300 X $48).......... Gain on Sale of Stock Investments [$15,900 – (300 X $48)] ..................

15,900

Cash (1,200 X $1) .................................... Dividend Revenue..............................

1,200

Cash (700 X $0.50) .................................. Dividend Revenue..............................

350

Cash (4,000 X $2.20) ............................... Dividend Revenue..............................

8,800

2017 Jan. 1 Balance 2017 Dec. 31 Balance

10,000 500 7,200 1,800 14,400 1,500 1,200 350 8,800

Stock Investments 2017 108,000 Sept. 1 Oct. 1

7,200 14,400

86,400

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

H-17

PROBLEM H-3 (Continued) (b) Dec. 31

Fair Value Adjustment—Availablefor-Sale ($89,700 – $86,400) ............. Unrealized Gain or Loss—Equity ....

Security C Co. common D Co. common E Co. common

Cost $33,600* 28,800** 24,000 $86,400

3,300 3,300

Fair Value $32,900 ( 700 X $47) 28,000 (4,000 X $ 7) 28,800 (1,200 X $24) $89,700

*$48,000 – $14,400 **$36,000 – $7,200 (c) Investments Investments in stock of less than 20% owned companies, at fair value ..............

89,700

Stockholders’ equity Common stock ............................................ $2,000,000 Retained earnings ....................................... 1,200,000 Total paid-in capital and retained earnings ............................................. 3,200,000 Accumulated other comprehensive income 3,300 Total stockholders’ equity ................... $3,203,300 LO 2, 3 BT: AN Difficulty: Hard TOT: 40 min. AACSB: Analytic AICPA FC: Measurement & Reporting

H-18

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

PROBLEM H-4

(a) 2017 Jan.

June 30

Dec. 31

(b) 2017 Jan.

June 30 Dec. 31 31

Stock Investments ............................ Cash ............................................

1,800,000

Cash ................................................... Dividend Revenue (60,000 X $0.50) .......................

30,000

Cash ................................................... Dividend Revenue (60,000 X $0.50) .......................

30,000

Stock Investments ............................ Cash ............................................

1,800,000

Cash ................................................... Stock Investments .....................

30,000

Cash ................................................... Stock Investments .....................

30,000

Stock Investments ............................ Revenue from Stock Investments ($800,000 X 30%).......................

240,000

Kimmel, Financial Accounting, 8/e, Solutions Manual

1,800,000

30,000

1,800,000 30,000 30,000

240,000

(For Instructor Use Only)

H-19

PROBLEM H-4 (Continued) (c)

MEMO To:

Board of Directors

From:

Student

Re:

Cost and equity methods

Under the cost method of accounting for investments, the investment is recorded at cost and revenue is recognized only when cash dividends are received. Under the equity method, the investment is initially recorded at cost, and the investment account is adjusted annually to show the investor’s equity in the investee. The investment account is increased for the investor’s share of the investee’s net income. Dividends received are recorded as a reduction of the investment account instead of as dividend revenue. The table below illustrates the differences in account balances for Wellman Company’s investment in Grinwold Inc. at December 31, 2017.

Stock investments Dividend revenue Revenue from stock investments

Cost Method $1,800,000 60,000 0

Equity Method $1,980,000* 0 240,000

*$1,800,000 – $60,000 + $240,000 LO 2 BT: AN Difficulty: High TOT: 30 min. Measurement, Reporting, & Communication

H-20

AACSB: Analytic & Communication

Kimmel, Financial Accounting, 8/e, Solutions Manual

AICPA FC:

(For Instructor Use Only)

PROBLEM H-5

(a) Jan. 20

Feb.

8 18

July 30

Sept.

Dec.

Cash (1,400 X $55) .................................. Investment in Batone Inc. Common Stock ............................. Gain on Sale of Stock Investments .................................. Investment in P. Wahl Corporation Common Stock .................................... Cash (400 X $78) .............................

77,000 73,500 3,500 31,200 31,200

Cash ........................................................ Dividend Revenue ($1.25 X 1,200) ...............................

1,500

Cash ........................................................ Dividend Revenue ($0.40 X 800).....

320

Cash ($35 X 800) ..................................... Loss on Sale of Stock Investments ...... Investment in P. Tillman Corporation Preferred Stock ............................

28,000 5,600

Cash ........................................................ Dividend Revenue ($1.10 X 1,200) ..............................

1,320

Investment in P. Wahl Corporation Common Stock .................................... Cash ($82 X 600) ............................. Cash ........................................................ Dividend Revenue ($1.50 X 1,000) ...............................

Kimmel, Financial Accounting, 8/e, Solutions Manual

1,500 320

33,600

1,320 49,200 49,200 1,500 1,500

(For Instructor Use Only)

H-21

PROBLEM H-5 (Continued) (b) Investment in Batone Inc. Common Stock 1/1 Bal. 73,500 1/20 73,500 12/31 Bal. 0

Investment in Mendez Corporation Common Stock 1/1 Bal. 84,000 12/31 Bal. 84,000

Investment in P. Tillman Corporation Preferred Stock 1/1 Bal. 33,600 2/18 33,600 12/31 Bal. 0

Investment in P. Wahl Corporation Common Stock 1/28 31,200 9/6 49,200 12/31 Bal. 80,400

Unrealized Gain or Loss—Equity ........... Fair Value Adjustment—Availablefor-Sale ($164,400 – $155,000) ......

Security Mendez Corporation common P. Wahl Corporation common

Cost $ 84,000 80,400 $164,400

9,400 9,400

Fair Value $ 78,000 (1,200 X $65) 77,000 (1,000 X $77) $155,000

(d) Investments Investments in stock of less than 20% owned companies, at fair value..........................................

$155,000

Stockholders’ equity Total paid-in capital and retained earnings Accumulated other comprehensive loss .... Total stockholders’ equity ..................................

XXXXX (9,400) $ XXXXX

LO 2, 3 BT: AN Difficulty: Hard TOT: 50 min. AACSB: Analytic AICPA FC: Measurement & Reporting

H-22

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

PROBLEM H-6

MANFREID CORPORATION Balance Sheet December 31, 2017 Current assets Cash ......................................................................... $ 63,000 Short-term investments, at fair value .................... 128,000 Accounts receivable ............................................... $ 90,000 Less: Allowance for doubtful accounts ................ 6,000 84,000 Inventory .................................................................. 170,000 Prepaid insurance ................................................... 16,000 Total current assets ......................................... 461,000 Investments Debt investments ...................................................... Stock Investments (Horton Inc. stock, 30% ownership, at equity) ..... Total investments ............................................ Property, plant, and equipment Land .......................................................... Buildings .................................................. $900,000 Less: Accumulated depreciation— buildings ....................................... 180,000 Equipment ................................................ 275,000 Less: Accumulated depreciation— equipment ..................................... 52,000 Total property, plant, and equipment ..................................... Intangibles Goodwill .................................................................... Total assets ....................................................................

Kimmel, Financial Accounting, 8/e, Solutions Manual

400,000 240,000 640,000 410,000 720,000 223,000 1,353,000 190,000 $2,644,000

(For Instructor Use Only)

H-23

PROBLEM H-6 (Continued) MANFREID CORPORATION Balance Sheet (Continued) December 31, 2017 Liabilities and Stockholders’ Equity Current liabilities Notes payable ...................................................... Accounts payable................................................ Dividends payable ............................................... Income taxes payable ......................................... Total current liabilities ................................. Long-term liabilities Bonds payable, 10% due 2028............................ Less: Discount on bonds payable .................... Total long-term liabilities ............................. Total liabilities ............................................................ Stockholders’ equity Paid-in capital Common stock, $5 par value, 500,000 shares authorized, 240,000 shares issued and outstanding ............................ Paid-in capital in excess of par value ......... Total paid-in capital .............................. Retained earnings ............................................... Total stockholders’ equity .................... Total liabilities and stockholders’ equity ...........

70,000 150,000 50,000 70,000 $ 340,000 350,000 20,000 330,000 670,000

$1,200,000 464,000 1,664,000 310,000 1,974,000 $2,644,000

LO 3 BT: AP Difficulty: Hard TOT: 40 min. AACSB: Analytic AICPA FC: Measurement & Reporting

H-24

Kimmel, Financial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)